Fortnightly, May 20th 2015

On 14 May, Prime Minister Benjamin Netanyahu’s 20-minister government was sworn, following a day full of problems with Likud appointments to his cabinet. The Knesset approved the government by a vote of 61 – 59. Netanyahu told the Knesset that all the problems building his government proved that the electoral system needs to be changed. Netanyahu turned to opposition Zionist Union leader Isaac Herzog and pleaded with him to join the government in order to help change the system. But Herzog rejected the offer of a national unity government.

After a raucous five-hour debate on 18 May, the Knesset voted 61-59 in favor of an amendment to the Basic Law: Government that would enable the new government to have 20 ministers instead of 18. These proceedings at the Knesset marked the first reading of the bill. The Knesset also approved the establishment of a special committee that would prepare the bill for its second and third readings.

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1.2 New Finance Minister Races to Boost Competition

On 18 May, newly-appointed Finance Minister Moshe Kahlon said that increasing competition in the economy and bringing down housing prices will be at the forefront of his economic policies. During his first official meeting with Finance Ministry officials, Kahlon said he already had “plans” to deal with the housing crisis and banking reform, but qualified this by adding, “Speaking with ministry officials, I saw that they already have some plans ready as well. The director general presented me with reform proposals, and I hope we can realize at least 15% of them. We are committed to [economic] growth.”

Kahlon’s first official meeting as finance minister focused largely on banking reform, which was a major issue touted during his election campaign, as well as his proposed reform in the credit system, which he seeks to open to competition. Israel’s credit market is dominated by a trio of issuers: Isracard, controlled by Bank HaPoalim; Leumi Card, a subsidiary of Bank Leumi; and Visa Cal, operated by Mercantile Discount Bank. Kahlon seeks to sever the companies’ links to the banks, introduce new players and promote an individual credit scoring model, similar to that used in the U.S. and the EU. (IH 19.05)

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1.3 Israel’s Cabinet Approves Moving Housing Planning to Treasury

On 19 May, the Israeli cabinet discussed a proposal for the establishment of the new housing cabinet, and approved its composition and authority. At the same time, the cabinet also approved the transfer of planning administration authority and other matters to Minister of Finance Moshe Kahlon. The proposal distributed to the ministers included 13 ministers in the new housing cabinet, while excluding the Minister of Environmental Protection. The proposal was later amended, however, to add the Ministry of Environmental Protection director general to the housing cabinet, but only as an observer without voting rights. The cabinet then approved this proposal. The cabinet resolution also lists other parties to be invited regularly to housing cabinet meetings, without giving them voting rights, including the government legal advisor and the head of the National Economic Council.

The environmental organizations are still complaining about the Minister of Environmental Protection’s exclusion. They are asserting that the proposal approved is inadequate and warning that damage could result.

The Minister of the Interior’s authority under the Planning and Building Law will be given to the Minister of Finance, as well as his authority relating to the housing expediting committees, the Preferred Housing Sites Law, the National Parks, Nature Reserves, National Sites and Memorial Sites Law and the Natural Gas Law. This transfer of authority significantly reduces the Minister of the Interior’s power. The cabinet resolution also states that legislative changes stipulating these changes will be considered, while adding that this matter will still require the housing cabinet’s approval.

The resolution states that the new national housing headquarters in the Ministry of Finance will be established within 30 days, and will “serve as a headquarters aimed at ensuring that government policy on housing is implemented.” The tasks and authority of the official heading the headquarters will be brought to the housing cabinet for approval within 14 days. At the same time, the housing headquarters’ work plans will also be brought to the housing cabinet for approval. (Globes 19.05)

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2: ISRAEL MARKET & BUSINESS NEWS

2.1 Cybereason Raises $25 Million Because Corporate Security Is Broken

Cybereason announced that it closed $25 million in Series B funding, which will be used to expand its Research and Development and Sales and Marketing teams. Spark Capital led the round with participation from existing investor CRV and strategic investor Lockheed Martin. Additionally, Lockheed Martin, which is already a current Cybereason customer, will integrate the Cybereason Detection and Response Platform into its various cyber security offerings. By continuously hunting for known and unknown malicious activities within an environment, the Cybereason platform dramatically reduces the time it takes to detect and confirm a breach. It connects isolated pieces of malicious activity, visually presenting the complete ‘attack story’ as it unfolds in real-time. Through its unique application of big data analytics and machine learning, Cybereason’s Malop Hunting Engine analyzes up to eight million events per second to reveal the key elements of an attack, including its timeline, root cause, adversarial activity, malware involved, communication inside and outside of the environment and the affected endpoints and users.

Founded by members of the Israeli intelligence agency’s elite cyber security Unit 8200, the Cybereason platform mirrors the founders’ expertise in handling some of world’s most complex hacking operations. The Cybereason Detection and Response Platform leverages big data, behavioral analytics and machine learning to uncover, in real-time, complex cyber-attacks designed to evade traditional defenses. It automates the investigation process, connects isolated malicious events and visually presents a full malicious operation. The platform is available as an on premise solution or a cloud-based service. Cybereason is privately held and headquartered in Cambridge, MA with offices in Tel Aviv, Israel. (Cybereason 06.05)

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2.2 Designers’ Web Creation Platform Webydo Raises $5 Million from Singulariteam

Tel Aviv’s Webydo, a cloud-based web design platform for designers, has added another $5 million to close its B1 round of funding at $13.8 million. The new funding comes from Singulariteam, which previously invested in leading companies such as StoreDot and InfinityAR. Webydo, made by designers for designers, is a B2B website design platform that empowers graphic and web designers to craft, manage, and host pixel-perfect responsive websites for their clients, without writing any code. In a radically democratic process, Webydo’s features are determined by its growing community of designers. More than 140,000 web design agencies, design studios, and freelance designers already joined Webydo and thousands of new designers are joining every week. Following the requests of its designer community, Webydo released new features such as the Pixel-Perfect Responsive Editor, Code-Free Parallax Scrolling Animator, History Revisions, and many other cutting edge features.

Singulariteam is a private investment fund that assists advanced-technology companies grow and develop by providing capital and additional services. Singulariteam acts as a super angel investor, focusing on advanced, disruptive technologies, in the fields of artificial intelligence, robotics, augmented reality, virtual reality and other industry-leading technologies. The fund was founded in 2012 and is headquartered in Tel Aviv with four global offices. (Webydo 11.05)

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2.3 Frutarom Acquires Controlling Share in India’s Sonarome

Frutarom Industries acquired 60% of the share capital of the Indian flavors and fragrances company Sonarome Private in exchange for a cash payment of $17.2 million (reflecting a company value of $28.6 million). The purchase agreement includes an option for Frutarom to acquire the remaining balance of shares starting two years from now at a price conditional on the company’s business performance. The transaction is being financed using bank debt. Sonarome, which was founded in 1981, engages in the development, production and marketing of flavors and fragrances. Sonarome’s manufacturing, marketing, and research and development are based in Bangalore, India where it has additional production capacity. Herzliya’s Frutarom is a multinational company operating in the global flavors and fine ingredients markets. Frutarom has significant production and development centers on four continents and markets and sells the over 31,000 products it produces to over 16,000 customers in more than 150 countries. Frutarom’s products are intended mainly for the food and beverages, flavor and fragrance extracts, pharmaceutical, nutraceutical, health food, functional food, food additives and cosmetics industries. (Frutarom 14.05)

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3: REGIONAL PRIVATE SECTOR NEWS

3.1 Aviat Wins Nationwide Public Safety LTE Backhaul Deal in UAE

Santa Clara, California’s Aviat Networks, a leading expert in microwave networking solutions, announced an agreement with a United Arab Emirates security agency to implement CTR microwave routers in a new public safety LTE network. This exemplifies how networks worldwide are moving to a common broadband LTE infrastructure optimally backhauled by Layer 3 microwave networking. Initial deployments will comprise CTR 8540 microwave routers. When the customer deploys commercial LTE, Layer 3 services at the network edge will be introduced into the network via IP/MPLS technology. (Aviat Networks 12.05)

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3.2 PizzaExpress Acquires UAE Franchise Amid Expansion Push

Italian-inspired dining brand PizzaExpress has acquired its UAE franchise operation from operator Jordana Restaurants. The acquisition is part of ambitious international expansion plans as PizzaExpress celebrates its 50th anniversary this year and prepares to double the number of UAE outlets in the next five years, the company said. Jordana has operated the PizzaExpress franchise since 2000. There are currently seven restaurants in the UAE – six in Dubai, in Al Safa, Ibn Battuta, World Trade Centre, Bin Sougat, Jumeirah Lakes Towers and Kidzania in Dubai Mall, as well as one restaurant in Fujairah. An eighth is due to open this summer in Abu Dhabi’s World Trade Centre Mall. This will be the second alcohol licensed Jazz@PizzaExpress concept, building on the success of the first such live music venue in Dubai’s Jumeirah Lakes Towers. Established in London’s Soho in 1965, PizzaExpress has 436 restaurants in the UK and a further 77 in 13 markets across the world. (AB 10.05)

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3.3 Meraas Signs with China’s Alibaba to Establish Technology JV

Meraas, a leading Dubai-based holding company, and Aliyun, Alibaba Group’s cloud computing subsidiary, signed a deal to setup a new technology enterprise that offers system integration services to private companies and government institutions in the MENA region. Headquartered in Dubai, the new joint venture will specialize in application development, service-oriented architecture, testing, validation, citizenship e-services and Big Data operations with a special focus on analytics, revenue-generation and payment solutions. The enterprise will support potential clients in achieving stronger business results, help them respond rapidly to market changes and transform their business and IT services. While the initial focus will be on the technology venture, Meraas will leverage its development capabilities through the creation of a technology-oriented master-planned integrated community comprising of a Tier 3 Data Center, as well as hospitality, residential and commercial spaces, retail and food & beverage units. The newly-formed joint venture company will be an anchor tenant. (Meraas 12.05)

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3.4 US Restaurant Chain “Five Guys” to Make Middle East Debut

US-based restaurant chain Five Guys has announced that it will make its Middle East debut this month with an outlet opening in The Dubai Mall. The restaurant brand, which specializes in halal burgers and hotdogs, grilled cheese sandwiches, veggie sandwiches, free toppings, fries, and the Five Guys customizable milkshake, will look to expand across the UAE. With its first opening nearly 30 years ago near Washington DC, Five Guys has since grown to be one of the most popular burger restaurants in the US and Canada with 1,200 locations, and is expanding into new markets overseas. The first opening outside of North America was in 2013 in London and there are now over 20 UK locations. (AB 16.05)

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3.5 World’s Biggest Hotel to Open in Saudi Arabia

Abraj Kudai is to become the world’s largest hotel located in Mecca, Saudi Arabia and upon completion, will offer 10,000 rooms in 12 separate towers. Designed by Dar Al Handasah, the project has a total built area of 1.4 million meter square and will be set in the Manafia area in Mecca’s central zone. The $3.5 billion hospitality project is already on site and comprises of 12 towers with a total of 10,000 rooms, 70 restaurants, rooftop helipads, royal floors and a full size convention center, all roofed under what will become one of the largest domes in the world. The architecture is set to create an iconic landmark that will reflect a contemporary interpretation of a traditional desert fortress. London-based design practice Areen Hospitality has been appointed to design the interior spaces, which will be complete with palatial luxury typical of the region. Ten of the towers are intended to provide four-star accommodation while the remaining two will offer luxurious five-star amenities. Abraj Kudai is expected to be completed in 2017. (AB 14.05)

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3.6 Hyatt Place Hotel Opens in Taghazout, Morocco

Chicago headquartered Hyatt Hotels Corporation announced the opening of Hyatt Place Taghazout Bay, the first Hyatt Place hotel to open in Africa. The opening of the 152-room hotel, located 10 miles (17 kilometers) north of the Moroccan coastal town of Agadir, marks a significant milestone for the Hyatt Place brand as it continues to expand outside the United States. Hyatt Place Taghazout Bay is part of Morocco’s new sustainable and development Taghazout Bay Resort, which is set in the peaceful foothills of the Atlas Mountains and overlooks the stunning Atlantic coastline. The resort is located only 40 minutes from Agadir International Airport, and a range of activities will be offered throughout the year at the on-site surf camp, tennis club and golf academy at the beautiful new 18-hole golf course designed by architect Kyle Philips, as well as hang-gliding, hiking and mountain biking.

Hyatt Place Taghazout Bay offers 152 guestrooms and suites, each offering a balcony to ensure all guests can enjoy the impressive views of the coast. Additionally, guestrooms offer the Hyatt Grand Bed®, a Cozy Corner sofa sleeper, and a 42-inch flat screen TV. For those looking to stay fit during their stay, the hotel offers two outdoor swimming pools and a 24-hour Gym. After a busy day, guests seeking some relaxation can unwind in the ASENFO Spa and its authentic Hamman, hot tub or sauna, or enjoy a pampering session in one of the six treatment rooms.

Launched in 2006, the Hyatt Place brand brings authentic hospitality to the upscale service hotel category for which Hyatt is known. Inspired by the 24/7 lifestyle of multitasking travelers, Hyatt Place combines style with casual hospitality; featuring spacious guestrooms with the Cozy Corner sofa-sleeper, free Wi-Fi everywhere, 24/7 Gallery Menu, Coffee to Cocktails Bar, and free hot breakfast for guests. The Odds & Ends program also has guests covered with items they may have forgotten and can buy, borrow or enjoy for free. Specially trained Gallery Hosts are on hand to offer assistance with everything from directions to check-in to a freshly made meal. (Hyatt 08.05)

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3.7 Exelis & TUBITAK SAGE Collaborate on Smart Release Technology

Clifton, NJ’s Exelis signed a memorandum of understanding with TUBITAK SAGE, the Defense Industries Research and Development Institute of Turkey, to collaborate on developing and integrating advanced smart carriage and release technology for international military aircraft. The signing took place at the 2015 International Defence Fair May 5-8 in Istanbul, Turkey. The endeavor will harness each party’s complementary skills and experience to produce and market a smart rack with enhanced capabilities for NATO aircraft, including international F-16 fighters and other strategic and unmanned platforms. For decades, Exelis has led the market in the design and production of pyrotechnically and pneumatically actuated racks and launchers. These systems support safe, reliable carriage and release of stores and payloads on a wide range of U.S. and international military platforms. TUBITAK SAGE has extensive experience in the development of smart weapons, aircraft integration, simulation and training systems. (Exelis 08.05)

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3.8 ARIAD Announces Commercial Distribution Agreement for Iclusig in Turkey

Cambridge, Massachusetts’ ARIAD Pharmaceuticals and Gen Ilac, a leading Turkish pharmaceutical company focused on the supply of orphan drugs for the treatments of rare diseases, announced that ARIAD has granted Gen Ilac exclusive rights to distribute Iclusig (ponatinib) in Turkey for patients with Philadelphia-positive leukemia. Gen Ilac was granted the exclusive right to sell Iclusig as an investigational product in Turkey on a named-patient basis and will provide associated medical affairs and regulatory support. ARIAD retains the option to file for marketing authorization at a later date and, if approved, to hold the Marketing Authorization for Iclusig in Turkey. Gen Ilac has the exclusive right then to market and commercialize the product upon approval.

GEN ILAC A.C, is a leading specialty pharmaceutical company headquartered in Ankara, Turkey. Gen Ilac represents innovative pharmaceutical and biotechnology companies, serving the medical community and patients in specific therapeutic areas of neurology, oncology, hematology and endocrinology. Gen Ilac has long-term collaborations with a number of international companies, including Biogen, Ipsen, PTC, Orphan Europe and others. Gen Ilac is taking a leading role in Turkey bringing novel treatment options to patients with difficult-to-treat or rare conditions. (ARIAD 06.05)

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4: CLEAN TECH & ENVIRONMENTAL DEVELOPMENTS

4.1 Amman to Turn Waste Into Energy Through $13 Million EBRD Loan

The European Bank for Reconstruction and Development (EBRD) is providing a $13 million loan to the Greater Amman Municipality to help manage solid waste, generate electricity and reduce carbon dioxide emissions. The project will help implement a comprehensive landfill-gas recovery system, “the first of its kind in Jordan”, designed and constructed with gas-collection technology. Given the innovative nature of the investment and the potential energy savings, EBRD is co-financing the loan with $5 million from the Bank’s Green Energy Special Fund (GESF). The main donor to the GESF is the Taiwanese International Cooperation and Development Fund, according to EBRD. The landfill gas will be used to generate electricity for delivery to the national grid, replacing electricity produced by grid-connected power plants that previously used heavy fuel oil. The investment is expected to create “substantial benefits for the environment”. It will also serve as a model by establishing a new solid waste company, owned by the city of Amman, and by introducing a public service contract between the city and the newly created company. The government of Austria is providing further resources to ensure appropriate supervision of engineering and to support project implementation. The project will also benefit from technical cooperation for the divestment of solid waste services, for corporate development and for assistance with governance, as well as to oversee the preparation of a livelihood restoration plan.

Jordan became a member of EBRD in 2012 and the bank has since committed $422 million across 22 projects in various sectors of the economy. In November 2013, the Kingdom received the status of an aid-receiving country from EBRD. (JT 16.05)

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4.2 King Inaugurates First Solar Power Venture in Royal Court Compound

On 17 May, Jordan’s King Abdullah inaugurated the Royal Hashemite Court’s grid connected solar power plant which was established inside the Royal Court compound. The 5.6 MW plant came in line with His Majesty’s directives to build similar projects of renewable energy in order to encourage switching to this source of power. It will cover the Royal Court’s needs of such energy, reduce expenditure and preserve the environment. Royal Court Secretary General Issawi briefed the King on the importance of this project in meeting the Royal institution’s electricity demand. He added that studies were conducted according to high standards by using state-of-the-art technology in this area. He said that a tender in this regard was referred to a company that participated in the competition to build the plant, where the project was implemented within eight months. (AMMONNEWS 17.05)

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5: ARAB STATE DEVELOPMENTS

5.1 Lebanon’s Trade Deficit Narrowed to $3.43 Billion in First Quarter

Lebanon’s trade deficit tightened by 25.91% year-on-year (y-o-y) to $3.43B in Q1/15 compared to $4.62B in the same period the year before. This was mainly due to the decline in the price of oil and the depreciating of the Euro, which led to a 22.72% decline in overall imports outpacing the 3.62% fall in total exports. Total imports, in the first three months of the year, reached $4.17B compared to $5.40B in Q1/14.

Specifically, the three major imported product categories by March were mineral products (17.76% share of total imports), “products of the chemical or allied industries” (11.74% share of total imports) and “machinery and electrical instruments” (11.15% share of total imports). Imported mineral products experienced a massive 49.25% yearly decline from March 2014. With an inelastic demand, this contraction went parallel with the average 49.17% decrease in the price of international oil since March last year. In addition, “products of the chemical or allied industries” and “machinery and electrical instruments” downturned by 6.60% and 18.41% y-o-y, respectively. Both saw a weakening in demand, as the respective total tonnage imported fell by 7.19% and 5.87% to 137 tons and 57 tons. Furthermore, the prices of the former imports fell with the depreciating Euro, as they were mostly brought in from Germany and France. Prices of “machinery and electrical instruments” dropped with China selling about 30% of those goods to Lebanon. Notably, the three major countries that Lebanon imports goods from were China, Italy and Germany with corresponding weights of 12.29%, 6.68% and 6.40%.

Similarly, total exports fell annually by 3.62% to $743.83M by March 2015 despite the 7.78% y-o-y increase in volume of overall exports to 471 tons. Exported “prepared foodstuffs, beverages, and tobacco” (15.99% share of total exports) experienced a yearly detraction of 7.00% in Q1 2015, despite the 5.64% rise in exported volume to 95 tons. This might be due to the falling global trend in prices of “off the shelf items” (prepared food stuffs, beverages & tobacco). “Machinery and electrical instruments” (13.55% share of total exports) experienced a 1.90% y-o-y downtick in the value of exports in response to the rise in local prices, as the volume went down by 19.48% yearly to 15 tons in Q1/15. In terms of the major destinations of the Lebanese exports, Saudi Arabia, United Arab Emirates and Iraq seized respective weights of 13.20%, 10.47% and 8.36%. On a monthly basis, total exports and imports lessened by 6.39% and 15.76% respectively from March 2014. Consequently, the trade deficit contracted from $1.52B to $1.25B in March 2015. (Blom 10.05)

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5.2 Lebanon’s Tourist Numbers Up by 21% in First Quarter

Tourism activity in Lebanon grew by 21% in the first three months of 2015 compared to the same period in 2014, according to a report by the Committee of the World Tourism Organization for the Middle East. The report attributed the “remarkable growth” to a successful winter skiing season, which drew an increased number of tourists to the country. The report said Lebanon’s tourism activity grew by 6% in the third quarter of 2014, following a drop from 2.2 million tourists in 2010 to 1.3 million in 2013. It added that Lebanon’s tourism sector saw an improvement after GCC countries lifted travel advisories warning citizens against visiting the country. The advisories had been in place since mid-2012, inflicting crippling losses on the country’s tourism sector. The warnings were issued after security deteriorated in Lebanon following a spate of suicide car bombings linked to the crisis in Syria. But the travel advisories were lifted a year ago, days after the Saudi ambassador’s visit to Lebanon. The report said that the Tourism Ministry adopted several measures in a bid to attract tourists. (TDS 12.05)

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5.3 Amman Launches ‘Jordan 2025’ Development Blueprint

On 11 May, Jordanian King Abdullah attended the launch of “Jordan 2025”, the 10-year blueprint for economic and social development. The plan, also dubbed “2025 vision”, is based on two scenarios, a conservative one that assumes that the economy would grow by 4.8% in 10 years, and an ambitious scenario that suggests the economy would expand by 7.5% in 2025, Prime Minister Abdullah Ensour said in his remarks at the ceremony. The premier said the ambitious scenario is still realistic. He said the document features a long-term vision for Jordan’s economy that includes over 400 policies and measures to be implemented by the government, private sector and civil society to support economic development in the coming decade. He added that these policies and procedures seek to boost the rule of law and equal opportunity, and achieve financial sustainability and self-sufficiency.

On how to improve the economic situation, the blueprint envisions Jordan as a regional economic gateway to regional markets that is also taking advantage of free trade agreements the Kingdom has signed with several countries in order to achieve an export-oriented economy, the minister said. The formula used in the blueprint is based on the concept of economic clusters based on the cooperative advantages of the Kingdom, adding that the vision aims at achieving relatively high economic growth rates and a tangible drop in unemployment and public debt, which planners expect to decline to 47% of the gross domestic product (GDP) in 2025. Currently, the debt ratio to the GDP is nearly 81%. (JT 11.05)

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5.4 Jordan First Quarter Tourism Income Falls 11.9%

Jordan’s first quarter tourism revenue dropped 11.9% as visitor numbers from Europe and North America fell by more than a fifth because of wars in neighboring nations, Jordan’s tourism minister said on 5 May. Jordan shares frontiers with Iraq and Syria, where the IS has seized swathes of territory. Amman took a lead role in conducting air strikes against the radical group after it burned alive a captured Jordanian pilot earlier this year. The number of tourists visiting Jordan fell 9.4% in the first quarter to 1.12 million from 1.24 million a year earlier, Fayez said, adding tourist numbers also fell in April. This led the sector’s quarterly revenue to decline to 642 million Jordanian dinars ($906.5 million) from JD 729 million in the prior-year period – a fall of 11.9%. The number of visitors from Europe fell 27% in the first quarter and those from North America dropped more than 20%, Fayez said, while tourists from other Arab countries accounted for nearly half of all foreign visitors. (Reuters 06.05)

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►►Arabian Gulf

5.5 IMF Says Oman’s Diversification Drive ‘Critical’ Amid Oil Price Slump

Oman’s non-oil economic growth is forecast to drop from 6.5% last year to five% in 2015 and then to 4.5% from 2017-2020, according to a new analysis by the International Monetary Fund (IMF). Its latest Article IV Consultation with Oman also said inflation is set to remain below 3% in the medium term. The IMF said oil market developments present the main risk to the medium-term outlook, as a further drop in oil prices would worsen the fiscal and economic outlook. The decline in oil prices is expected to push Oman’s fiscal and current account balances to deficits from 2014/15. The increase in total spending, particularly during 2010–14, mainly in response to social demands, has pushed the breakeven oil price to $108 per barrel in 2014. The IMF report said ongoing efforts to pursue economic diversification are becoming more critical in the lower oil price environment.

The overall fiscal deficit is projected at 14.8% of GDP in 2015 and would remain in double digits over the medium-term in the absence of fiscal reforms. Without further fiscal adjustment, financing the projected cumulative fiscal deficit between 2015 and 2020 would exhaust fiscal buffers and raise debt to about 25% of GDP, or increase government debt to over 70% of GDP by 2020 if buffers were to be preserved, the IMF added. A reversal of the recent oil price decline would enable saving the windfall revenues for intergenerational equity, the IMF said. It added that there is large potential for raising non-oil revenues by expanding tax categories and reconsidering tax rates and exemptions for corporates, identifying new sources such as selected excises, VAT and property taxes. The report said the banking system in Oman is resilient but the Central Bank of Oman should remain vigilant in monitoring and managing evolving risks. (AB 16.05)

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►►North Africa

5.6 Egyptian Wheat Consumption Drops 23% After New Bread Subsidy System Implemented

Egypt’s consumption of wheat dropped to 8.3 million metric tons in 2014/2015, decreasing by 23% in comparison to 10.2 million metric tons in 2013/2014, Supplies Minister Hanafi said on 11 May. Hanafi attributed the drop to Egypt’s new bread subsidy program, introduced last year to cut down on state spending. Under the new smart-card system, card owners are entitled to a fixed ration of five loaves of bread per day at the unchanged subsidized price of LE0.05 per loaf. To avoid bakers selling off subsidized flour for profit, bakers buy flour at a market rate and are reimbursed the subsidy later, based on sales data gathered from the smart cards. The new system has been implemented in all 27 Egyptian governorates.

Further, wheat imports also dropped by 40% from 2013/2014 to 2014/2015, falling from 6.4 million metric tons to 4.6 million metric tons. Egypt, the world’s largest wheat importer needs around 9.5 million metric tons of wheat to produce subsidized bread, the main staple food for Egyptians. The new bread subsidy system has contributed to a decline in state spending on food subsidies, from LE37.3 billion in the last fiscal year to LE37 billion, said Hanafi. (Ahram Online 11.05)

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5.7 Discovery of Natural Gas in Morocco – Production to Begin in June

Morocco’s Office of Hydrocarbons and Mining (ONHYM) announced positive test results for the SAH-W1 well in the western-central area of the Sebou Permit, onshore Morocco. Well flows were 140,000 cubic meters per day and production will start at the end of June this year. The well is located within the western-central area of the Sebou Permit, about 3.2 kms to the south-west of the main gas gathering station. The well was drilled to a TD of 1,263 meters MD in June 2014, with gas shows encountered at different levels within the target Guebbas sands. As is normal practice, Circle Oil will produce from the lowermost Guebbas zone followed by the Main Guebbas zone sequentially from the bottom up, where the highest pressure is present. (MWN 11.05)

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6: TURKISH, CYPRIOT & GREEK DEVELOPMENTS

6.1 Turkey’s Minimum Wage at Lower End of OECD Spectrum

The minimum wage in Turkey was ranked 20th out of 26 member states of the Organization for Economic Cooperation and Development (OECD). An OECD report entitled “Minimum wages after the crisis: Making them pay,” analyzes minimum wages according to the dollar at purchasing power parities. Based on 2013, the report shows that Turkey fell behind most OECD countries, only beating Slovakia, the Czech Republic, Hungary, Estonia, Chile and Mexico, with the latter having the worst figures. Turkey has been a member of the 34-state OECD since 1961. Its current minimum wage stands at TL 949, which today corresponds to just over $353. Additionally, Turkey has by far the highest proportion of employees working very long hours among all OECD countries, coming last in a work-life balance index prepared by the organization. According to the latest OECD statistics, close to half – 43.3% – of all employees in Turkey work 50 hours or more a week, far more than the average – 9% – across all OECD members. While the proportion of men spending extra hours at work in Turkey is 47%, the same figure for Turkish women is 33%. The corresponding OECD averages are 12% and 5%, respectively. (Zaman 08.05)

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6.2 EU Sees Greek Deal by End of May as Technical-Level Talks Make Gradual Progress

As Greek government officials expressed their confidence that a deal with the country’s creditors is close, top European officials indicated on 19 May that although there has been progress in negotiations, an agreement is unlikely before the end of the month. Finance Minister Varoufakis said he believed a deal was likely “in about a week.” At around the same time the so-called Brussels Group of negotiators were pondering a Greek proposal for overhauling value-added tax rates. According to government sources, progress has been achieved on the technical level with the two sides converging on a primary surplus target for this year of about 1% of GDP. Differences remain however on the issues of pension and labor reform. Addressing a joint press conference in Berlin, German Chancellor Angela Merkel and French President Francois Hollande said talks must be accelerated to produce an agreement by the end of May. European Commission President Jean-Claude Juncker said he expected a deal by late May or early June; he also rebuffed reports that he had proposed a compromise deal to Athens.

According to sources, Tsipras is keen to secure political support in Riga that would allow Eurozone finance ministers to call an extraordinary summit. Greece hopes that a Eurogroup meeting could give the green light for the release of much-needed rescue loans. The hope is for a portion of €3.7 billion in European loan money to be released as the IMF appears unwilling to release its €3.5 billion unless the reforms proposed by Greece are similar to those promised by the previous government. At the very least Athens hopes that a positive Eurogroup statement could prompt the European Central Bank to allow Greece to issue more treasury bills, which would tide the country over until the two sides hammer out a broader pact in summer. That deal should include a debt restructuring and an investment plan, according to Athens. Greece will struggle to meet a €300 million repayment due to the IMF on 5 June without the release of loan money. (ekathimerini 19.05)

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7: GENERAL NEWS AND INTEREST

*ISRAEL:

7.1 Shavuot Holiday to be Marked on Eve of 23 May

On 23/24 May, the Jewish world will observe the holiday of Shavuot. Shavuot is the second of the three major pilgrim festivals (Passover being the first and Sukkot the third) and occurs exactly fifty days after the second day of Passover. This holiday marks the anniversary of the day when the Jewish People received the Torah at Mount Sinai. This is a biblical holiday complete with special prayers, holiday candle lighting and Kiddush, with many forms of work and labor are prohibited. The word shavuot means weeks and it marks the completion of the seven-week counting period between Passover and Shavuot. During these seven weeks the Jewish people cleansed themselves of the scars of Egyptian slavery and became a holy nation ready to enter into an eternal covenant with G d with the giving of the Torah. Before the giving of the Torah the Jews were a family and a community. The experience of Sinai bonded the Jews into a new entity: the Jewish people; the Chosen Nation. This holiday is likened to their wedding day – beneath the wedding canopy of Mount Sinai, G d betrothed the Jews.

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*REGIONAL:

7.2 Jordan Independence Day

Jordan on 25 May marks its 69th Independence Day with parades and displays of patriotism taking place across the Kingdom. Jordan won its full independence from the British mandate and was declared a Kingdom on 25 May 1946. Several celebrations, at the official and grass-roots levels, are scheduled across governorates to mark the occasion. Celebrations marking the 1916 Great Arab Revolt anniversary and Army Day, which falls on June 10, customarily kick off on Independence Day. Sharif Hussein, the emir of Mecca and king of Hijaz, launched the Great Arab Revolt in June 1916 with the objective of establishing an independent and unified Arab state. The Great Arab Revolt secured Arab rule over most of the Arabian Peninsula, Syria and all of modern Jordan, founded by Sharif Hussein’s son, the late King Abdullah I. All ministries, public departments and institutions will observe a holiday on Monday on the occasion of the Independence Day.

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8: ISRAEL LIFE SCIENCE NEWS

8.1 Rosetta Genomics Launches Two Assays for Bladder Cancer

Rosetta Genomics will commercially introduce two FGFR3 gene mutation assays; one for diagnostic monitoring using urine samples to detect recurrences of FGFR3-positive low-grade bladder cancers, and the other in conjunction with Ki67 expression for tissue-based prognostication.

FGFR3 mutation analysis identifies low-grade bladder cancer in both urine- and tissue-based specimens to help urologists better manage patients through improved prognostication and non-invasive recurrence monitoring in urine samples. These assays are used in conjunction with the Company’s leading FISH technology to provide highly sensitive and specific assays for all grades of bladder cancer. Multiple prior studies have shown that FGFR3 has the ability to detect a significant number of low-grade bladder tumors as well as tumors in the upper urothelial tract from voided urine specimens. Therefore, FGFR3 may detect tumors that conventional detection methods miss. The FGFR3 mutation analysis is part of the PersonalizeDx product line and addresses a market opportunity of approximately $250 million in the U.S. PersonalizeDx, a Rosetta Genomics company, was acquired by Rosetta Genomics last month.

Rehovot’s Rosetta develops and commercializes a full range of microRNA-based molecular diagnostics. Founded in 2000, Rosetta’s integrative research platform combining bioinformatics and state-of-the-art laboratory processes has led to the discovery of hundreds of biologically validated novel human microRNAs. Building on its strong patent position and proprietary platform technologies, Rosetta is working on the application of these technologies in the development and commercialization of a full range of microRNA-based diagnostic tools. (Rosetta 14.05)

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8.2 Rosetta Receives Additional U.S. Patent Protection for the Cancer Origin Test

Rosetta Genomics announced that the company has received a Notice of Allowance from the United States Patent and Trademark Office for U.S. patent application No. 13/986,516 titled, “microRNAs and uses thereof.” The composition of matter patent claims hsa-miR-509-3p, its complement and a sequence at least 90% identical to it, as well as a primer and a vector comprising this microRNA. This patent specifically covers one essential marker in the Rosetta Cancer Origin Test. Rosetta Genomics has 42 issued patents, seven allowed patents and 43 patents pending worldwide.

Rosetta Cancer Tests are a series of microRNA-based diagnostic testing services offered by Rosetta Genomics. The Rosetta Cancer Origin Test can accurately identify the primary tumor type in primary and metastatic cancer including cancer of unknown or uncertain primary (CUP). The Rosetta Lung Cancer Test accurately identifies the four main subtypes of lung cancer using small amounts of tumor cells. The Rosetta Kidney Cancer Test accurately classifies the four most common kidney tumors: clear cell renal cell carcinoma (RCC), papillary RCC, chromophobe RCC and oncocytoma. Rosetta’s assays are designed to provide objective diagnostic data.

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8.3 Cell Cure Neurosciences Awarded $1.6 Million Grant from Israel’s Chief Scientist

BioTime and its subsidiary Cell Cure Neurosciences announced that Cell Cure has been awarded a grant for 2015 of NIS 6.24 million (approximately $1.61 million) from Israel’s Office of the Chief Scientist (OCS) to help finance the development of OpRegen, a cell-based therapeutic product that consists of animal product-free retinal pigment epithelial (RPE) cells with high purity and potency. Cell Cure is now enrolling patients at Hadassah University Medical Center in Jerusalem, Israel, in a clinical Phase I/IIa dose-escalation study evaluating the safety and efficacy of OpRegen for geographic atrophy (GA), the severe stage of the dry form of age-related macular degeneration (dry-AMD). The Phase I/IIa clinical trial was opened in February 2015 following regulatory clearance from the U.S. (FDA) and the Israeli Ministry of Health.

Cell Cure Neurosciences was established in 2005 as a subsidiary of ES Cell International Pte. (ESI), now a subsidiary of BioTime. Cell Cure is located in Jerusalem, Israel on the campus of Hadassah University Hospital. Cell Cure’s mission is to become a leading supplier of human cell-based therapies for the treatment of retinal and neural degenerative diseases. Its technology platform is based on the manufacture of diverse cell products sourced from clinical-grade (GMP) human embryonic stem cells. Its current focus is the development of retinal pigment epithelial (RPE) cells for the treatment of age-related macular degeneration. (BioTime 13.05)

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8.4 Nitiloop Announces FDA 510(k) Clearance for its NovaCross Microcatheter

Nitiloop received FDA clearance for its first product, NovaCross, which is intended to be used in conjunction with a guide wire to access discrete regions of the coronary or peripheral vasculature. NovaCross functions both as a competent supporting micro catheter and as a premium low profile micro catheter on its own. NovaCross gains its supportive characteristic through the use of a unique operator-controlled Nitinol scaffold and an extendable segment, both located at its distal end. In addition to the recent granting of FDA clearance, the company reported successful results from a First in Human (FIH) European multicenter study which looked at NovaCross’s ability to cross CTOs in the coronary vasculature. The device was successfully used in 22 patients, half of whom had undergone a prior failed CTO attempt. NovaCross enabled crossing of the CTO in its entirety in 82% of cases. At 30 days after the procedure, there were no reports of any Major Adverse Cardiac Event (MACE). The company is currently conducting a pivotal trial in order to be cleared for a CTO indication in the coronary vasculature.

Founded in 2009, Herzliya’s Nitiloop is dedicated to the development of cutting edge cardiovascular and peripheral supporting micro catheters for complex lesions and Chronic Total Occlusions (CTO). Nitiloop’s technology enables superior operator-controlled positioning and support in multiple vasculature applications. (Nitiloop 18.05)

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8.5 POCARED Announces Real Time Identification of Bacterial Markers

POCARED Diagnostics announced a breakthrough in real time identification of bacterial species and antibiotic resistance markers utilizing its proprietary technology in the P 1000. POCARED’s P 1000 is a rapid automated platform that employs intrinsic fluorescence; optical data analysis and artificial intelligence to analyze multi-dimensional optical characteristics of microorganisms. POCARED’s P-1000 has successfully identified 5 antimicrobial resistance markers: KPC, NDM, vanB, mecA and OXA. Increasing antimicrobial resistance is a global problem with surveillance of resistance a priority. The global market for antimicrobial resistance testing is greater than $500 million and is growing 5 to 7% annually. POCARED continues to develop solutions for today’s Healthcare issues. The P 1000 is revolutionizing the detection, identification and enumeration of bacteria and yeast together with their antimicrobial resistance markers in a few minutes directly from culture. It is a fully automated, reagent-free, real-time and easy to operate platform.

Rehovot’s POCARED Diagnostics is an in-vitro diagnostic and pre-analytics company utilizing cutting edge technologies to deliver next generation platforms. POCARED’s CULTURE-FREE Microbiology technology is revolutionizing infectious disease diagnosis and practice with real-time automated results. POCARED’s P- 1000 platform is fully automated, reagent- free, real time and easy to operate. It provides multi-source detection, quantification and species identification for bacteria and yeast in a few minutes directly from sample. This saves several critical days in reporting compared to current practices. (POCARED 19.05)

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 Twistlock Unveils the Industry’s First Virtual Container Security Suite

Twistlock unveiled the industry’s first security suite designed to give enterprises the visibility and control they need over their container-based applications and data. Twistlock’s breakthrough container security enables enterprises to maximize the efficiency, portability and scalability of their containers, while maintaining end-to-end security. The company also announced they received $2.5 million in seed funding, led by YL Ventures.

Twistlock gives enterprises the confidence to adopt container technologies and deploy them in production environments, without compromising the security of the data they contain. Typically, containers represent a huge blind spot for enterprises, as security operations teams only see a virtual machine (or groups of machines) running unknown processes being accessed by large numbers of remote machines. Twistlock is the first solution that understands what’s really going on within a container or cluster of containers, illuminating who is accessing what and which processes relate to which workloads; it plugs into the control channel that manages containers to enable the intelligent inspection of containers at rest, as well as at run-time. The suite addresses risks on the host and within the application of the container, enabling enterprises to consistently enforce security policies, monitor and audit activity and identify and isolate threats in a container or cluster of containers.

Tel Aviv’s Twistlock is the industry’s first enterprise security suite for virtual container security. The suite addresses risks on the host and within the application of the container, enabling enterprises to consistently enforce security policies, monitor and audit activity and identify and isolate threats in a container or cluster of containers. Twistlock’s mission is to provide a full, enterprise-grade security stack for containers, so organizations can confidently adopt and maximize the benefits of containers in their production environment. (Twistlock 07.05)

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9.2 LightCyber Zeros in on Data Breaches with Increased Accuracy & Actionability

LightCyber announced Version 3.0 of the LightCyber Magna platform that enables even higher levels of accuracy and actionability in finding active network intruders. The introduction of two new features extends the unique attack detection and remediation capabilities enabled through integrated network and endpoint context. The new Network-to-Process Association (N2PA) technology provides the industry’s first ability to directly associate suspicious network traffic with a specific executable process or file on an endpoint via an agentless mechanism. In addition, the new Malicious File Termination (MFT) technology allows a security incident responder to remotely delete a file once it is confirmed as a part of an active attack. With the addition of these two features, security operators will have an even greater ability to efficiently detect active attacks, utilize automatically generated investigative data for incident response and rapidly stop the breach before damage is done.

While traditional threat prevention systems have been limited to either an endpoint or network-oriented threat detection context to prevent the initial intrusion attempt, the innovative LightCyber Magna Active Breach Detection platform integrates network activity and endpoint state into a single detection domain to detect active attackers that have circumvented legacy threat prevention systems. Instead of using technical artifacts that might or might not be associated with an attack, LightCyber Magna employs behavioral profiling to identify anomalous attack behaviors that cybercriminals must use to successfully perpetrate their attack, including reconnaissance activities, lateral movements from machine to machine, external communications with command centers and, ultimately, data exfiltration. While prior Magna versions already combined network and endpoint intelligence, version 3.0 with N2PA and MFT provides a significant advance in accuracy and actionability by identifying the specific file or process involved with an active breach and then allowing the incident responder to take immediate action. Actionability and accuracy help reduce attack dwell time and the associated damage potential – the ultimate goal of security organizations.

Ramat Gan’s LightCyber is a leading provider of Active Breach Detection solutions that accurately detect active cyber attacks that have circumvented traditional threat prevention systems. The LightCyber Magna platform is the first security product to simultaneously profile both network traffic and endpoint state in order to accurately detect compromised user accounts and devices early in the attack lifecycle, and to enable security operators to remediate breaches and stop attacks before real damage is done. (LightCyber 07.05)

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9.3 Cloudinary Adds Cloud-Based Video Management To Its Developers Toolbox

Tel Aviv’s Cloudinary, the leading cloud-based image-management solution made for developers by developers, is unveiling a whole new feature set for video. Cloudinary already manages billions of images and simplifies the lives of more than 50,000 developers worldwide, working at companies such as Conde Nast, Outbrain, Indiegogo, Under Armour and Answers.com. The cloud-based software-as-a-service solution has emerged as the gold-standard that developers of large companies and small startups alike use for their websites and mobile apps to solve all their image needs. Cloudinary’s newly launched video support provides a technical solution to all aspects of handling videos online, allowing developers to focus on their core product instead of spending time building and supporting their in-house video solutions. The idea for Cloudinary was born once the team decided to take the time to build a service that would offer an end-to-end solution to an application’s entire image-related needs, by developers for developers. (Cloudinary 06.05)

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9.4 Sckipio Named 2015 Leading Lights Finalist

Sckipio Technologies announced Light Reading editors have selected Sckipio as a finalist for the prestigious Leading Lights award in the “Outstanding Component Vendor” category. Sckipio was selected for the introduction of the world’s first G.fast modem chipsets, which fundamentally changed how telecom service providers can deliver 1Gbps ultra-broadband Internet access to bandwidth-hungry customers – at the lowest cost per megabit. Vendors nominated in this category were chosen because they stand out from competitors, innovate constantly, help set the industry trends, make investors proud and keep employees happy, according to the award criteria.

Ramat Gan’s Sckipio is the leader in G.fast modems and is dedicated to delivering ultra-broadband using next-generation G.fast-based Fiber-to-the-distribution point (FTTdp) architectures. Sckipio offers a complete G.fast solution – chipsets bundled with software – for a variety of access and mobile backhaul applications based on the ITU G.fast G.9700 and G.9701 standards, to which Sckipio is a leading contributor. (Sckipio 11.05)

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10: ISRAEL ECONOMIC STATISTICS

10.1 Israel’s CPI Rises 0.6% In April

Israel’s Consumer Price Index (CPI) rose by 0.6% in April, the Central Bureau of Statistics reported on 15 May. There were notable price rises in fresh fruit and vegetables (7.8%), hospitality and vacations (5.5%), clothing and footwear (5.2%), culture and entertainment (1.5%) and transport (0.7%). Notable declines were in furniture and home equipment (0.5%) and health (0.3%). The index excluding housing rose by 0.9%, to 98.8 points. The index excluding energy rose by 0.7% to 100.2 points, and the index excluding fresh fruit and vegetables rose by 0.4%, to 99.3 points.

In January, the CPI fell sharply, by 0.9%, and it fell by a further 0.7% in February. These falls were attributed to reductions in electricity and water tariffs (by 10% each) and did not stem from weakness in demand in the economy and a slide into a recession. Support for this view came in March, when the CPI rose by 0.3%. Nevertheless, despite the positive inflation figures for the past two months, inflation over the past twelve months is negative, at -0.5%, which compares with a government inflation target of 1-3%. Excluding housing, the CPI fell 1.3% in the twelve months to the end of April. (CBS 15.05)

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10.2 Israel’s Luxury Car Sales Soar in 2015

There is a school of thought that says that Israel’s car market mirrors society. They claim that the social revolution has reached the automobile sector with a rich range of brand new cars costing only NIS 50 – 80,000 allowing more Israelis than ever with modest means to become the proud owner of a new car. But that mirror also shows that there are more rich people than ever before who can afford to spend upwards of NIS 160,000 on a new car. In the first four months of 2015 deliveries of luxury cars rose sharply compared with the corresponding period of 2014. Sales of Mercedes cars were up 37.9% to 1,198; Audi sales were up 21.3% to 1,625; BMW sales were up 74.3% to 1,173; Lexus sales were up 24.5% to 539; Volvo sales were up 18.2% to 390; Alfa Romeo sales were up 10.4% to 201; Infiniti sales were up 304% to 182; Cadillac sales were up 9.6% to 151; and Land Rover sales were up 7.5% to 57. (Globes 14.05)

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11: IN DEPTH

11.1 ISRAEL: Fitch Affirms Israel at ‘A’; Outlook Stable

On 08 May, Fitch Ratings has affirmed Israel’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’, respectively. The Outlooks are Stable. The issue ratings on Israel’s senior unsecured foreign and local currency bonds have also been affirmed at ‘A’ and ‘A+’, respectively. The Country Ceiling has been affirmed at ‘AA-‘ and the Short-term foreign currency IDR at ‘F1’.

Key Rating Drivers

Israel’s IDRs balance a strong external balance sheet, robust institutional strength, solid macroeconomic performance and substantial financing flexibility with an elevated government debt/GDP ratio and high geopolitical risks.

The affirmation reflects the following key rating drivers:

The central government deficit narrowed to 2.8% of GDP in 2014, the lowest since 2008 and compared with an official projection of 3.2% of GDP at the end of Q3/14. This reflected under-execution of capital spending and a jump in revenues in Q4/14. A budget for 2015/16 may not be in place until Q4/15, allowing time for the new government, formed in May, to formulate its fiscal plans. In the absence of a budget, a fiscal rule will keep spending unchanged in real terms, allowing a further narrowing of the deficit. Early indications from the new coalition suggest a more expansionary fiscal stance in 2016.

Government debt is fairly high, but on a gradual downward trend at 67.1% of GDP at end-2014. A further fall is expected during the forecast period, but debt/GDP will remain above the peer median of 47%. Financing flexibility is high, with deep and liquid local markets, access to international capital markets and an active diaspora bond program and US government guarantees in the event of market disruption. The structure of debt is favorable.

The external balance sheet is a strength and Fitch forecasts it will improve. Gas production should ensure sustained current account surpluses, which we forecast to average just over 3% of GDP over 2015-2016. Likely large inflows of FDI will further bolster reserves and its net creditor position, which Fitch estimates at 33.1% of GDP at end-2014, compared with the ‘A’ range median of 14% of GDP.

Growth is stronger and less volatile than peers despite occasional conflict-related fluctuations. Real GDP growth rebounded to 6.8% in Q4/14, at quarterly annualized rates, after military operations in Gaza pulled it down to 0.2% in Q3/14. Shekel weakness, expansionary monetary policy, higher investment, a stronger global economy and a rebound from the Gaza conflict are forecast to underpin growth of 3.4% in 2015. Inflation is currently negative, but looks set to return to within the authorities’ preferred range of 1% – 3% by the end of 2015 due to currency depreciation and a pick-up in economic activity.

Domestic politics can be turbulent, with coalition governments often not lasting their full term. A new ruling coalition was formed on 6 May 2015, after elections in March at which the incumbent Likud party secured the largest share of the vote, following the collapse of the previous coalition. Although the new coalition appears fairly cohesive in terms of policy, it holds only 61 of the 120 seats in the Knesset.

Geopolitical risks weigh on Israel’s ratings. Fitch expects little progress in the peace process under the new government and the Palestinian Authority joining the International Criminal Court in March brings new risks. Some neighboring countries do not formally recognize Israel’s existence and there are intermittent conflicts with military groups in surrounding countries and territories. Tensions with Iran are high. The conflict in Syria poses risks to Israel and to other neighboring countries that could impact Israel, although direct spill-over has so far been negligible.

Israel’s well-developed institutions and education system have led to a diverse and advanced economy. Human development and GDP per capita are well above the peer medians and the business environment promotes innovation, particularly in the high-tech sector. However, Doing Business indicators, as measured by the World Bank, have slipped below peers and government intervention risks setting back development of the gas sector.

Steps are being taken to tackle structural weaknesses. The employment rate among ultra-orthodox men and Arab women has risen (to 30.5% and 44.5% in 2013, from 23.4% and 40.4% in 2008, respectively), partly in response to government initiatives, holding down wage inflation. Concentration of ownership in the private sector is being addressed, although introducing new players in some sectors is complicated by Israel’s fairly small and isolated market.

Rating Sensitivities

The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. The main factors that could, individually or collectively, lead to positive rating action are:

• Sustained progress in reducing the public debt/GDP ratio towards the category peer median.
• A sustained easing in geopolitical risk.
• A continued strengthening of the external balance sheet.

The main factors that could, individually or collectively, lead to negative rating action are:
• A sustained deterioration of the public debt/GDP ratio.
• A serious worsening of geopolitical risk.

Key Assumptions

Current regional conflicts and tensions are assumed to continue, but their impact on Israel is not expected to worsen materially. Fitch does not expect a military conflict between Israel and Iran. Fitch assumes the civil war in Syria will continue without seriously destabilizing neighboring states or directly spilling over into Israel.

Renewed conflict with Hamas in Gaza is not ruled out, despite a serious degradation of the latter’s military capacity. The tolerance of the rating and Outlook depends on the economic and fiscal implications of any conflict. Fitch does not assume any breakthrough in the peace process with the Palestinians. (Fitch 08.05)

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11.2 ISRAEL: The Israeli Private Equity Market – Q1/15

On 11 May, the IVC Research Center announced that in Q1/15, 14 Israeli private equity deals accounted for $310 million, a drop of 55% from $696 million invested by Israeli and foreign private equity investors in Q4/14. The amount was also 34% below the $471 million invested in Q1/14.

The largest deal in the quarter, which accounted for 52% of total quarterly investments, was the $162 million investment by foreign PE fund Northleaf Capital and geothermal company Ormat Technologies in a new joint venture.

In Q1/15, Israeli private equity fund investments of $77 million accounted for 25% of all investments. This compared to $217 million and $262 million in Q4/124 and Q1/14, respectively. All private equity transactions involving Israeli PE funds in the first quarter of 2015 were valued at under $40 million.

Israeli high-tech transactions captured $263 million or 85% of total private equity investments in Q1/15, compared with 71% and 41% in Q4/14 and Q1/14, respectively. Even though the amount invested in high-tech deals was down 47% from the previous quarter, it was up 37% from the amount invested in technology companies in Q1/14.

Rick Mann, Partner and Head of M&A at GKH, noted: “The strong growth in the portion of PE transactions that involve technology companies is an important trend. When non-tech deals occur, they are often led by local PE funds. Foreign PE funds continue to show a strong interest in Israel in tech deals and despite the lower overall figures in Q1/15, we expect higher results in the coming quarters.”

In Q1/15, straight equity deals dominated Israeli private equity transactions with $290 million or 94% of total investments, while in Q4/14 and Q1/14 buyout deals accounted for the majority of investments, with 75% and 52% of deal value, respectively. In terms of the number of deals, straight equity transactions accounted for more than 70% of all deals performed in Q1/15, Q4/14 and Q1/14.

Israeli Private Equity Investors

“On the one hand, the first quarter of 2015 demonstrated a marked slowdown in Israeli private equity deal making, mostly due to the decline in Israeli PE fund activity,” noted Marianna Shapira, Research Manager at IVC Research Center. “On the other hand,” she observed, “PE fund raising has already surpassed our earlier projections. From the beginning of 2015, three Israeli private equity funds raised approximately $1.5 billion, and 11 other funds are currently engaged in fund raising. This in large part explains the drop in PE transactions at the beginning of the year, as most funds were short of capital and focused on capital raising efforts. We expect the situation in the Israeli PE market to improve significantly later this year both in terms of deal value and number of transactions as newly raised funds start engaging in investment activity. Moreover, we expect growth in Israeli PE fund involvement both in technology and non-technology transactions throughout 2015.”

The IVC-Online Database maintains data on 34 active Israeli private equity management companies with a total of $7.4 billion under management. Currently, 11 funds are raising capital, and are expected to close some $800 million.

IVC Research Center is the leading online provider of data and analyses on Israel’s high-tech, venture capital and private equity industries. Its information is used by all key decision-makers, strategic and financial investors, government agencies and academic and research institutions in Israel.

Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. is one of Israel’s leading corporate and securities law firms, providing superior and innovative legal services. GKH is engaged in all aspects of corporate and commercial legal practice, representing a large number of publicly held corporations traded on US, Israeli and European stock exchanges. The firm also represents international investment banks, privately held corporations of all sizes, newly formed businesses, partnerships and joint ventures. (IVC 11.05)

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11.3 UAE: Emirate of Sharjah ‘A/A-1’ Ratings Affirmed; Outlook Stable

On May 8, 2015, Standard & Poor’s Ratings Services affirmed its ‘A/A-1’ long- and short-term foreign and local currency sovereign credit ratings on the Emirate of Sharjah. The outlook is stable.

Rationale

The ratings are supported by Sharjah’s continued solid growth and low government debt burden. Also underpinning the ratings are the advantages Sharjah derives from its membership in the United Arab Emirates (UAE), which include low external risks. We believe that, under certain circumstances, Sharjah would receive extraordinary financial support from the UAE if needed. We do not currently anticipate that such a need will arise, however.

The ratings on Sharjah are constrained by its underdeveloped political institutions and highly centralized policy-making, mirroring our assessments of other Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE). In addition, the emirate’s economic and demographic data, including national income and external accounts, are substantially weaker, in terms of availability and timeliness, when compared with other rated peers.

Policy-making is highly centralized and depends heavily on Sharjah’s ruler, Sheikh Dr. Sultan bin Mohammed Al Qasimi. In our opinion, this could undermine institutional effectiveness and policy predictability. Still, having ruled Sharjah since 1972, Sheikh Sultan has been instrumental in implementing the emirate’s long-term economic and social development objectives. We do not expect any significant changes in the government’s policy stance. Scope for political participation is limited to the Sharjah Consultative Council, but citizens’ relatively easy access to the leadership strengthens domestic stability, in our view.

The real economy in Sharjah is supported by a relatively diverse production base. The four largest sectors in the economy are real estate and business services (about 20%); manufacturing (16%); mining, quarrying and energy (13%); and wholesale and retail trade (12%). We estimate GDP per capita at $28,700 in 2015. In the absence of official real GDP data, we estimate real GDP growth using consumer price inflation as a proxy deflator. We estimate real economic growth at about 3.5% this year, down from an estimate of 5.5% in 2014. Sharjah’s growth is usually in line with trends in neighboring emirates (particularly Dubai, where many residents commute to) and the wider GCC, and we expect that overall regional demand will dip in line with lower oil prices and tighter banking sector liquidity. However, offsetting this, we expect large public sector infrastructure projects in Dubai and Abu Dhabi will provide support for Sharjah’s economy and also note that economic growth now depends less on the hydrocarbons sector. We think these factors will fuel increased consumption.

The Sharjah government’s budget is small relative to GDP, largely because the UAE federal budget covers a large share of public services. We estimate that government expenditures will equate to 8% of GDP in 2015. The government’s revenue base is similarly small, at about 6% of GDP. The government’s 2015 budget outlines the major contributors to government revenues as customs (17%), company registration fees (15%), and the police department (14%; mainly fines). We note that the contribution from oil and gas, which generated 14% of revenues in 2014, is likely to fall in line with decreasing hydrocarbon prices, and is budgeted at half of 2014 figures. We expect that the authorities will implement cost saving measures in order to offset this decline. After posting losses in recent years, state utility Sharjah Electricity and Water Authority (SEWA) required support representing approximately 1.7% of GDP in 2014, owing to its increased cost base, partly resulting from higher-than-expected purchases of diesel fuel. In 2015, we think lower gas prices could offset the heightened pressure from declining domestic hydrocarbon production on SEWA’s finances. Demonstrating its fiscal flexibility, the government has implemented a number of exceptional measures to raise revenues–mainly sales of stakes in construction projects and increases in dividends from other state-owned enterprises–to alleviate the impact on the fiscal deficit.

In our opinion, the general government deficit in 2015 will likely remain similar to 2014 levels, equating to a slightly wider deficit as a percentage of GDP than the average of 1% of GDP between 2009 and 2014, as capital expenditures expand and revenues dip slightly, given our projection of lower economic growth. We think the government will post modest deficits of less than 2% of GDP on average during 2015-2018. In our baseline scenario, we expect that government borrowing will be limited to that required for capital spending, and potentially, for a small proportion of deficit financing. We estimate that net general government debt will average 8% of GDP in 2015-2018, after standing at 2.6% of GDP in 2013.

Partly owing to the small size of the overall budget, the Sharjah government’s interest expenditures are high as a proportion of government revenues and will likely average about 10% in 2015-2018. In September 2014, the government issued a $750 million, 10-year, ijara sukuk (i.e. the Islamic equivalent of bonds).

Data on Sharjah’s balance of payments and external position is not available. Under our criteria, we use UAE data to assess external risks in the emirate. We think that Sharjah’s external risk is limited by the UAE’s extremely strong external balances, combined with its system of fiscal transfers and banking coordination. Using our narrow net external debt metric, we expect the UAE’s external creditor position will average about 115% of current account receipts (CARs) in 2015-2018, although it will likely decline over the period.

We estimate the UAE’s gross external financing needs will average about 100% of usable reserves of the Central Bank of the UAE (CBU) and CARs over the same period. We expect the UAE’s current account will show an overall surplus of about 1.4% of GDP in 2015-2018, significantly lower than the average of 16% of GDP in 2011-2014.

We estimate Sharjah’s risks from contingent liabilities as limited. We expect potential contingent liabilities from the financial sector to be modest, given that Sharjah-based banks are well capitalized. Furthermore, the CBU supervises Sharjah-based banks and they would be eligible for liquidity and capital support from the CBU and the UAE federal government if needed. In our view, the UAE’s monetary and banking union limits the external risks of the smaller emirates, including Sharjah, and would provide a cushion in the event of an external shock. The UAE dirham is pegged to the U.S. dollar, which has reduced some uncertainty in Sharjah’s private sector, albeit at the expense of diminished monetary flexibility.

Outlook

The stable outlook balances our view that Sharjah’s nominal GDP growth will still remain strong, against the Sharjah government’s relatively high and rising interest burden. We expect continued support for Sharjah through the UAE’s system of fiscal federalism, and consider that there is a strong likelihood that Sharjah would receive extraordinary support from the UAE (with Abu Dhabi backing) in the event of financial distress.

We could consider lowering the ratings if Sharjah’s economic or fiscal performance deteriorated markedly. For example, we foresee pressure on the ratings if Sharjah’s GDP per capita falls noticeably below our current estimates or if we revise upward our estimates for the average annual change in Sharjah’s general government debt by more than 1% of GDP. We could also lower the ratings if we assessed the likelihood of extraordinary support from the UAE federal authorities as weaker than we currently expect.

We could raise the ratings if Sharjah’s data transparency and development of public institutions improved significantly. (S&P 08.05)

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11.4 EGYPT: The Role of Egypt’s Central Bank

Adnan Karimeh posted on 13 May in Al Monitor that with the addition of $6 billion from Saudi Arabia, and the United Arab Emirates and Kuwait’s contributions at a rate of $2 billion each, the Central Bank of Egypt’s foreign reserves grew to $21.29 billion as of the end of April. This step is the first important development toward achieving the goals set at the March 2015 Sharm el-Sheikh conference and comes in affirmation of the Gulf partnership meant to advance Egypt’s economy. Furthermore, said reserves are expected to grow further as Egypt begins to gradually benefit from the flow of Arab and foreign investments, allowing the central bank to aggressively act in the foreign exchange market to protect the Egyptian pound and bolster its value, which dropped to 7.63 pounds to the dollar.

In that regard, the Sharm el-Sheikh conference restored Egypt’s position on the global investment map for the last quarter of the 2014-2015 fiscal year ending next June. The first two quarters of the 2015-2016 fiscal year will further witness the implementation of some of the memorandums of understanding signed during the conference. In that sense, the size of investments and loans received by Egypt totaled $60 billion, spread between investments under contracts worth $36.2 billion, and agreed-upon and funded projects valued at $18.6 billion to be paid in long-term installments, as well as loans worth $5.2 billion granted by international institutions and funds under contracts signed by the Ministry of International Cooperation.

In the coming phase, Egypt is betting on entering “a third renaissance period” characterized by a specific outlook for the future, centered around the Egyptian people’s hopes that investment projects pave the way toward a bright future for generations to come. The “first renaissance” occurred during the reign of Muhammad Ali, the founder of modern Egypt, and the “second renaissance” took place during the period of Gamal Abdel Nasser, which combined between Egypt’s internal renaissance and its aspirations to play an important Arab and regional role, which manifested itself in the “celebration of Arabism aimed at unity.”

The importance of these expected positive developments is evident when taken in the context of the great deterioration suffered by Egypt’s economy since the January 2011 revolution, when investments worth in excess of $20 billion were withdrawn and the central bank’s reserves fell from $36 billion at the end of 2010 to less than $15 billion in subsequent years, leading to the collapse of the pound’s value to the dollar. Moreover, during the past three years, the growth rate hovered around 2% prior to jumping to 3.7% in the last quarter of the 2013-2014 fiscal year, ending in June 2014, and then again rising to 4.3% for the 2014-2015 fiscal year. This growth rate is expected to increase to 6% in coming years as a result of the inflow of investments and support from the Gulf partnership countries.

But, conversely, a series of financial, economic and social challenges have arisen, which the central bank is expected to help address, particularly since the goals set by central banks after the world financial crisis of 2008 are no longer confined to guaranteeing monetary stability, protecting the national currency from inflation and safeguarding the banking sector. These goals have instead evolved to exploit fiscal policies for the benefit of revitalizing the economy, promoting growth and working toward securing economic and social stability.

In light of “extremely dangerous” regional developments that have negatively affected local economies, at a time when the financial burdens of governments never cease to increase, the World Bank has affirmed that regulatory and oversight bodies, led by central banks, must play a pivotal role in preparing the proper institutional environment conducive to achieving financial inclusion and expanding the base of those benefiting from financial services, while increasing the employment rate and combating poverty. In addition, the Arab Monetary Fund stressed the need to adopt comprehensive economic policies that govern the relationship between the availability of funds and economic activity, with the aim of achieving price stability and creating a climate suitable for the conduct of economic activities of all kinds, which, in turn, would lead to stimulating the economy.

Can the Central Bank of Egypt achieve all those goals? If a healthy economy requires that economic growth be equal to three times the rate of population growth, then this formula is far from being realized under the current Egyptian economy, where population growth rates exceed economic growth rates. In addition, further exacerbating this dilemma is the fact that the division of growth is far from equitable, resulting, on the one hand, in poor distribution of wealth and, on the other, the marginalization of a large segment of Egyptian society, while unemployment and poverty continue to rise.

This is all occurring at a time when the central bank is suffering from a lack of foreign currency reserves, which currently stand at $21.29 billion (compared to $36 billion before the revolution). This amount is very small for a large country with a population of 90 million. In comparison, the Central Bank of Lebanon, which is located in a small country with a population of less than 6 million, has reserves estimated at $50 billion in gold and foreign currencies, despite the fact that it is a consumer country, with annual import expenditures in excess of $22 billion. Yet, it managed to approve financial incentives totaling over $3.36 billion between 2013 and 2015, thus helping increase the rate of economic growth. As a result, Lebanon’s economy and banking sectors are greatly dependent on loans and incentives offered by the central bank, which has stayed abreast of its economic and social responsibilities. Meanwhile, central banks have had to modify the implementation of their fiscal policies and expand their economic roles by supporting their respective governments and preparing the framework necessary to achieve sustainable growth. (Al Monitor 13.05)

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11.5 EGYPT: Outlook Revised to Positive on Gradual Economic Recovery

On May 15, 2015, Standard & Poor’s Ratings Services revised its outlook on the Arab Republic of Egypt to positive from stable. At the same time, we affirmed our ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings on Egypt.

Rationale

The rating action reflects our view of Egypt’s gradual economic recovery, supported by improving, albeit still fragile, political stability, alongside policymakers’ commitments since 2014 to embark on economic reforms. These include subsidy and income tax reforms, a new law on investment and the announced value-added tax (VAT) system on goods and services. In addition, we expect some Gulf states will continue to provide the Egyptian government with sufficient foreign currency funds to manage the country’s short-term fiscal and external financing needs.

Our ratings on Egypt remain constrained by wide fiscal deficits, high domestic debt, low income levels, and institutional and social fragility. The ratings are supported by positive growth prospects and financial support from the Gulf states.

According to preliminary government estimates, Egypt’s real GDP growth rose to 5.6% year-on-year during the second half of 2014, supported by improved political conditions compared with the same period a year earlier. The services, tourism, and manufacturing sectors have mainly fueled the country’s recent economic performance. In addition, we expect growth will be bolstered by inward foreign investment that we estimate could exceed an annual average of $10 billion over the next three years, particularly in the energy, real estate, and transport and logistics sectors. We think growth will average about 4.3% per year in 2015-2018, compared with just 2.1% in the previous four years.

In early 2015, Saudi Arabia, the United Arab Emirates (UAE) and Kuwait pledged a further $12.5 billion in economic and financial assistance to Egypt. They have already demonstrated support to Egypt by providing substantial financing – totaling close to $25 billion – in grants, aid, and concessionary loans, over the past three years. We understand that the Central Bank of Egypt (CBE) received, at the end of April 2015, $6 billion in deposits from the Gulf states, which has helped increase Egypt’s foreign currency reserves to $20.5 billion from $15.3 billion.

Mr. Abdel-Fattah El-Sisi, formerly Field Marshal and Chief of Army Staff, was sworn in as president in June 2014. Since then, the Egyptian political landscape has seen a broad return to stability, albeit with underlying unresolved issues surrounding social inclusion. Egypt has indicated it will hold parliamentary elections between June and September of this year and these will be the third and final milestone in the country’s current political roadmap. This socio-political improvement remains fragile, however, with sporadic incidents of hostility occurring between the government and supporters of the now-outlawed Muslim Brotherhood, and tensions in Northern Sinai.

In addition to the stabilizing security situation and stimulating growth, the government has launched a number of fiscal reforms, including raising administered fuel and electricity prices. It plans to gradually phase out fuel subsidies over the next five years. The government also raised taxes on higher income earners, corporations, and property, and introduced taxes on capital gains and dividends. It has announced plans to impose a value-added tax to replace the existing goods and services tax and generate higher revenues. These measures target a deficit reduction over the next few years, but are partially counterbalanced by spending on health, education and scientific research that is now mandatory under the new constitution.

We expect Egypt’s fiscal deficits and domestic debt ratios to remain high. The government is targeting a fiscal deficit of 10.5% of GDP in 2014-2015 (July-June), below the estimated 12.8% recorded in 2013-2014. We project Egypt’s fiscal deficit will stabilize at a still-high 10% on average between 2015 and 2018. We consider the government’s ability to significantly cut spending as limited, particularly given Egypt’s shortfall in basic services and owing to constitutionally mandated expenditures.

We estimate the annual change in general government debt will average about 10% of GDP in 2015-2018. We expect net general government debt will average about 82% of GDP in 2015-2018, having risen sharply from an average of 73% in the past four years. We project general government interest expenditure will average about 34% of general government revenues in 2015-2018, exceeding the 27% average in 2010-2014. We understand the government plans to raise $1.5 billion during the first half of 2015 through a Eurobond offering, and aims to issue sukuk in fiscal 2015-2016 to diversify its funding sources.

The Egyptian banking system is heavily exposed to the sovereign, with net claims on the government amounting to 75% of net domestic assets in 2014, compared with 51% in 2010, on the back of high fiscal deficits. Egyptian banks have so far remained keen buyers of government debt, and have chosen to invest their excess domestic currency liquidity in government debt offerings in recent years. Their customer deposit bases have continued to grow strongly, while private-sector credit remained relatively flat. This situation could however change if banks want to consider more diversified loan portfolios by expanding their private sector lending to new projects, alongside those announced during the conference.

We forecast current account deficits to average 4.4% of GDP in 2015-2018. Over the same period, we estimate external debt net of liquid assets will average a relatively modest 25% of current account receipts (CARs). However, we expect Egypt’s overall net external liability position to exceed 125% of CARs in 2015 and then 150% in 2018. We take the view that support from Gulf donors and foreign direct investments will continue to provide the Egyptian government with sufficient foreign currency resources to mitigate external vulnerabilities. Notably, Saudi Arabia, the UAE and Kuwait disbursed to Egypt $16.4 billion in 2013-2014 (equivalent to 5.7% of GDP), and an additional $8.4 billion in 2014-2015 (about 2.7% of GDP). About 65% of the funds received between 2013 and 2015 was in the form of grants and deposits at the CBE, while the remaining 35% was delivered in the form of energy products.

We assess Egypt’s monetary policy flexibility as low, reflecting our view of the CBE’s intermittent interventions in the foreign exchange market and its exposure (along with that of the banking system) to the government, and an annual inflation rate exceeding 10%. Notwithstanding the CBE’s interventions, the Egyptian pound has depreciated by about 27% against the U.S. dollar since January 2012, including a slide of about 7% since the beginning of the year.

Outlook

The positive outlook reflects the possibility that we could raise our long-term ratings on Egypt over the next 12 months if the economic recovery outperforms our current expectations, or if narrower-than-expected current account deficits lead to a stronger external position.

We could revise the outlook to stable if we come to believe donor support is likely to be much lower than we currently expect, which would exacerbate Egypt’s external vulnerabilities. We could also revise the outlook to stable if we think recently improved political stability is threatened by political strife that could hamper the economic recovery. (S&P 15.05)

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11.6 TURKEY: Turkey Avoids Economic Pain with EU Trade Agreement

Mehmet Cetingulec posted on Al Monitor on 6 May that Turkey has won its customs union struggle with the European Union, which decided not to exclude Turkey from the Transatlantic Trade and Investment Partnership (TTIP) it’s about to conclude with the United States. The customs union agreement between the EU and Turkey was signed on 11 May.

Prime Minister Ahmet Davutoglu announced the development in his address to the General Assembly of the Union of Chambers and Bourses of Turkey on 2 May. Davutoglu emphasized that henceforth there will be no infringement of Turkey’s rights in future EU free trade agreements.

Turkey was excluded from the TTIP negotiations that began between the United States and the EU in 2013 because it was not an EU member. The risk of being kept out of the planned accord that would provide economic integration with the world’s largest free trade market of 800 million people brought Turkey to the verge of leaving the customs union.

The TTIP will remove all customs barriers between the United States and the EU. But as Turkey had already made a customs union agreement with the EU in 1996, the TTIP would have burdened Turkey with a tremendous disadvantage. Once the TTIP went into effect, Turkey would not impose a customs duty on imports from the United States, but the United States would continue such fees on imports from Turkey, costing Turkey considerable tax revenue. Moreover, its industry would be threatened by duty free imports; industries would shut down, production would decline and unemployment and the deficit would rise.

This scenario has been a nightmare for Turkey for several years. Turkey had two options: Either to reach a separate free trade agreement with the United States, or be included in the TTIP by persuading the EU to let it join.

What would have happened if neither of those options had worked out? The answer came in 2013 from Economy Minister Zafer Caglayan, who said, “We can leave the customs union.” This was the first time a Turkish official had voiced the possibility.

When no progress was achieved in negotiations with the EU, Minister for EU Affairs Volkan Bozkir said 11 November 2014 that the customs union agreement could be suspended and that this option did not constitute blackmail.

Last year, Economy Minister Nihat Zeybekci expressed his position, saying: “The TTIP is a negotiation for full economic and political integration. If it is implemented, it will mean redrawing the world economic map. We cannot tolerate this. We can’t live with its ramifications. The customs union will become impossible to sustain.”

While the government was studying various options, including terminating the customs union, Turkey’s Central Bank listed the effects the TTIP would have on Turkey:

• If Turkey joins the TTIP and can export goods to the United States duty-free, its exports will rise by 7%.
• If Turkey is excluded, there will be a $ 4 billion reduction in its gross domestic product, but if it is included, its GDP will increase by $31 billion.
• The TTIP will provide 2.6-9.7% increases in the welfare economies of EU countries and 13.4% for the United States. Among the countries not covered by the TIPP, there will be the following welfare losses: Switzerland 3.7%, Canada 9.48%, Mexico 7.24% and Turkey 2.5%.

These predictions gravely worried Turkey. The latest to voice Turkey’s concern was Minister of Customs and Trade Nurettin Canikli, who said: “The TTIP is an agreement that will have very serious implications. We can’t accept it. Turkey’s economy cannot tolerate it. There are two options: Either we will have a say in the agreement and negotiations, or we must be allowed equitable share of its results. If this is not done, it is simply impossible for us to accept it. In that case, we will be left with one option: to give up the customs union. The EU knows the damages this agreement will inflict on Turkey. If it persists, it would mean that the EU want us to give up the customs union.”

The picture was clear. If Turkey were kept out of the agreement, its economy would sustain heavy damages. Negotiations with the EU continued and after a tense two years, two months ago, a promising statement came from Economy Minister Nihat Zeybekci, who said, “We are approaching a point when Turkey’s views on the customs union are being accepted. We will conclude this negotiation process when a new format of customs union emerges. A formula was developed to include Turkey in the TTIP by the middle of 2016. At this point, updating the customs union commensurate with the conditions of the day has become a necessity.”

The accord with the EU will signify that the EU has agreed to update the customs union as requested by Turkey. Negotiations between the EU and Turkey on revising the customs union will commence at the beginning of 2016. These negotiations are expected to be finalized in six months, before the TTIP goes into effect.

With the updating of the customs union, Turkey will have the right to be a party to all free trade agreements the EU will sign, including the TTIP. Until now, Turkey had to negotiate separate agreements with the countries that had signed free trade agreements with the EU. Turkey lost tax revenues in its trade with countries it could not reach such agreements with. After the change, Turkey will automatically be party to all the customs accords the EU signs.

The free trade agreements that Algeria, Mexico and South Africa signed with the EU will now cover Turkey. Other advantages will include removing the quotas imposed on Turkish trucks. The agreement will not only address Turkey’s demands, but also cover EU demands such as expanding customs union coverage to the service and agricultural sectors, the trading of used goods, the medicine trade and allow Turkey to minimize its protective measures against imports.

The updating of the customs union is an important development that night help Turkey overcome the economic bottlenecks it is experiencing with declining growth and exports and increasing unemployment and may well reinforce Turkey’s motivation to join the EU. (Al Monitor 06.05)

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11.7 TURKEY: Local Currency Ratings Lowered to ‘BBB-/A-3’; Outlook Remains Negative

On May 8, 2015, Standard & Poor’s Ratings Services lowered its unsolicited long- and short-term local currency sovereign credit ratings on the Republic of Turkey to ‘BBB-/A-3’ from ‘BBB/A-2’. At the same time, they affirmed their unsolicited ‘trAAA/trA-1’ long- and short-term Turkey national scale ratings and unsolicited ‘BB+/B’ long- and short-term foreign currency sovereign credit ratings on Turkey. The outlook remains negative.

Rationale

The lowering of the local currency sovereign credit ratings on Turkey reflects what we consider to be increasing curbs on the operational independence of Turkey’s central bank, which in our opinion have made it more challenging for the monetary authority to credibly fulfill its price stability mandate and to dampen the impact of exchange rate volatility on the economy’s growth prospects. Another consequence of rising currency volatility, which reflects a less transparent monetary policy, is the re-dollarization of the financial sector’s deposit base. Overall, we now consider that the challenged credibility of the central bank, including a weakened monetary transmission channel, has diminished the status of the Turkish lira as a reliable transactional currency; we think this poses greater risks to the refinancing of Turkey’s considerable stock of external debt. While we consider that Turkey’s relatively deep capital markets benefit its monetary flexibility, we view the complex monetary framework – with multiple interest rates and an unusually broad interest rate corridor – as relatively ineffective given the high pass-through of exchange rate depreciation into headline inflation.

The affirmation of the foreign currency sovereign credit ratings on Turkey reflects our base-case scenario that annual GDP growth will average about 3% from 2015-2018, that external debt metrics will gradually stabilize and that Turkey’s leveraged private and state-owned banks, which have been intermediating high current account deficits since 2008, will not require fiscal support.

In our view, authorities have accurately flagged key risks, in particular Turkey’s high and recurrent external deficits. The government’s ambitious Tenth Development Plan pragmatically focuses on ways to raise the domestic savings rate and cut the bill for imported energy (which we estimate made up most of last year’s current account deficit of about 5.7% of GDP), while improving the currently low participation of women in the labor market and reducing the size of Turkey’s substantial informal economy. However, since the Development Plan’s publication in the summer of 2013, there has been only modest progress on its implementation. Were the pace of implementation to accelerate after this year’s general elections on 7 June, it could help Turkey to shift away from its current economic growth model, which remains highly dependent on net debt financing from abroad.

The Turkish economy continues to have higher external debt levels and lower foreign exchange reserves relative to other large emerging markets. For end-2015, we project Turkey’s narrow net external debt to total 1.4x current account receipts; by comparison, this ratio is 0.3x in South Africa, 0.4x in Brazil, and 0.5x in Hungary. We estimate usable reserves (gross reserves excluding foreign exchange and gold reserve requirements, but including government deposits of $4.5 billion) at $45.3 billion as of end-February 2015, a figure that is roughly equal to last year’s current account deficit. This international reserve position only provides a limited buffer against any further exchange-rate pressure. Stripping out government deposits, this figure is an estimated $40.8 billion, equivalent to 2.4 months of import cover, well below the coverage ratios of peers. Total deposits for all foreign exchange reserve requirements made up an estimated 65% of gross reserves in February 2015 (37% in 2011).

External leverage for Turkey’s banking sector remains relatively high, and at quite short maturities. Between 2008 and 2015, net banking sector external debt increased from less than $8 billion (1% of GDP) to a projected $172 billion (23% of GDP), while in dollar terms the size of the economy remained about the same. It remains to be seen whether rapid credit growth to the corporate sector, particularly small and midsize enterprises, can benefit Turkey’s long term growth potential. While we view Turkey’s banking system in general as well capitalized and supervised, the size of the state banks, and their involvement in quasi-fiscal operations, means that asset quality should not be assumed to be homogenous throughout the system. Although the banks are fully hedged, their rising foreign currency borrowing has occurred in tandem with declining profitability – and could create a problem for banks if their hedges do not hold due to counterparty risk or the second round effects of the large open foreign exchange position in the corporate sector (at an estimated 22% of GDP) on banks’ asset quality.

While Turkish banks’ direct exposure to nonresidential property appears to be limited to 7% of total assets, the corporate sector’s exposure to construction and property together would likely be about 14.5% of its assets (similar to its share in Turkish 2014 GDP as measured in current prices). In our view, the Turkish financial system would therefore not be immune to any larger downturn, especially one accompanied by further exchange rate depreciation. Nevertheless, the low system wide nonperforming loans ratio of about 2.8% indicates a robust starting point in any potential crisis.

The ratings on Turkey benefit from the Treasury’s policy of meeting net public-sector financing needs by issuing in local currency, at longer maturities. External and monetary risks to Turkey’s economic prospects persist. These include:

• Turkey’s still-sizable, albeit considerably narrowed, current account deficit (CAD), which we forecast at 4.6% of GDP at end-2015 (5.7% in 2014). We forecast that the CAD will be 16% of current account receipts by year-end.

• Inflation, which we project will average 7% in 2015. Headline inflation has remained above the Turkish central bank’s medium-term target of 5% for several years.

• The 22% year-over-year depreciation of Turkey’s exchange rate against the economy’s key funding currency, the U.S. dollar. In our view, this will exert further pressure on the corporate sector in light of its large open foreign exchange position of an estimated $177.5 billion, or 22% of GDP, as of the end of January 2015.

• The estimated loss of two-thirds of the competitiveness gains from the depreciation of the trade-weighted exchange rate due to higher inflation versus trading partners since 2010.

• The uncertain global economic environment, particularly the possible reversal of historically low U.S. interest rates.

Mitigating these external vulnerabilities to some degree, Turkey benefits from deep local currency capital markets, which have benefited the sovereign’s access to and cost of financing.

The decline in oil prices should benefit the net financing position of the economy. After revising our oil price assumptions down to a medium-term average of $67.5/barrel for Brent oil (from $102), we now project the CAD will decline to 4.6% of GDP in 2015 and 3.7% of GDP by 2018. We forecast a slight improvement in the external financing profile, with progressively lower reliance on net debt inflows over a four-year horizon.

Our baseline expectation is that the government will continue running limited deficits, averaging 1.6% of GDP in 2015-2016, widening to 3% in 2018. However, historically, fiscal performance has been highly cyclical, and subject to large swings into deficit, such as in 2009, when automatic stabilizers yielded a general government deficit of 5.9% of GDP. Key debt metrics trends will, under our baseline projections, remain largely flat – with the general government interest burden at about 7% of revenues and net general government debt at 33% of GDP, of which we estimate two-thirds is denominated in Turkish lira. We also note that, since 2009, the average maturity of Turkish government domestic debt has more than doubled to about seven years. Our headline deficit figures are higher than in the government’s Development Plan given our lower growth forecasts. One risk to the funding profile of the central government remains the high stock of domestic debt held by non-residents: 20.6% of total debt at end-March 2015, down from its 25.7% peak in April 2013, equivalent to just under 5% of GDP. Were monetary instability to persist, this stock could become a flow, which might put pressure on balance-of-payments financing.

Despite the government’s presentation of a new structural reform agenda, we continue to see policy risks that we believe could persist even after the upcoming 2015 general elections. The erosion of checks and balances in Turkey’s key independent institutions, alongside the centralization of decision-making, poses risks to business confidence and economic stability, in our opinion. With our expectation that real GDP growth will hover around 3% over the medium term, unemployment could continue rising, leading to social pressures. Lastly, the spillover of sectarian and ethnic tensions from conflicts in Syria and Iraq could render policymaking less predictable and also lead to higher fiscal costs.

Outlook

The negative outlook reflects our view that there is at least a one-in-three likelihood that we could downgrade Turkey within the next 6-12 months if Turkey’s fiscal performance and debt metrics were to deviate from current expectations – for instance, due to a sudden drop in revenue, higher expenditure needs, or the crystallization of contingent liabilities from quasi-fiscal activities or financial-sector instability. Such fiscal deterioration could result from a balance-of-payments or growth shock as a result of changed global liquidity conditions or an economic downturn in core trading markets. An intensification of intervention in the independence of Turkish institutions, including the central bank, could also lead to weaker growth outcomes, and a lower rating.

We could revise the outlook to stable if economic growth continued to rebalance and depended less heavily on external borrowing. (S&P 08.05)

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11.8 TURKEY: An Alevi Tide Headed For Turkey’s Parliament

Soner Cagaptay wrote on 6 May in TWI PolicyWatch 2418 that the unprecedented influx of Alevi deputies could form a significant anti-AKP bloc in the next legislature, but this development could also hurt the opposition CHP if Alevi deputies act in a sectarian manner.

One of the key dynamics emerging in the buildup to Turkey’s June 7 election is the anticipated record number of Alevis set to enter parliament, mostly from the opposition Republican People’s Party (CHP). For the first time, the percentage of Alevis in the legislature could roughly represent their percentage of the total population. This development will have implications for Turkish politics, as leftist and liberally disposed Alevis vehemently oppose the ultraconservative Justice and Development Party (AKP) government and could form an informal anti-AKP bloc in the parliament. For its part, the AKP could respond by painting the CHP as an Alevi party, suggesting that Sunnis vote AKP and Alevis vote CHP. Such a tactic could marginalize the CHP and boost the ruling party’s power.

Alevi Politics and Low Representation

Alevis belong to a Turkish brand of Islam that professes an open, Sufi-inspired understanding of the religion. Though nearly eponymous with the Levantine Arab Alawite community, the Turkish- and Kurdish-speaking Anatolian Alevis are a distinct constituency. Alevis constitute 10 – 15% of Turkey’s population of 77 million, while Turkish citizens of Alawite origin are a much smaller community of less than a million people. The latter also practice a deeply devout, esoteric version of Islam shared by Alawite supporters of the Assad regime in Syria. Despite their differences, Alevis and Alawites are politically aligned in Turkey because they share a visceral suspicion of the AKP’s Sunni tilt, including its backing of Sunni rebels in Syria. Both groups are staunchly secular in their political habits, voting for the CHP and other leftist parties in overwhelming numbers.

Alevi representation in the 550-seat Turkish legislature has traditionally been much smaller than their share of the country’s overall population, hovering at 3-5%. There are a number of reasons for this underrepresentation. First, although CHP deputy Sabahat Akkiraz indicated in 2012 that 75% of Alevis tend to support her party in elections, the CHP’s leadership has long taken them for granted, and few of its deputies are Alevi.

Second, although an estimated 10-20% of Turkish Alevis speak Kurdish, they still identify primarily as Alevis, not as Kurds. Therefore, they typically do not support leftist Kurdish nationalist parties such as the Peoples’ Democratic Party (HDP), limiting another potential avenue for parliamentary representation (though as discussed below, the party will still field a few Alevi candidates).

Third, the conservative platforms of right-wing parties have historically failed to attract Alevi voters. As a result, Alevi deputies have had almost zero representation in these parties’ parliamentary delegations. For example, the AKP list for June 7 includes no Alevi candidates, and only one of the party’s 312 current deputies is Alevi. Similarly, the right-wing Nationalist Action Party (MHP) has only one Alevi candidate on its June list.

Even taking into account traditional Alevi underrepresentation in Turkish politics, the AKP’s rule since 2002 represents a near-total Alevi marginalization that is unique in Turkey’s modern history. There are no Alevis in the governing party’s leadership or among the twenty-six cabinet ministers. More significantly, there are no Alevis among the eighty-one provincial governors, eighty-one provincial police chiefs, or twenty-six undersecretaries — all key bureaucratic positions filled by central government appointment. Combined with historical memories of persecution under the Ottoman Empire, the ongoing alienation has led many Alevis to oppose the AKP through street politics and demonstrations. For example, large numbers of them took part in the liberal Gezi Park movement of 2013, organizing rallies and establishing NGOs.

CHP Primaries and the Alevi Tide

Turkish parties typically determine their candidates for legislative elections in a top-down process, with the party chair singlehandedly picking who will run. This year, however, the CHP organized primaries in March for a majority of the country’s electoral districts, in an effort to mobilize its base and allow new candidates to emerge from the grassroots.

This approach exceeded expectations, producing a highly diverse list. For example, a record number of forty-eight women entered the CHP’s lists in the primaries. Party chair Kemal Kilicdaroglu, a liberal, added another fifty-five women to the rosters to further vary the lists, for a total of 103 — he even included an Armenian woman to top the list in one of Istanbul’s districts. Current poll numbers indicate that the CHP could send 25 to 35 of these women to parliament on 7 June, pushing the share of the party’s female deputies from 13.6% in the current legislature to as high as 25%.

As for the Alevis, they mobilized particularly large numbers to vote in the CHP primaries. A recent article by Turkish columnist Hasan Kanbolat suggests that as many as 68 of the Alevi candidates elected in the primaries are likely to win posts in the next parliament. Moreover, another ten Alevis could be elected from the Kurdish nationalist HDP list (as explained below). This would theoretically raise the percentage of Alevis in the legislature as high as 10-15%. If so, for the first time in Turkey’s modern history, their parliamentary representation would be almost proportional to their percentage of the population, ending a long period of disenfranchisement.

Alevi Caucus?

Although it did not hold primaries, the HDP also ended up placing an unprecedented number of Alevis on its lists, naming about ten Alevi candidates. Should the HDP cross the 10% electoral threshold required for parties to enter parliament, most of these candidates will be elected. This year, the HDP aims to transcend its traditional Kurdish nationalist focus in order to pass the threshold — the party has been unable to exceed 6.5% of the vote in previous general elections. Accordingly, it has adopted a liberal platform to attract feminist, minority, socialist, and Alevi voters. If it crosses the threshold, the party is expected to gain 50 – 60 seats, of which 15 – 20% could be assigned to Alevi deputies.

Combining this figure with the CHP’s projections, the next parliament could have sixty to seventy Alevi deputies, or fifty to sixty if the HDP does not meet the threshold. As such, an informal Alevi caucus is on the cusp of emerging in the legislature (the Turkish parliament does not have formal caucuses). Most of the prospective Alevi deputies are young, and a large number are women, lawyers, journalists, bloggers, and human-rights/NGO activists. Moreover, many of the Kurdish-speaking Alevis on the HDP list identify primarily as Alevis and could vote with their CHP counterparts on key issues, including separation of religion and government, gender equality, compulsory teaching of Sunni Islam to all nominally Muslim students in the public schools as well.

Implications for Turkish Politics

The Alevi tide currently poised to enter the Turkish legislature can be seen as part of a broader political development. The next parliament will better represent Turkey’s diversity, including a record number of women, Roma, Armenian, Yazidi, Orthodox and Syriac Christian deputies. For their part, Alevi deputies could form an informal bloc to challenge the AKP’s authoritarian and ultraconservative tendencies. Given its potential size, this bloc is unlikely to stop any AKP legislation, but its actions could stir public debate.

As mentioned previously, however, the AKP will likely exploit any Alevi bloc formation to label the CHP as the “Alevi party.” The CHP is expected to win 100 – 150 seats, and Alevi deputies will enjoy a significant share of them. Before the August 2014 presidential election, then-prime minister Recep Tayyip Erdogan depicted the party as an Alevi movement despite the fact that its candidate, Ekmeleddin Ihsanoglu, was a devout Sunni. Today, such a label could marginalize the CHP and render it a minority party par excellence. Therefore, the CHP’s challenge is to broaden its appeal and platform beyond promoting Alevi rights. Those Alevi deputies who do manage to win seats will need to demonstrate their nonsectarian credentials by advocating universal rights and freedoms, including for devout Sunnis.

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Soner Cagaptay is the Beyer Family Fellow and director of the Turkish Research Program at The Washington Institute, and author of “The Rise of Turkey: The Twenty-First Century’s First Muslim Power” (http://washin.st/ZI45JV), named by the Foreign Policy Association as one of the ten most important books of 2014. (TWI 06.05)

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Fortnightly, May 20th 2015

Fortnightly, May 20th 2015

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