Fortnightly, May 6th 2015

Prime Minister Benjamin Netanyahu supports a major increase in the 2016 defense budget, according to preliminary discussions in recent days at the Ministry of Finance as part of preparations for the proposed 2015-2016 budget. Netanyahu, who is still serving as acting Minister of Finance until a new government is sworn in, ordered the Ministry of Finance professional echelons to consider the budget consequences of increasing the defense budget beyond the NIS 55 billion allocated in the Ministry of Finance’s planning for 2016.

It is already clear that the struggle over the defense budget will be the most urgent issue on Minister of Finance designate Moshe Kahlon’s agenda. As far as the Ministry of Finance is concerned, a hike in the defense budget can only be at the expense of reduced budgets for civilian ministries. Netanyahu and then-Minister of Finance Yair Lapid reached a compromise at the last moment last year, in which the defense budget was put at NIS 57 billion (before spending contingent on revenue). NIS 4.3 billion was defined as a “box” – a one-time supplement beyond the spending ceiling, with the reason for this exceptional measure being the costs of Operation Protective Edge. The projected budget hole for 2016 is estimated at NIS 6-14 billion. (Globes 29.04)

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1.2 Bank of Israel Governor’s Decisions Among OECD’s ‘Most Surprising’

Bank of Israel Governor Dr. Karnit Flug has been dubbed by the Bloomberg news agency as being “top of the class” among central bankers across the developed world, especially when it comes to defeating predictions on Israel’s benchmark interest rate. According to Bloomberg, since taking office in July 2013, Flug has issued six rate decisions that all but defeated projections, more than any other central banker among the 34 member nations of the Organization for Economic Cooperation and Development. Most recently, Flug’s decision to both set and keep Israel’s key interest rate at 0.1% has sent analysts reeling.

According to Bank of Israel data, the shekel has appreciated more than 7% against the dollar, euro and other major currencies since December. The report noted that as exports account for a third of Israel’s economy, the shekel’s strong performance is something the central back is actually trying to curb, to assist exporters. The Bank of Israel projects that the Israeli economy will grow by 3.2% in 2015 and 3.5% in 2016, up from 2.8% in 2014. Unemployment rates are expected to shrink to 5.5%, according to the bank’s forecast. (Bloomberg 27.04)

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1.3 Record Israeli Defense Procurements in 2014

The Ministry of Defense Procurement and Production Directorate announced that the figures for procurement in the Israeli economy in 2014 – an all-time record of NIS 14.1 billion. Ministry of Defense procurement on the domestic market averages NIS 8-9 billion a year. According to the Ministry of Defense, the reason for last year’s steep rise was the rapid procurement of various weapons for use by IDF force in Operation Protective Edge and large-scale procurement following the operation in order to replenish stockpiles. The Procurement and Production Directorate’s figures show that half of the estimated NIS 8.6 billion cost of the operation was spent on procurement from thousands of suppliers in Israel. This included ammunition procured from security companies, spare parts for maintaining the air force’s planes, intelligence and computer equipment, food and equipment for soldiers, etc.

Some NIS 3.2 billion of the procurement in the Israeli economy in 2014 had been from industries in outlying areas and in areas defined as being in the line of fire. NIS 6.25 billion, most of the Procurement and Production Directorate’s procurement in the Israel economy last year, was for the land army, and NIS 3 billion was for procurement for the air force and navy. Procurement for intelligence and computer systems developed and manufactured by Israeli companies totaled NIS 1.8 billion.

The figures also show that procurement of services in 2014 totaled NIS 1.35 billion. Another significant expense for the Procurement and Production Directorate was NIS 550 million for ammunition from Israel Military Industries (IMI) under the outline negotiated by the Ministries of Defense and Finance, which was one of the conditions for carrying out privatization of IMI. Munitions orders from IMI this year are expected on a similar scale. The Ministry of Defense’s domestic procurement last year, considered exceptional, broke the 2012 record of NIS 13 billion. (Globes 29.04)

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1.4 UN Commends Israel on Fight Against Corruption

The UN is praising Israel for its measures against public corruption, according to a summary of a report dealing with the UN Convention against Corruption. The report positively cites law enforcement in Israel. The report singles out for praise the putting of public figures on trial in recent years, the legislative measures taken to deal with bribery, the State Attorney’s Office’s guidelines in this matter, the arrangements involving foreclosure of assets, cooperation between law enforcement authorities in Israel, and cooperation between law enforcement authorities in Israel and the corresponding international agencies in dealing with corruption. The report was published as part of a comprehensive probe conducted in the framework of Israel’s participation in the convention, in which a UN delegation visited Israel.

The UN investigative team dealt mainly with an examination of how Israel was observing half of the convention’s 70 sections. Israel’s observance of the remaining sections will be assessed in a projected future round. The assessment was coordinated by the Ministry of Justice departments of criminal law consultation and legislation and international law, and by the State Attorney’s Office. (Globes 28.04)

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2: ISRAEL MARKET & BUSINESS NEWS

2.1 Courtagen Partnership with Pronto for Distribution of Clinical Tests

Woburn, Massachusetts’ Courtagen Life Sciences, an innovative molecular information company, announced an international distribution agreement with Pronto Diagnostics, headquartered in Tel Aviv, Israel. Courtagen continues to expand its international presence, and is pursuing similar commercial relationships with leading distributors in markets around the world. Often diagnosis of pediatric neurological and metabolic disorders is challenging due to the wide range of symptoms and severity, and frequently genetic factors play a pivotal role. Courtagen’s genetic tests take advantage of recent advances in Next Generation Sequencing technology, and enable new opportunities to find genetic causes of disorders.

Pronto Diagnostics offers genetic testing services to all of the Israeli healthcare providers and this new addition aligns with the company’s strategy of presenting the local market with the world’s leading tests in specific clinical fields. (Courtagen 23.04)

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2.2 Windward Raises $10.8 Million

Tel Aviv’s Windward has raised $10.8 million in a financing round led by Li Ka-shing’s Horizons Ventures, with participation from Series A investor Aleph and others. The funds will be used to build the largest, most comprehensive ever maritime data and analytics platform. It will also make those insights accessible for anyone with stakes at sea, with a solution for the financial sector scheduled to launch later in 2015. Windward’s intelligence solution, MARINT, is already in wide use by Security, Intelligence and Law Enforcement agencies worldwide, who use Windward’s data and insights to preemptively identify threats before they reach their shores. The latest funding will allow Windward to expand its deep learning capabilities via its unique data platform – the Windward Mind – and to operationalize FORESEA, its finance solution. FORESEA is in beta testing as the first significant vertical extension of the Windward Mind and is providing traders, investors and analysts with access to unprecedented amounts of unstructured data, critical insights and untapped market opportunities.

Windward is a maritime data and analytics company, bringing unprecedented visibility to the maritime domain. Windward has built the world’s first maritime data platform, the Windward Mind, which analyzes and organizes the world’s maritime data. The Windward Mind makes the data accessible and actionable across verticals, from flagging criminal threats at sea to identifying new market trading opportunities. Windward’s data and insights are in wide use by Intelligence, Security and Law Enforcement Agencies worldwide. (Globes 28.04)

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2.3 ClickSoftware to Go Private – to Be Acquired by Francisco Partners

Petah Tikva’s ClickSoftware Technologies, the leading provider of automated mobile workforce management and optimization solutions for the service industry, has signed a definitive agreement to be acquired by private funds managed by Francisco Partners Management, a leading global technology-focused private equity firm, in an all-cash transaction valued at approximately $438 million. Under the terms of the agreement, Francisco Partners will acquire all of ClickSoftware’s outstanding ordinary shares for $12.65 per share in cash. This represents a premium of approximately 45% over the average closing price of the Company’s shares on the Nasdaq Global Select Market during the previous 90 calendar days. The Board of Directors of ClickSoftware unanimously approved the merger agreement and recommends that ClickSoftware’s shareholders approve the agreement.

ClickSoftware is the leading provider of automated mobile workforce management and service optimization solutions for the enterprise, both for mobile and in-house resources. As pioneers of the “Service chain optimization” and “The real-time service enterprise” concepts, their solutions provide organizations with end-to-end visibility and control of the entire service management chain by optimizing forecasting, planning, shift and task scheduling, mobility and real-time management of resource and customer communication. (ClickSoftware 30.04)

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3: REGIONAL PRIVATE SECTOR NEWS

3.1 Emirates Set to Expand US Cargo Reach Amid Subsidies Row

Emirates SkyCargo, the freight division of Emirates, is set to expand its United States cargo network to 11 destinations, when it launches a daily service to Orlando, Florida from 1 September. The Dubai to Orlando route will be served by a Boeing 777-200 LR, which has a belly-hold capacity of up to 17 tonnes of cargo per flight. Emirates SkyCargo also has belly-hold cargo services to San Francisco, Seattle, Washington DC, Boston, Dallas, New York, Los Angeles, Chicago and Houston. The new route announcement comes amid a continuing dispute between US-based carriers Delta, American and United and their Gulf competitors over claims by the American airlines they receive more than $40 billion in subsidies from their home governments. This, they say, has allowed them to lower prices and begin pushing US airlines out of key markets. Emirates, Etihad Airways and Qatar Airways have denied the allegations, saying US carriers have lost market share because of inferior service. (AB 25.04)

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3.2 Best Western Unveils Plan for Gulf Hotels Expansion

Best Western International has announced plans for rapid expansion in the Middle East with 13 new hotels in the pipeline, including one in Kuwait, two in Qatar and 10 in Saudi Arabia. The hotel brand said it is adding to its eight hotels currently operating in the Middle East with new construction projects in key destinations including Kuwait City, Doha, Riyadh, Dammam, and Makkah. The company is also adding two new properties in Al Ahsa and Ar Rass, both in Saudi Arabia and due to open in 2016. In addition the company said it will add five Best Western Plus hotels, which will add nearly 1,800 new rooms to the brand’s Middle East portfolio. The brand recently made changes to its operational and development support strategy which will now be centered in the Best Western International offices in Istanbul, Turkey where the company already supports 18 Best Western branded hotels. (AB 26.04)

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3.3 Dubai’s Marka Buys Stake in Cheeky Monkeys Kids Concept

Marka, a UAE-based retail and hospitality firm, acquired a majority stake in Cheeky Monkeys Playland & Sweet Surprises, an edutainment concept designed as a destination where children learn as they play. Marka plans to open an additional eight Cheeky Monkey outlets across the GCC before 2018 following the deal. The move by Marka follows the company’s recent announcements that it will pursue a 2015 strategy focused on securing profitable retail operations with brands that show strong growth potential. The company offers full turnkey solutions for kids’ event management along with venue services and conducts more than 2,000 children’s events each year. (AB 25.04)

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3.4 Hilton Plans to Build World’s Biggest Hampton Hotel in Dubai

Hilton Worldwide and UAE-based wasl hospitality and leisure have announced the introduction of mid-market hotel brand Hampton by Hilton to the Middle East. A management agreement has been signed to open Hampton by Hilton Dubai Al Qusais, which becomes the largest Hampton under development anywhere in the world. In addition, an agreement has been signed to open Hilton Garden Inn Dubai Al Garhoud, which joins Hilton Garden Inn Dubai Al Mina and Hilton Garden Inn Dubai Al Muraqabat, both of which are expected to open this year. This latest agreement will see the opening of Hampton by Hilton Dubai Al Qusais and Hilton Garden Inn Dubai Al Garhoud in 2017, adding more than 550 guest rooms to the emirate’s inventory of mid-market rooms.

In the Middle East, Hilton Garden Inn will make its Dubai debut this year with the opening of hotels in Al Mina and Al Muraqabat, joining Hilton Garden Inn Riyadh Olaya which is already welcoming guests and Hilton Garden Inn Dubai Mall of the Emirates, which is expected to open in 2016. (AB 26.04)

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4: CLEAN TECH & ENVIRONMENTAL DEVELOPMENTS

4.1 Additional Installation of Ecoppia’s Water-Free Solar Panel Cleaning Robots

Ecoppia announced that its E4 robotic solar panel cleaning system is now fully operational on five additional PV production facilities in the Middle East, totaling more than 35 MW. With these new systems in its portfolio, Ecoppia’s E4 system is now cleaning approximately five million panels every month. Ecoppia’s E4 robots were retrofitted onto the existing solar power plants, owned by leading Israeli solar developer Arava Power, in just six months. Three of the systems are located in the Arava desert, a region that suffers from frequent dust storms originating in Saudi Arabia, with few rainy days to naturally wash the debris away. The remaining plants are in the Negev desert, an area that has significant dust blown in from the Sub-Sahara region, also with minimal rain. Prior to the E4 installation, each system was cleaned manually, requiring tens of millions of liters of water and costly manpower resources.

Ecoppia designs and produces innovative photovoltaic panel cleaning solutions to cost-effectively maximize the performance of utility-scale installations. The company’s water-free, automated technology removes dust from panels on a daily basis to ensure peak output, even in the toughest desert conditions. Supported by a robust control unit, systems can be remotely programmed and managed to minimize O&M costs. (Ecoppia 04.05)

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5: ARAB STATE DEVELOPMENTS

5.1 Lebanon’s Consumer Prices Drop in First Quarter

According to Lebanon’s Central Administration of Statistics (CAS), the consumer price index (CPI) has dropped from an average of 100.97 points in Q1/14 to 97.55 in Q1/15, registering a 3.38% year-on-year (y-o-y) fall. Since “water, electricity, gas & other fuels” and “transportation” constitute two of the major weights in the CPI with a cumulative share of 25%, it’s expected that consumer prices will fall on the back of the approximate 45% yearly decline in international oil prices in March 2015. Furthermore, the appreciating dollar versus the Euro influenced the price decrease considering that a major part of Lebanon’s imports are from Europe. Even though overall prices have been increasing month-on-month for last two months by an average of 0.61%, the CPI still experienced a year-to-date drop of 0.98%.

In terms of the CPI’s components, “Food and non-alcoholic beverages” (20.6% of CPI) decreased by an average 1.00% y-o-y in Q1/15. Moreover, transportation (13.1% of CPI) and “Water, electricity, gas & other fuels” (11.9% of CPI), witnessed a yearly fall of 13.23% and 16.48%, respectively. Prices for education and apparel rose in the period. (CAS 24.04)

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5.2 Stable Political Scene Boosts Beirut’s Occupancy Rate in March

According to E&Y’s Middle East Hotel Benchmark Survey, Beirut’s occupancy rate improved from 40% in March 2014 to 54% in March 2015 as a result of the Arabnet Beirut Conference 2015, the largest event for digital creative sectors and as a result of the ongoing political stability. The average room rate grew from $142 in March 2014 to $167 in March 2015. The higher average room rate led to the rise in the room yields from $57 in March 2014 to $91 in March 2015. Despite the monthly improvement, the Beirut occupancy rate remained at the bottom of the Middle Eastern list, ranking only one spot above Cairo city’s occupancy rate of 45%. Low occupancy rates of 55% in the city of Manama, Bahrain and of 58% in the city of Amman were also registered in March. The highest occupancy rate of 89% was registered in the city of Medina in Saudi Arabia while Dubai came in close second with an occupancy rate of 87.6%. (Blominvest 25.04)

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5.3 Lebanon’s Tourists Surged to 282,256 during First Quarter

Lebanon’s tourism sector improved in Q1/15 year-on-year (y-o-y), following the low base reached last year, the skiing season that attracted Arab tourists and the enhanced political and security situations in the country in light of the developments that are taking place in the region. The Ministry of Tourism said the number of arrivals during Q1/15 amounted to 282,256, a 23.12% surge from 229,252 recorded in the same period last year.

The number of Arab tourists, constituting 36.19% of the total, displayed a yearly increase of 28.22%, to register 102,154 by March 2015. As for Iraqi arrivals, their number held the largest share of Arab tourists of 38.64%, and increased by an annual 24.45% to 39,473 over the same period, knowing that Iraqi tourists are actually refugees that are granted a tourist visa. The number of Saudi and UAE visitors recorded the most pronounced increases going from 6,283 to 12,846 and from 883 to 1,643, respectively. The number of Kuwaitis also jumped from 4,492 to 6,832 y-o-y in Q1/15. The number of European visitors was 31.57% of the total, rising by 19% y-o-y, to reach 89,122. France held the largest share of European tourists at 25%, followed by Turkey, Germany and the United Kingdom. (Blominvest 25.04)

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5.4 Jordanian Unemployment Rate Remains Unchanged Over a Decade

The unemployment rate in Jordan ranged between 11 and 14% over the past 10 years with no significant improvement as most of the “created vacancies” are held by guest workers. Although the demand for jobs has increased in the Kingdom, the number of vacancies has declined over the past few years, the Phoenix Centre for Economic and Informatics Studies report said. The study said 50,000 jobs were available in Jordan in 2013 and 2012 compared with 55,000 in 2011 and 66,000 in 2010. A total of 23,000 job opportunities were available in the first half of 2014, the center said, noting that the challenges facing Jordanian workers have remained the same over the past few years.

One of the main challenges is low wages compared to high prices of commodities, with the majority of workers receiving less than the minimum wage of JD190, according to the report. A Department of Statistics (DoS) statement outlined similar challenges, reporting that guest workers are competing with Jordanians for jobs, which exacerbates unemployment in the Kingdom. However, DoS did not provide figures on the number of guest workers in Jordan. (JT 30.04)

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5.5 Jordan Building World’s Largest Internal Combustion Power Plant

Prime Minister Abdullah Ensour on 29 April laid the foundation stone for an electricity generation mega-project. Implemented by the Amman-Asia Electric Power Company, the multi-fuel run electricity plant, coded IPP3, will have the production capacity of 573MW, making it the largest internal combustion power plant in the world, which has an entry in Guinness Book of Records. The project, located in the Manakher area in east of Amman, will provide around 15% of additional electric power to the Kingdom’s electricity grid. The station is implemented as a joint venture between a consortium of the Korea Electric Power Corp., Mitsubishi Corporation and the Finnish power company, Wärtsilä Global, in cooperation with local task groups from the Ministry of Energy and Mineral Resources, the National Electric Power Company and the Jordan Water Authority. (JT 30.04)

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►►Arabian Gulf

5.6 Kuwait Puts Freeze on Expat Population

Kuwait has frozen the number of expatriates in the country and new foreign workers will only be granted visas to replace exiting expats. Expats make up about two-thirds of the total population of about 3.3 million. Various schemes to reduce expat numbers have been previously announced, including in 2013 when the then-social minister said the number of expats would be cut by 100,000 each year until 2023, effectively halving the total. The new government has not followed through with that policy. More than 90% of Kuwaitis who work are employed by the public sector, while there are more than 2 million expats in the private sector. (AB 27.04)

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5.7 Qatar Wealth Fund to Open New York Office as US Portfolio Grows

The Qatar Investment Authority, the state’s acquisitive sovereign wealth fund, is setting up an office in New York to manage its growing portfolio in the United States. The fund is one of the most active sovereign investors in the world, snapping up stakes in everything from real estate to luxury goods. It led a consortium this year to secure control of the company that owns London’s Canary Wharf financial district in a $4 billion deal. Much of its activity has traditionally been in Europe, but the fund has said it is looking to diversify into Asia and the United States, announcing last year a plan to spend $20 billion in Asian investments over the next five years. (Reuters 01.5)

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5.8 Qatar Opens $1 Billion Environmental Gas Project

Qatar officially unveiled what it said is the world’s biggest environmental project, a $1 billion plant to capture wasted gas. The Jetty Boil-Off Gas Recovery Project (JBOG) would capture enough gas to power 175,000 cars per year or 300,000 homes. It also allows Qatar, the largest producer of liquefied natural gas (LNG) in the world, to recover a further 29 million cubic feet of gas per year. Qatari officials said it would save the equivalent of 1.6 million tonnes of CO2 each year. The JBOG project salvages gas normally lost and burnt off in a flare when the fuel is transported onto ships. Officials say it will result in a 90% reduction in flaring at the Ras Laffan port in northern Qatar, the largest LNG export terminal in the world. Instead of the wasted gas being burnt off, JBOG would collect the fuel and transport it to an area where it is compressed to be ready for use again either as LNG or fuel gas. Qatargas operates JBOG on behalf of Qatar Petroleum and RasGas. (AFP 28.04)

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5.9 Oman Economy to Grow by 5% in 2015

Oman’s economy is projected to grow by 5% in 2015, the country’s central bank reported. Despite falling crude oil prices, Oman’s economy managed to address this situation in Q1/15. The bank says the nation’s economy is still capable of addressing the fall in oil prices in international markets. It says the sultanate enjoys good monetary reserves with local banks, in addition to government bonds, which can be used to address the budget deficit. Furthermore, the bank notes that non-performing loans have declined to around 2% and that, according to the report, is a good rate compared with international rates.

In Q1/15, the government remained committed to spending on investment, which was set at OMR3.214 billion. Furthermore, spending on social benefits such as pension, health insurance and education remains unaffected in the first quarter of the current year, while work is underway on strategic projects as planned. The country’s economic growth is forecast to reach 5.5% at fixed prices, the bank indicates. Various 30.04)

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►►North Africa

5.10 Unemployment Declines by 34,000 in Morocco

The unemployment rate in Morocco was 9.9% in the first three months of 2015, down four-tenths of a% from 10.3% during the same period of last year, according to the High Planning Commission (HCP) latest statistics. The new figures have shown that the number of jobless people currently stands at 1.157.000, down from 1.191.000 in 2014 or a decrease of 34,000 (12,000 in urban areas and 22,000 in rural areas). The rate of unemployment decreased from 14.3% to 14.3% in urban areas and from 5.1% to 4.7% in rural areas. The Moroccan economy has also managed during this period to create 27,000 new jobs. These new jobs have benefited services sectors with 4,000 jobs, agriculture and fisheries with 14,000, and industry (including crafts) with 9000. (MWN 05.05)

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5.11 Over 10 Million Internet Subscribers in Morocco

A new report released by Morocco’s telecommunications regulator has revealed that the number of internet subscribers grew by 61.4% in the course of one year. The number of internet subscribers has reached 10.3 million during the first quarter of 2015, according to a report released by the National Agency for the Regulation of Telecommunications, known by its French acronym ANRT. That is a penetration rate of 30.5%. The report has also revealed that customers of internet services have seen a 31% decrease in prices, moving from an average monthly bill of 32 Dirhams in 2014 to 22 Dirhams by the end of March 2015. The number of mobile phone subscribers stood at 43.3 million subscribers by the end of March 2015, a penetration rate of 128% compared to 130.5% in June 2014. Moroccans spoke 11.68 billion minutes on their mobile phones and sent 4.55 billion text messages by the end of March 2015, a 4.2 and 27.1% increase respectively, the governing body of Moroccan telecommunications sector reported. (MWN 05.05)

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6: TURKISH, CYPRIOT & GREEK DEVELOPMENTS

6.1 182,000 Turks Lose Jobs Within One Month

A total of 182,000 Turks lost their jobs between the months of December 2014 and January 2015, according to recent figures from the Social Security Institution (SGK). While 13,240,000 workers were recorded as officially working within the social security system in December of last year, that number receded to 13,058,000 in January of this year. Figures also indicate that 103,000 shopkeepers and small business owners have closed their doors in the past four months. The data show 2.924 million registered shopkeepers in October 2014, but this number slipped to 2.821 million by January.

The latest unemployment figures are tied to the month of January, where an 11.3% jobless rate came in 1% higher than in January 2014, while the number of unemployed increased by 454,000 within the same time period. January’s rate was the highest Turkey has witnessed since April of 2010.

Turkey’s unemployment rate will increase from 9.9% in 2014 to 11.4% in 2015, rising further to 11.6% in 2016, according to data in IMF’s World Economic Outlook (WEO) report. Rates of informal employment also remain persistently high, as millions work without social security benefits or insurance. These rates are particularly high in the agricultural sector where the majority of laborers work on an informal basis. The December to January loss of 182,000 jobs cost the state TL 82 million in unemployment and insurance coverage payments. (SGK 24.04)

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6.2 Nicosia Raises €1 Billion in Second Post-Bailout Issue

Cyprus’s finance minister said the country has raised €1 billion from international markets with its second public bond issue since its painful bailout two years ago. Harris Georgiades stated the seven-year bonds were nearly twice oversubscribed and carried a 4% interest rate. Georgiades said the issue affirms that confidence has been restored in the Cypriot economy, which will help the country emerge from recession. He added that the money will be used to pay off older, more expensive debt and inject fresh liquidity into the economy. Cyprus’s finance minister said the country won’t need all of its €10 billion rescue loan because Cypriot banks won’t need further state support and budget deficits have been reined in. (ekathimerini 28.04)

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6.3 Greece Aims for Deal With Lenders & IMF Hard on Reforms

Greece intends to meet debt payments this may and reach a deal with its international lenders to unlock remaining bailout aid, but the International Monetary Fund insists on tough labor reforms. Struggling amid a cash crunch, Athens faces debt repayments to the IMF totaling nearly €1 billion this month. It has been borrowing from municipalities and government entities to meet obligations.

Prime Minister Alexis Tsipras’ three-month-old government is under growing pressure at home and abroad to reach an agreement with European and IMF lenders over reforms to avert a national bankruptcy. The IMF is unyielding on its demands for labor reforms, including pensions cuts, mass layoffs and resisting a plan by the leftist-led government to raise the minimum wage. Elected on pledges to roll back austerity, the government has been resisting further cuts in pensions and legislation that would allow mass layoffs. Unemployment remains near record highs. Negotiations with lenders have made headway recently and an agreement could be closer this month. (Bloomberg 04.05)

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7: GENERAL NEWS AND INTEREST

*ISRAEL:

7.1 Israel Ranked No. 11 on UN Happiness Scale

Israelis are basically happy, the United Nations’ World Happiness Report for 2015 shows. Israel was ranked No. 11 among 158 countries surveyed. The U.N.-sponsored survey, which has been published annually since 2012, uses a tool called Cantril’s ladder to measure happiness. According to the report’s website, respondents are asked to picture a ladder on which the best possible life would score a 10 and the worst possible life would score a 0, and rate their own happiness accordingly.

Switzerland came out on top in the happiness rankings, with an average rating of 7.587. In descending order, Iceland, Denmark, Norway, Canada, Finland, the Netherlands, Sweden, New Zealand, and Australia rounded out the top 10. Israel, with an average score of 7.278, was still ahead of the U.S. (at No. 15), Germany (No. 26), and France (No. 29.) The least happy nations, according to the survey, were Rwanda, Benin, Syria, Burundi and Togo. (Various 28.04)

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*REGIONAL:

7.2 Saudi King Salman Replaces Heir and Next in Line to Rule

Saudi King Salman on 29 April appointed Interior Minister Mohammed bin Nayef as his new heir, replacing the monarch’s half-brother Prince Muqrin, and made his son, Defense Minister Mohammed bin Salman, second in line to succeed. He also replaced veteran foreign minister Prince Saud Al Faisal, who had served in the role since March 1975, with the kingdom’s Washington ambassador Adel Al Jubeir, the first non-royal to hold the post. The changes signaled a major shift at the top of the ruling Al Saud family away from princes chosen by the late King Abdullah, who died in January, and towards those close to the new monarch.

King Salman said the decision to replace Muqrin with Mohammed bin Nayef and to make his own son deputy crown prince had been approved by a majority of the family’s Allegiance Council. The decree also appointed Saudi Aramco chief executive Khalid Al Falih as Health Minister and chairman of Aramco and made labor minister Adel Al Fakeih Economy and Planning Minister, replacing him with Mufrej Al Haqbani. Internal reshuffles in Saudi Arabia often move oil prices as stability in the world’s biggest petroleum exporting country is key to global supplies. Of particular interest to oil markets was Falih’s appointment. His new post of chairman is a position so far held by veteran oil minister Ali Al Naimi, who remained in his post. (Reuters 29.04)

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7.3 Saudi King Orders Salary Bonus for Security Personnel

Saudi Arabia’s King Salman ordered on 29 April a one-month salary bonus for all military and security personnel to convey his “appreciation of their efforts.” The decree came after the king earlier in the day appointed a new heir and second-in-line as part of a major cabinet reshuffle, and after the most intense activity by the Saudi military in several years.

Since late March, a Saudi-led coalition has been bombing Iran-allied Houthi rebels in Yemen, and authorities said that security forces had gone on alert for a possible militant attack on a shopping mall or energy installation. The announcement did not say how much money would be disbursed for the bonus, but it is likely to be sizeable; the armed forces, including the National Guard and paramilitary forces, are estimated by analysts to exceed 200,000 active-duty personnel. Royal bonuses at times of political change or tension have a long history in Saudi Arabia. To mark his accession in January, King Salman ordered the payment of two months’ extra salary and pensions to government employees and retirees. Lavish social welfare spending was announced during the Arab Spring uprisings elsewhere in the region in 2011. (AB 29.04)

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7.4 Turkey Designated with OECD’s Worst Work-Life Balance

Turkey has by far the highest proportion of employees working very long hours among all Organization for Economic Cooperation and Development (OECD) countries, coming in at the bottom of a work-life balance index prepared by the organization. According to the latest OECD statistics, the share of employees working 50 hours or more per week is 43.3% in Turkey, the highest rate in which the average is 9%. 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. Touching on sub-categories of work-life balance, the OECD’s statistics say people in Turkey work 1,855 hours a year, far beyond the organization’s average of 1,765 hours.

Regarding time allocated to non-paid work in each country, the OECD remarks on Turkey: “The distribution of tasks within the family is still influenced by gender roles: men are more likely to spend more hours in paid work, while women spend longer on unpaid domestic work.” While Turkish men spend 116 minutes a day on non-paid activities such as cooking, cleaning or caring for children, women in Turkey allot 377 minutes on average for the same job, resulting in one of the largest gaps with regards to the two genders’ distribution of time for domestic work among all OECD countries.

In the meantime, Turkey is ranked at the bottom of the list that ranks countries according to the amount of time a full-time worker devotes to leisure and personal care. While full-time Turkish employees allocate around 13.42 hours to basic daily activities such as eating, sleeping, socializing with friends and family, etc., the OECD average is nearly 15 hours. (Zaman 04.05)

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8: ISRAEL LIFE SCIENCE NEWS

8.1 Teva Launches Argatroban Injection in the United States

Teva Pharmaceutical Industries launched Argatroban Injection in 0.9% sodium chloride, 250 mg/250 mL for intravenous infusion only, in the United States. Argatroban Injection is used to prevent or treat blood clots in adult patients who have developed antibodies to heparin or heparin-like products causing a decrease in platelets (known as heparin-induced thrombocytopenia). Argatroban Injection is also used as a blood thinner in adult patients during percutaneous coronary intervention (PCI), a cardiac procedure, in patients who have had or are at risk for heparin-induced thrombocytopenia. Argatroban Injection works by blocking a certain natural substance (thrombin) that the body uses to form blood clots. This premixed formulation (250 mg in 250 mL aqueous sodium chloride solution) is supplied in a bag ready for intravenous infusion and does not require further dilution.

Argatroban Injection is indicated for prophylaxis or treatment of thrombosis in adult patients with heparin-induced thrombocytopenia (HIT). Argatroban Injection is also indicated as an anticoagulant in adult patients with or at risk for HIT undergoing percutaneous coronary intervention (PCI).

Teva Pharmaceutical Industries is a leading global pharmaceutical company that delivers high-quality, patient-centric healthcare solutions to millions of patients every day. Headquartered in Israel, Teva is the world’s largest generic medicines producer, leveraging its portfolio of more than 1,000 molecules to produce a wide range of generic products in nearly every therapeutic area. In specialty medicines, Teva has a world-leading position in innovative treatments for disorders of the central nervous system, including pain, as well as a strong portfolio of respiratory products. (Teva 28.04)

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8.2 Mazor Robotics’ Guidance System Completes 10,000th Procedure

Mazor Robotics announced that the 10,000th spinal surgery in which Mazor Robotics’ guidance system (Renaissance as well as the earlier Spine Assist) was used has been completed successfully. The Renaissance Guidance System was launched in mid 2012 and is being used by orthopedic and neurosurgeons to perform a wide range of spine and brain surgeries. Renaissance improves the execution and results in a wide variety of spine procedures, including minimally-invasive and percutaneous degenerative repair, vertebrae stabilization and fixation for complex spinal deformity as well as vertebral augmentation. To date, Renaissance has been used in over 1,000 complex spinal deformity correction procedures and thousands of minimally invasive procedures. Additionally, Renaissance has been used in a variety of brain operations, including Deep Brain Stimulation procedures.

Caesarea’s Mazor Robotics believes in healing through innovation by developing and introducing revolutionary robotic-based technology and products aimed at redefining the gold standard of quality care. Mazor Robotics Renaissance Guidance System enables surgeons to conduct spine and brain procedures in a more accurate and secure manner. (Mazor Robotics 28.04)

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8.3 Yissum Introduces Novel Method for Increasing Shelf Life of Leafy Greens

The short shelf life of leafy greens, such as lettuce, celery, spinach and parsley, strongly influences their marketability and profitability. In some cases, post-harvest losses from field to market in leafy vegetables can reach 50%, due to natural development of senescence in the detached leaves and other factors.

Yissum, the Technology Transfer Company of the Hebrew University of Jerusalem, introduced a novel solution for prolonging the shelf life of leafy greens by delaying senescence. The method utilizes an approved food additive that according to academic publications may have beneficial effects on human health. The novel solution is introduced into the plant tissue by dipping the cut leaves into the solution, and thus delaying senescence. In proof of concept experiments, the invention was shown to delay senescence and chlorophyll loss in Lettuce leaves as well as in Arabidopsis, a small flowering plant related to cabbage and mustard.

Yissum Research Development Company of the Hebrew University of Jerusalem was founded in 1964 to protect and commercialize the Hebrew University’s intellectual property. Products based on Hebrew University technologies that have been commercialized by Yissum currently generate $2b in annual sales. (Yissum 27.04)

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8.4 Netafim Launches Next-Generation Low-Flow Drippers

Netafim launched its next-generation low-flow drippers. Bolstering the Company’s position as the drip industry’s pioneer and innovative frontrunner, the new line represents the cutting edge in drip irrigation technology. Featuring a new design to boost yields under harsh water conditions, the drippers are the latest addition to Netafim’s range of smart irrigation solutions that fight food scarcity across the globe. The new dripper line is anchored by the fifth generation of the Company’s breakthrough design, initially developed in 1970. Combining a wider, shorter and deeper labyrinth water passage with a larger filtering area, the next-gen drippers handle flow rates as low as 0.4 l/h with superb clogging resistance. The new line is highly durable and works effectively for multiple years regardless of water quality, including harsh water.

Irrigating at lower flow rates and higher flow uniformity than comparative offerings, the next-gen drippers give growers greater control and peace of mind by delivering consistent and high yields. The new line drastically reduces the investment required for new system installation and cuts labor costs by irrigating large plots while minimizing in-field shifting to further enhance grower profitability.

Tel Aviv’s Netafim is the global leader in drip and micro-irrigation solutions for sustainable productivity. With 28 subsidiaries, 16 manufacturing plants and over 4,000 employees worldwide, Netafim delivers innovative solutions to more than 110 countries across the globe. Founded in 1965, Netafim pioneered the drip revolution, creating a paradigm shift toward low-flow agricultural irrigation. (Netafim 27.04)

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8.5 Teva Completes Acquisition of Auspex Pharmaceuticals

Teva Pharmaceutical Industries announced that the acquisition of Auspex Pharmaceuticals has been completed through the successful tender offer for all of the outstanding shares of common stock of Auspex at $101.00 per share in cash, representing total consideration of approximately $3.2 billion in enterprise value and approximately $3.5 billion in equity value. The acquisition is expected to enhance Teva’s revenue and earnings growth profile and strengthen its core central nervous system franchise.

Auspex is an innovative biopharmaceutical company specializing in applying deuterium chemistry to known molecules to create novel therapies with the potential for improved safety and efficacy profiles. Its lead compound is SD-809 (deutetrabenazine) for the potential treatment of chorea associated with Huntington’s disease, tardive dyskinesia, and Tourette syndrome.

Teva Pharmaceutical Industries is a leading global pharmaceutical company that delivers high-quality, patient-centric healthcare solutions to millions of patients every day. Headquartered in Petah Tikva, Israel, Teva is the world’s largest generic medicines producer, leveraging its portfolio of more than 1,000 molecules to produce a wide range of generic products in nearly every therapeutic area. In specialty medicines, Teva has a world-leading position in innovative treatments for disorders of the central nervous system, including pain, as well as a strong portfolio of respiratory products. (Teva 05.05)

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 Marvell Partners with Celeno for Industry-Leading Wireless Video Solution

Celeno Communications and Marvell announced a partnership that will see Marvell’s ARMADA 1500 family of multi-media processors and connectivity solution combined with Celeno’s 802.11ac Access Point chips to power a wireless video experience in the home that can reliably handle 4K or HD video streaming alongside regular data applications. This combined solution is designed to meet the growing demand for linear TV, Video-on-Demand and OTT services to multiple screens and mobile devices throughout the home, all while ensuring the highest levels of reliability and performance.

The Celeno CL2348 802.11ac Wave 2 chip and the CL2330 802.11ac chip provide a powerful access point technology in the home gateway. Utilizing Celeno’s concurrent dual band Wi-Fi module, the Gateway will be able to stream high-quality video using both the 2.4GHz and uncongested 5GHz bands. Marvell’s ARMADA 1500 family of multi-media processors will power set top boxes, TVs and 4K platforms, leveraging the company’s award-winning Qdeo video processing, TV tuner, and Wi-Fi/Bluetooth connectivity chip to ensure a robust video connection.

Ra’anana’s Celeno provides high performance Wi-Fi chips and software for demanding home networking applications. Celeno’s extensive chip portfolio and OptimizAIR technology enable the wireless distribution of multiple and simultaneous HD video and data streams throughout the home with the highest levels of performance and reliability while ensuring a superlative quality of service and user experience. (Celeno 28.04)

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9.2 FST Biometrics Wins Two Honors for IMID Mobile App at ISC West

FST Biometrics was recognized with two industry awards during the week of the International Security Conference & Exposition (ISC West) in Las Vegas. FST Biometrics won the 2015 Security Sales & Integration MVP (Most Valuable Products) Award for the company’s IMID Mobile solution for the impact of the new offering on integrators. A second industry distinction – an Honorable Mention, also for IMID Mobile – came from the Security Industry Association’s 2015 New Product Showcase (NPS).

IMID Mobile delivers FST Biometrics’ award-winning In Motion Identification (IMID) technology to personal devices. IMID Mobile, a smartphone application, is designed to identify visitors on a mobile device and enhance the important work of security personnel by providing them with valuable supplemental information about visitors to sites in need of tight security.

Rishon LeZion’s FST Biometrics is a leading identity management solutions provider. The company’s IMID product line offers access control through its proprietary In Motion Identification technology. This provides the ultimate security and convenience for users, who are accurately identified without having to stop or slow down. IMID solutions integrate a fusion of biometric and analytic technologies that include face recognition, body behavior analytics and voice recognition. (FST Biometrics 28.04)

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9.3 So What Are the OffBits?

OffBits is all about recycling spare bits and pieces and making them into fun, original toys for a fresh take on creativity and play. The leftover screws from the shelving unit you just built, the extra nuts and bolts from the bicycle you just fixed, or the studs and fasteners you just didn’t want to throw away all have a new future, thanks to an Israeli toy design team. The creators behind the OffBits, the open-source robot toys that encourage you to tinker, are hoping to add a new sense of creativity to the toy-building community. With the tagline “the art of spare parts,” the OffBits is all about taking those leftover bits and pieces at the bottom of your toolbox and making them into fun, original toys. It’s about re-imagining common bits and pieces as parts of an artistic toy. “We want people to look at a screw and see a foot,” co-founder Avner Goren, tells ISRAEL21c. “We want people to look at the same things in a very different way and ask, ‘What part could that be?’ ‘What could we do with it?’ ‘Where can I add it?’ In LEGO, you don’t have that thought process. You finish building your model and then you need a new game.” While it may seem strange to buy a small box of little screws and odd pieces, Goren says the OffBits Starter Kits, which contain custom parts and connectors, are your entry into a world of unlimited creativity. (via Israel21c 30.04)

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9.4 AudioCodes Announces Skype for Business One Voice Solution

AudioCodes announced Skype for Business One Voice Solution. From the introduction of the first versions of Microsoft’s unified communications offering, AudioCodes has been a leading vendor of a voice networking product portfolio that is constantly being updated and expanded. AudioCodes today offers the most comprehensive voice networking product portfolio for Microsoft including IP Phones, Session Border Controllers, Survivable Branch Appliances, Gateways, Call Recording application, One Box 365™, Auto Attendant/IVR and fax applications. AudioCodes also offers a comprehensive network and services management framework – One Voice Operations Center.

Leveraging AudioCodes’ extensive knowledge in voice services implementation in best of breed networks, a suite of professional services is available together with its resellers and global system integrators. This enables effective design, deployment, network readiness assessment, remote implementation, interoperability, and support, along with managed spares services.

Lod’s AudioCodes designs, develops and sells advanced Voice-over-IP (VoIP) and converged VoIP and Data networking products and applications to Service Providers and Enterprises. AudioCodes is a VoIP technology market leader, focused on converged VoIP and data communications, and its products are deployed globally in Broadband, Mobile, Enterprise networks and Cable. AudioCodes’ underlying technology, VoIPerfectHD™, relies on AudioCodes’ leadership in DSP, voice coding and voice processing technologies. AudioCodes’ High Definition (HD) VoIP technologies and products provide enhanced intelligibility and a better end user communication experience in Voice communications. (AudioCodes 05.05)

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10: ISRAEL ECONOMIC STATISTICS

10.1 Israel Among Costliest Countries for Food, But Lowest for Wages

Israel ranks third in Europe, coming just behind the two most expensive countries in Europe – Switzerland and Norway – for the price of food, household essentials and toiletries. But while Israelis pay through the nose for basic goods, they fall far behind when it comes to salaries, ranking 13th on a scale of wages in Europe. The data comes from an international study conducted by market researchers Nielsen. The study was conducted in the last quarter of 2014 among 30,000 consumers worldwide, including 500 Israelis.

According to the study, the average cost in Europe for a monthly purchase of essentials is approximately NIS 1,520, while the average in Israel is approximately NIS 1,930 – 22% higher. Even so, Israelis can only envy the workforce in countries such as Denmark, England, Sweden, Germany and the Netherlands, whose earning capacity is higher, while prices are lower. In seven countries with a lower average salary than Israel – such as Turkey, Hungary, Romania and Poland – the cost of basic goods is proportionately lower. (IH 03.05)

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10.2 Israel’s Record ~100,000 Car Deliveries this Year

Israel’s new car market continues to grow, as the first third of the year saw 97,657 new car deliveries in Israel, an all-time record for the period, and 7.6% more than the corresponding period last year. In April alone, 17,647 new cars were delivered; there was a slight decrease of 3.7% compared with April of last year. It should be noted that this is despite the few work days in April, due to the many Jewish holidays that fell during the month. Hyundai led the deliveries chart with 12,208 new car deliveries since the beginning of the year, an 8% increase. Kia is in second place, with 11,450 new car deliveries, up 30% compared with the corresponding period of last year. Kia led deliveries last month, thanks largely to the jump in sales of the basic model of the Sportage crossover, which is very reasonably priced. This was the best-selling vehicle in April in the entire market. Toyota was in third place, with 11,231 new car deliveries, up 7%. Mazda was in fourth place with 8,127 deliveries, up 15%, and Mitsubishi was in fifth place, with 6.035 deliveries, up 27%. (Globes 03.05)

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11: IN DEPTH

11.1 ISRAEL: Israeli Financial System Reforms Take One Step Forward

The five main matters that the new government will tackle in its first year were decided by agreement in a discussion on banking reform on 30 April. The participants in the discussion were Prime Minister Benjamin Netanyahu, Governor of the Bank of Israel Karnit Flug, and incoming Minister of Finance Moshe Kahlon, together with their aides and invited economic experts.

Financial Regulation

The discussion on consolidating financial regulation resulted in a general understanding that change was necessary in the current situation of fragmented powers and of contradictions between the Banking Supervision Department of the Bank of Israel, the Israel Securities Authority, the Commissioner of Capital Markets, Insurance and Savings in the Ministry of Finance, and the Anti-trust Authority. However, a proposal that was raised to set up an independent state financial board that would centralize all financial regulation and supervision was adamantly opposed by Flug, mainly because it would mean taking supervision of banks away from the Bank of Israel. Netanyahu said he would not accept a decision that the Governor of the Bank of Israel opposed, and the decision that was adopted was to examine the matter and discuss it further.

The Credit Information Service Law

It was agreed that the Credit Information Service Law should be amended, or some other way should be found, to provide positive information on retail customers, and not just negative information, as the law currently stipulates. A personal credit rating for a customer eliminates the information near-monopoly currently held by two big banks that keeps retail customers captive. An efficient, independent rating system or “banking ID card” not dependent on the banks themselves would enable good customers with proven repayment ability and awareness to obtain preferential credit terms. A personal credit rating administered by licensed information agencies is normal in most developed countries.

Deposit Insurance

Although there is agreement among all parties concerned to take a positive view of the matter and to proceed with it, it should be pointed out that such decisions have repeatedly been made very few years by every government since 1969, when the Bank of Israel produced a first draft bill.

This is something that Kahlon brought with him from his experience in promoting competition in mobile telephony. It was decided to start working in parallel on promoting the establishment of a computing infrastructure, even state-funded, which will enable new players to start business without having to devote large amounts of capital to investment in computing infrastructure.

The possibility will also be examined of obliging large banks with independent computing infrastructure to allow new players to take a rise on their infrastructure, at controlled prices. The method chosen by Bank Yahav will also be examined. Bank Yahav is currently dependent on Bank Hapoalim’s computing network. It has contracted with a unit of Indian conglomerate Tata to buy an off-the-shelf system in use by hundreds of banks around the world, which will be adapted for it.

Divesting the Banks of Credit Card Companies

A subject discussed at length but about which no practical agreement was reached was divesting the banks of their credit card companies. This is one of Kahlon’s flagship plans. Although it had been generally thought that Flug was opposed to the idea, at the discussion she said she was in favor, but only if a way could be found of carrying out the measure without causing damage, without reducing the public’s access to credit and without leading to higher fees.

Distribution of Credit

Banking is one of the main subjects in Kahlon’s plans. In late February this year, at the height of the election campaign, Kahlon said, “Small businesses employ a third of the workers in the economy, but receive 3% of the credit. That makes no sense. The time has come for greater justice in credit. Regulation is also skewed here: we’re halfway to becoming Russia instead of the US. In the US, everything is permitted except what’s forbidden, and in Israel everything is forbidden except what’s permitted. The time has come for us to be more like America.” (Globes 30.04)

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11.2 ISRAEL: Summary of Israeli High-Tech Company Capital Raising Q1/15

IVC and KPMG reported on 28 April that in Q1/15, 166 Israeli high-tech companies raised $994 million – the second highest quarterly amount in the last decade and just 10% below the record high $1.1 billion invested in 184 companies in the previous quarter. The Q1/15 amount was 48% above the $673 million attracted by 160 companies in Q1/14.

The average company financing round reached $6 million, equal to the previous quarter’s average, and well above $4.2 million of Q1/14.

In Q1/15, 91 VC-backed deals accounted for $832 million – 84% of total capital invested. The average VC-backed deal peaked at $9.1 million, compared to $7.7 million and $6.1 million in Q4/14 and Q1/14, respectively.

Ofer Sela, partner in KPMG Somekh Chaikin’s Technology group commented, “As can be seen from Q1 2015 results, the level of investment activity in Israeli companies is on the rise. This trend is being fueled by higher revenues, improved business results and other key performance indicators. However, the returns from the appreciation in value of VC-backed Israeli companies are mostly enjoyed by foreign investors. The majority of Israeli institutional investors, and through them the Israeli general public, is not participating in venture capital investments. ”

Sela believes that “The Israeli government should consider actions that encourage and facilitate Israeli institutional investment at a much higher level than currently. By doing so, global and local momentum could enable Israel’s technology industry to expand and become a global technology superpower in absolute numbers, not just relative to its size.”

Israeli VC Fund Investment Activity

Israeli venture capital funds invested $180 million in Israeli high-tech companies or 18% of all investments in Q1/15. The amount was down 6% from $192 million (17% of total) invested in Q4/14, but 80% higher than the $100 million (15% of total) invested in Q1/14.

First investments by Israeli VC funds accounted for 31% in Q1/15, a marked improvement, 55% above the 20% of the previous quarter although still below the 43% of Q1/14.

Capital Raised by Sector, Stage and Deal Size

The Internet sector experienced its best quarter ever with $343 million (35%) raised by 44 companies, and the sector continued to lead capital raising as in the two previous quarters. The life sciences and software followed, accounting for 22% and 19% of total capital raised, respectively. “The increase in high-tech capital raising is not coincidental, but directly reflects the trend toward growth company investments and higher valuations of mid and late stage companies,” noted Koby Simana, CEO of IVC Research Center.

“Up to a year ago we were accustomed to seeing average financing rounds of $3 million to $4 million, in the internet sector. In recent quarters though, we’ve been observing a distinct rise in the average internet financing round. This trend is even more evident among growth stage Internet companies for which the average deal jumped from $6 million about a year ago to $16.3 million in the first quarter of 2015.

Even though exceptionally large financing rounds of Taboola and Quixey (led by Alibaba) were responsible for the jump in Q1, our analysis shows that these were not special or unique events. They fit in well with the activity surrounding the Internet sector and the rise in the number of early stage investments. These parallel trends mostly feed each other as the increase in growth stage Internet companies attracts more entrepreneurs and investors into the sector. We believe that Internet success stories will drive the volume of growth deals as well as contribute to increase seed stage investments, which up until last quarter, were on the decline, “concluded Simana.

Another emerging trend is the increase in growth stage deals, which was accelerated in Q1/15, when initial revenue companies led all investments for the first time since 2013 with 47 firms raising $319 million (32%). Early stage companies attracted $315 million (32%), a decrease of 14% from the especially strong previous quarter, when early stage firms led capital raising. Late stage companies followed closely with a 31% share of total investments.

Additionally, Q1/15 demonstrated escalation in deals above $20 million, a trend pointed out in the previous quarter’s IVC-KPMG Survey. In Q1/15, deals above $20 million reached record levels, with 16 deals that accounted for 55% of total investments. In comparison, there were 13 deals (42%) and six deals (27%) in Q4/14 and Q1/14, respectively.

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.

IVC-Online Database showcases over 12,000 Israeli technology startups, and includes information on private companies, investors, venture capital and private equity funds, angel groups, incubators, accelerators, investment firms, professional service providers, investments, financings, exits, acquisitions, founders, key executives and R&D centers. (IVC 28.04)

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11.3 JORDAN: IMF Executive Board Completes the Sixth Review

On 24 April 2015, the Executive Board of the International Monetary Fund (IMF) completed the sixth review of Jordan’s three-year economic program supported by a Stand-By Arrangement (SBA). The completion of the sixth review enables the immediate release of SDR 142.083 million (about $200 million), bringing total disbursements under the program to SDR 1.08 billion (about $1.58 billion). The 36 month SBA in the amount of SDR 1.364 billion (about $2 billion) was approved by the Executive Board on 3 August 2012.

In completing the sixth review, the Executive Board approved the authorities’ requests to re-phase the undrawn Fund purchases in two disbursements over the remaining program period; and for waivers of applicability for the end-March 2015 performance criteria on the primary fiscal deficit and the combined public deficit.

Following the Executive Board’s discussion on Jordan, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, said:

“Jordan continues to persevere in a difficult regional environment. Conflicts in neighboring countries and hosting refugees continue to put social and economic pressures on the economy, including on the fiscal and external accounts. Nonetheless, growth is picking up, inflation is low, the fiscal and external positions are gradually strengthening, and the banking system is sound overall.

“Fiscal adjustment will continue in view of the high public debt. In particular, the windfall from lower oil prices, which is expected to be temporary, will be saved to reduce debt and rebuild fiscal buffers. A prudent 2015 budget together with the adoption of the new income tax law and other measures will bring about most of the adjustment in 2015.

“The authorities will continue to implement their energy strategy aimed at bringing the electricity company back to cost recovery by 2018. Progress on new energy sources remains on track and, most importantly, the liquefied natural gas terminal is expected to start operating in mid-2015. This progress, together with the planned fiscal adjustment, should bring debt on a downward path starting in 2016.

“The central bank is appropriately focused on preserving comfortable reserve buffers while being mindful of external developments. The authorities will further strengthen financial supervision, including in the nonbank sector.

“Despite the progress made in structural reforms, more is needed to support growth and reduce persistently high unemployment. The focus should be on broad-based labor market policies, especially to increase female labor market participation and reform public sector hiring and compensation practices. There is also scope for further improving the business climate and strengthening public institutions.” (IMF 04.05)

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11.4 JORDAN: Ratings on Jordan Affirmed At ‘BB-/B’; Outlook Stable

On 24 April 2015, Standard & Poor’s Ratings Services affirmed its long- and short-term foreign and local currency ratings on the Hashemite Kingdom of Jordan at ‘BB-/B.’ The outlook is stable.

Rationale

In our view, lower oil prices, as well as energy diversification efforts, will ease pressure on Jordan’s public finances and help contain current account deficits. We also expect lower oil prices to boost Jordan’s growth prospects. The more-expensive oil replacing cheaper gas supplies from Egypt (which have been significantly disrupted since 2012) had been a source of pressure on economic growth (adding to the cost of doing business and suppressing consumption).

That said, the benefits of lower oil prices on growth and easing pressure on external balances, in particular, will be partly offset by ongoing regional conflicts in Syria and Iraq. Regional turmoil will continue to have negative spillover effects on Jordan’s economy, suppressing important growth drivers including investment, tourism and trade. Jordan will remain highly dependent on bilateral and multilateral lenders and donors to close its funding gap. While we note that over the past two years Gulf Cooperation Council (GCC) grants have been forthcoming and stable, there remains some uncertainty about the size and timing of grants. That said, grants and future commitments from the U.S. have increased.

Despite the difficult regional environment, we expect Jordan’s GDP growth to continue to expand modestly in 2015 to reach 3.8%, from 3.1% in 2014. In particular, the mining and agricultural sectors have been performing well since 2014. We also expect that growth will be supported by domestic demand and to a larger extent by public infrastructure investment on the back of bilateral and multilateral grants. Given regional pressures, as well as domestic growth bottlenecks such as a structurally weak labor market, a challenging business environment, and high unemployment, we do not expect growth to reach pre-2010 levels over our 2015-2018 rating horizon. Our forecast assumes relative stability in the political environment, with neither a major change in the political system nor a significant deterioration in security.

The government recently adopted a 10-year economic agenda called Vision 2025, which aims to support sustainable long-term economic growth, with a focus on job creation. We expect the government will continue to make progress on fiscal consolidation, including electricity price increases. Jordan has increased tariffs each year since 2013 to reduce the losses at state-owned electricity utility NEPCO. The government plans to keep nominal spending flat, in particular wages and pensions. However, we do not expect, in the current political environment, there will be much impetus to implement politically sensitive structural reforms such as reducing the large public sector, or for labor market reforms. We believe the government will seek to preserve internal political and social stability. That said, we do expect the government will meet its International Monetary Fund (IMF) program commitments. It also signaled its intention to sign a new program with the IMF once the current one expires in August 2015.

According to the UN High Commissioner, over 600,000 refugees have registered in Jordan, of which more than 100,000 are living in the large Zaatari refugee camp, although estimates suggest a much larger refugee population in Jordan generally. We expect the refugee influx to weigh on public resources, particularly in terms of security, medical, and education costs. However, refugees are also providing a boost to consumption, as demonstrated by an increase in real estate turnover and construction, and are also supporting the increased aid flows to Jordan. There has not been a major influx of refugees from Iraq to date.

We expect Jordan’s external balances to improve moderately over the ratings horizon supported by an improved trade balance and foreign currency inflows from public sector borrowing, grants, remittances, and relatively stable tourism and investment. This improvement has supported foreign currency reserves and improved confidence in the local currency, as shown by a steady de-dollarization trend (dollarization of deposits has come down to 20% as of end-February 2015, from a peak of 30% in 2012) and stronger confidence in the currency peg. Meanwhile, the exchange rate peg to the U.S. dollar supports price stability. However, the peg also limits the central bank’s room for policy maneuver.

The current account deficit in 2014 narrowed to 6.8% of GDP, from 10.3%, supported by stronger services and transfers balances. While workers’ remittances and grants remained stable in 2014, direct aid for Syrian refugees increased, supporting the current account balance last year.

We estimate that the current account balance will narrow only modestly in 2015, to 6% of GDP, despite an improved trade balance due to lower oil prices (the mineral fuel bill makes up about 30% of total imports). The effect of lower oil prices on the trade balance will be offset by lower exports to Iraq, which accounts for just under 20% of exports. Offsetting the overall improvement in the trade balance will, in our view, be a weaker services surplus (we expect that tourism and other services may become more affected by the crisis in Iraq than last year) and lower official transfers: we expect 2015 levels will underperform the strong 2014 levels. Indeed, the government expects to receive fewer grants in 2015 than in 2014. We believe workers’ remittances will remain stable. Although 80% – 90% of the Jordanian diaspora is concentrated in the Gulf states, we see limited risk that remittances will decrease because workers are employed across diverse industries. We also expect remittances to remain stable because public spending in GCC countries and overall growth, will continue despite lower oil prices. In the short term, we do not believe that lower oil prices will have a significant impact on foreign currency inflows from the GCC in the form of tourism receipts, investment, remittances, or grants. That said, we believe that this risk would become more pronounced in the medium term were oil prices to decline significantly more than we expect.

Jordan’s external imbalance remains wide. Gross external financing needs peaked at 120% of current account receipts (CARs) and usable reserves in 2013, and we expect the ratio will decline only slowly. External shocks over 2011-2013, and the reserve drawdown in 2012, have pushed up external debt levels.

We expect the general government fiscal deficit, including transfers to state-owned power company NEPCO, to narrow to 5% of GDP in 2015, from an estimated 7% in 2014, mostly as a result of lower transfers to NEPCO. We expect NEPCO losses to decrease to less than 3% of GDP, from about 5% in 2015, primarily due to lower oil prices and increased electricity tariffs, which will support NEPCO’s revenues. We also expect that the government will not directly service NEPCO’s debts in 2015, whereas it did in 2013 and 2014. Government fiscal consolidation efforts, in line with steps taken during the past three years under the IMF program, will support revenue. We expect current spending to remain flat in nominal terms.

We expect deficits to continue to narrow gradually over the medium term due primarily to reduced transfers to NEPCO. NEPCO, which before 2011 was importing about 400 million cubic feet of gas annually from Egypt and operating with small profits, has since been running annual deficits of around 5% of GDP. Imports of Egyptian gas averaged only around 100 million cubic meters per year over 2012-2013, due to lower output and disruptions. Supplies were further disrupted in 2014 and averaged only 30 million cubic meters. NEPCO funded its purchase of costlier diesel fuel supplies by borrowing with a sovereign guarantee over 2012-2013, while the government subsidized NEPCO the difference with the selling price. Since mid-2013, however, the government has been directly paying NEPCO’s debt servicing costs (NEPCO’s commercial debt is issued with a sovereign guarantee). In 2015, the government expects not to service NEPCO debts, and for NEPCO to resume government-guaranteed borrowing from commercial banks. However, we still believe the risk of this contingent liability can easily crystalize, as it has recently, and we include NEPCO’s debt as part of the general government debt stock, which we estimate will peak at 80% of GDP in 2016.

Aside from lower oil prices and the tariff hikes (two more are planned in 2016 and 2017), we also expect energy diversification efforts to reduce NEPCO’s losses over the medium term. The LNG terminal under construction in Aqaba is due to come online in mid-2015, which will enable NEPCO to access cheaper energy supplies. Additional new sources of energy will be generated by projects involving shale gas and renewable energy.

We expect international support to remain strong. Regional instability, affecting Syria, Iraq, and increasingly Lebanon, has left Jordan as one of the most stable countries in the region. We believe that maintaining this relative stability is an important foreign policy objective for the U.S. and the GCC, as seen in the level of grants from U.S. and GCC aid organizations, as well the U.S. guarantee of U.S.-dollar Eurobonds issued over 2013-2014, with a further U.S. guaranteed issuance expected in 2015. We view these commitments as an important ratings strength.

Outlook

The stable outlook reflects our expectation that Jordan’s fiscal and external balances will continue to gradually improve. This is predicated on external and official funding remaining supportive; energy sector developments, including a lower energy import bill; and energy diversification efforts remaining on schedule. The outlook also reflects our expectation that government policy, for instance regarding fiscal reform, remains on track.

Successful implementation of key political and structural economic reforms supporting more sustainable economic growth and further easing fiscal and external vulnerabilities, for example due to a significant improvement in the regional security environment, could lead us to consider a positive rating action.

We could consider lowering the ratings if external and fiscal balances were to diverge significantly from our expectations, if external and official funding were less forthcoming, or if financing needs widened beyond the scope of available external assistance. (S&P 24.04)

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11.5 JORDAN: Jordan’s Tourism Industry Feels Impact of Regional Volatility

The Oxford Business Group observed that a concerted drive is under way in Jordan to reinvigorate the important tourism sector that has been curtailed by regional instability.

The total number of visitors in 2014 dipped 1.2% year-on-year (y-o-y), reaching 5.3m, as the number of tourists arriving on daytrips slipped 7.4% y-o-y to 1.3m, according to data provided by the Jordan Tourism Board (JTB). The number of overnight visitors fared slightly better in the year, rising 1.1% to reach nearly 4m, but according to the latest data, the tally for January and February is down 8.3% y-o-y.

Despite the drop in overall numbers, tourism receipts remained stable throughout 2014, totaling JD3.1b ($4.37b), according to Central Bank of Jordan data, up 6.3% on the previous year, thanks in part to a rise in tourists from the Gulf region.

Jordanian expatriates accounted for the largest number of all visitors in 2014, making up just under a third of all overnight stays in 2014, marking an increase of 10.8% y-o-y. Overnight arrivals from Gulf countries, which made up 17.3% of the total number of visitors, rose 3.1%. However, visitors from other Arab countries, which represented the largest group of visitors in 2013, slipped 7.6% to make up 27.6% of total overnight arrivals in 2014.

Regional Challenges

The various regional conflicts and most notably the rise of the Islamic State in neighboring Syria and Iraq is largely responsible for visitors staying away, even though internally Jordan remains stable. Industry players believe that other regional events are also causing problems. “A lot of winter bookings were cancelled in the wake of the Gaza conflict and since then the issue of Islamic State…has become more and more prominent,” said Peter Hoesli, general manager of the Movenpick Resort Dead Sea in Sweimeh, near Madaba.

The fall in visitor numbers has prompted the authorities, supported by industry representatives, to introduce measures aimed at boosting activity. A cabinet reshuffle in early March led to the reappointment of a dedicated minister for tourism in a widely welcomed move.

Later in the month, the Ministry of Tourism and Antiquities launched a campaign in conjunction with the JTB and tour operators to galvanize domestic tourism. The campaign includes promotions on travel packages to the Dead Sea and historical sites such as Petra. But keen to see more done, industry players have also drawn up a number of proposals, which include a reduction of entry fees to Petra for visitors staying in nearby hotels, as well as proposals to support the struggling hotel industry with cuts to taxes and lower electricity prices.

Reaching for the Skies

New developments in the aviation sector could prove instrumental in boosting air traffic, and visitor numbers, to the kingdom. In a significant development at the start of the year, UAE-based budget airline Air Arabia bought a 49% stake in Jordanian charter carrier Petra Airlines, to be rebranded Air Arabia Jordan.

The firm plans to open a new international hub at Amman’s Queen Alia International Airport (QAIA), becoming Air Arabia’s fifth in the region and operating flights to Europe, the Middle East and North Africa. “The acquisition is good news for the industry, as Air Arabia represents a new, large potential source of capital,” Kjeld Binger, CEO at Airport International Group (which operates QAIA) told OBG. “It will bring more jobs and contracts for services, and more competition will give rise to market growth and more innovation.”

Industry players hope that the merger of these low cost carriers will help counter the 15% y-o-y drop in passenger traffic seen at QAIA last year. This was compounded by the UK’s budget airline easyJet cancelling its three-times-weekly London Gatwick route to Amman last year.

Directives from the government to boost tourism numbers are spurring other carriers into action. In March, the national flag carrier, Royal Jordanian, announced plans to offer discounted tickets to tour operators for use in package deals. The initiative is targeted primarily at the GCC and European markets, which, between them, account for almost half of overnight arrivals before the inclusion of Jordanians living abroad.

The tourism industry is also calling for other measures to be introduced including the abolition of a departure tax for charter flights and low-cost carriers using Amman Civil Airport at Marka.

Whilst perhaps little can be done to boost sentiment among travelers, the Jordanian authorities and stakeholders in the tourism sector are looking to do all they can to try to create an environment for the industry to grow. In the long-term, they will certainly be hoping for more favorable regional headwinds. (OBG 27.04)

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11.6 OMAN: IMF Executive Board Concludes 2015 Article IV Consultation

On April 30, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Oman1 and considered and endorsed the staff appraisal without a meeting.

The non-hydrocarbon growth rate is forecast to drop from 6.5% in 2014 to 5% in 2015–16 consistent with the government’s spending plans, and thereafter to 4.5% in 2017-20, with risks tilted to the downside. The average inflation rate remained at 1% in 2014, given low non-food inflation. Consistent with the dollar peg, benign global inflationary environment, and elastic supply of foreign labor, inflation is projected to remain below 3% in the medium term. Oil market developments present the main risk to the medium-term outlook. 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. 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 capital adequacy ratio of banks stood high at 15.1%, supported by low net nonperforming loans and high provisioning ratios of 0.6% and 136%, respectively, at end-September 2014. Stress tests suggest that under a combination of interest rate and market shocks, the solvency of the banking system would be preserved, although some banks would be required to raise capital to meet the central bank’s regulatory capital requirement. Banks’ liquidity situation augurs well for meeting emerging private sector credit demand, and for further financial deepening.

Executive Board Assessment

In concluding the 2015 Article IV Consultation with Oman, Executive Directors endorsed staff’s appraisal, as follows:

Economic growth remained strong in 2014 but is projected to moderate over the medium term. The decline in oil prices is expected to push Oman’s fiscal and external current account balances to deficits from 2014/15 and keep them in double digits as a% of GDP over the medium term.

It would be prudent for Oman to begin the fiscal adjustment process early, given limited buffers and high breakeven oil prices. Because much of the oil price decline is expected to be sustained, any delay in starting medium-term fiscal reforms would further worsen the fiscal outlook and force deeper and less gradual adjustments later with a larger impact on growth. A reversal of the recent oil price decline would enable saving the windfall revenues for intergenerational equity.

Achieving fiscal sustainability will require measures to contain expenditure growth and increase non-oil revenues. On the expenditure side, curtailing the increase in government jobs in civil and defense services and keeping the growth in government employee compensation constant in real terms; gradually phasing out subsidies, complemented by a social safety net, other targeted mitigating measures, and a well-designed communication strategy; and rationalizing defense spending, would generate savings. Undertaking these reforms in a phased manner and preserving room for capital expenditures would limit the downward drag on growth.

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. Implementing a tax on outward remittances is not an efficient way of raising revenues because it has an insignificant revenue-generating potential while it could reduce the overall competitiveness of Oman’s private sector. Instead, introducing income tax for nationals and expatriates would be less distortive.

Efforts to establish fiscal sustainability should be underpinned by reforms to modernize the current budget system. There is a need for integrating the dual budget, establishing a medium-term budget framework that is integrated with the medium-term macroeconomic framework, and improving the public financial management system. Strengthening the macro-fiscal unit will provide expertise in some of these areas.

The banking system is resilient but the Central Bank of Oman (CBO) should remain vigilant in monitoring and managing evolving risks. The central bank should consider measures to enhance capital cushions to equip banks to face potential further oil price declines, including strengthening banks’ risk management capacity. A sudden sharp withdrawal of government deposits would induce liquidity pressures in banks. Avoiding such a situation warrants close coordination between the CBO and the government, and would require the CBO to inject temporary liquidity into the system, if the need arises.

Efforts toward economic diversification should be strengthened, to reduce dependence on oil and to generate jobs for nationals. Oman needs to improve the business environment by removing impediments to physical, legal, and business infrastructure. Although the government is making serious efforts to develop the SMEs segment, greater coordination between the agencies involved would be beneficial. Developing domestic debt markets will strengthen the diversification process and reduce concentration risks of banks. (IMF 04.05)

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11.7 SAUDI ARABIA: Ratings Affirmed At ‘AA-/A-1+’; Outlook Remains Negative

Rating Action

On 1 May 2015, Standard & Poor’s Ratings Services affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Saudi Arabia at ‘AA-/A-1+’. The outlook remains negative.

Rationale

The ratings are supported by the very strong external and fiscal positions Saudi Arabia has built up over several years. By managing high oil revenues prudently, the general government has retired virtually all of its debt. We estimate the general government’s net asset position at close to 110% of GDP on average during 2015-2018. Notwithstanding our assumption that the Brent oil price will average about $68 per barrel by 2015-2018, we expect that Saudi Arabia’s current account surpluses will average 3% of GDP and liquid external assets, net of external debt, will remain strong, averaging about 200% of current account receipts (CARs) over the same period.

Nevertheless, we expect a gradual deterioration in Saudi Arabia’s fiscal performance over the period to 2018. The government’s 2015 budget suggests a general government deficit of about 6% of GDP in 2015. However, in our view, the deficit could be around double that amount, based on our oil price assumptions and the government’s social, investment, and defense spending priorities. We think the government could face sustained fiscal deficits over the ratings horizon to 2018. Financing these deficits is likely to result in a pronounced decrease in the government’s net asset position and/or an increase in the government’s currently very low debt burden.

Sustained high oil prices over the past few years have helped bolster financial buffers, accumulating government liquid assets that we estimate will average about 115% of GDP in 2015-2018. In our opinion, this level of assets significantly offsets the concentration risk related to the economy’s hydrocarbon dependency. However, we could reassess our view that the government has an exceptional buffer to offset most economic or financial shocks should liquid government assets fall significantly below 100% of GDP.

The large public investment program (just over 30% of all central government spending is capital expenditures) could provide the Saudi authorities with fiscal flexibility to react to the deteriorating terms of trade and concomitant detrimental government revenue trends. However, this would come at the cost of slower economic growth and progress in implementing the official economic diversification strategy.

We understand that Saudi Arabia is the oil producer with the largest estimated amount of spare oil production capacity globally. In our view, this could provide it with an additional layer of fiscal and external flexibility that other oil producers lack.

We estimate GDP per capita at $21,000 in 2015. We estimate that trend growth in real per capita GDP, which we measure using 10-year weighted-average growth, will amount to about 1% during 2009-2018, which is relatively weak compared with peers that have similar GDP per capita.

Saudi Arabia derives about 40% of its GDP, 90% of government revenues and 85% of exports from the hydrocarbons sector. We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth. We find that the non-hydrocarbon sector relies to a large extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities.

King Abdullah passed away on 23 January 2015. The succession of his 79-year-old half-brother, King Salman, proceeded smoothly. On 29 April 2015, King Salman promoted his nephew, interior minister Mohammed bin Nayef – the deputy crown prince since January 2015 – to the position of crown prince, first in line to the throne. The king is believed to have adhered to the strictures of the Allegiance Council established in 2007, which formalized the procedure of appointing a crown prince. The king also named his son Mohammed bin Salman, the defense minister, to the position of deputy crown prince and second in line to the throne.

In our view, when the scepter is passed from a son of King Abdulaziz Al-Saud, who established the kingdom in 1932, to the next generation of rulers, reconciling the concerns and opinions of the extended Al-Saud family could become more challenging. So far, only the sons of King Abdulaziz have ruled after him. Our institutional assessment remains neutral for the rating.

In our view, Saudi Arabia is an absolute monarchy in which decision-making is highly centralized with the king and the ruling family. We find that this could make future policymaking more difficult to predict. Political institutions are still at an early stage of development compared with those of non-regional peers in the ‘AA’ rating category.

According to our estimates, based on the 2014 BP Statistical Review of World Energy, Saudi Arabia’s annual production of both oil and gas – about 5 billion barrels of oil equivalent (boe) – could be maintained for the coming 66 years, given its 320 billion boe in estimated reserves. However, in terms of years of hydrocarbon production at current levels, Saudi Arabia is surpassed by other Gulf Cooperation Council (GCC) countries: Qatar (106), Kuwait (91), and the United Arab Emirates (81). As a result, alongside the high share of hydrocarbons in nominal GDP and exports, and a relatively high fiscal breakeven oil price (estimated at $87/bbl in 2015 by the International Monetary Fund), diversification away from the oil sector is, in our view, more pressing in Saudi Arabia relative to some other GCC countries.

Over 2015-2018, we expect Saudi Arabia’s net liquid external assets (net of external debt) will remain in a strong position, averaging about 200% of CARs. Gross external financing needs should average about 90% of usable reserves and CARs by our estimate.

Given the Saudi riyal’s peg to the U.S. dollar, we view monetary policy flexibility as limited. The long-standing currency peg helps to anchor the population’s inflation expectations, but binds Saudi Arabia’s monetary policy to that of the U.S. Federal Reserve. Notwithstanding this, Standard & Poor’s classifies the banking sector of Saudi Arabia in group ‘2’ under its Banking Industry Country Risk Assessment (BICRA), one of the strongest banking systems globally.

Outlook

The negative outlook reflects our view that Saudi Arabia’s general government fiscal position is weakening. We could lower the ratings over the next two years if the government’s liquid assets fall well below 100% of GDP or the government’s overall fiscal performance were to significantly weaken by our estimates. The ratings could also come under pressure if domestic or regional events compromised political and economic stability.

The ratings could stabilize at current levels if the combination of policy choices by the Saudi authorities and external economic conditions preserve the government’s exceptionally large liquid asset position close to current levels, which provide the government with an exceptional buffer during periods of economic or financial shocks. (S&P 01.05)

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11.8 SAUDI ARABIA: Can Saudi Arabia Cope with Oil Volatility?

Energy companies in Saudi Arabia have started witnessing a major dent in their first-quarter results, compared with the same period last year. Revenues at one of the world’s largest petrochemical groups, Saudi Basic Industries Corp (SABIC) fell by 28% from a year earlier to $9.48 billion. The management blamed the slide in oil and petrochemical product prices for the bad results.

Petro Rabigh, a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical, announced its first quarter results with a 50.3% drop in profits. According to Petro Rabigh, the slump in results was due to lower profit margins on its petrochemical products, the prices of which are closely linked to oil prices, which have been falling consistently since mid-2014. Interestingly, Saudi producers benefit from subsidized energy and feedstock costs, so lower oil prices shrink their margins.

Riding out of crisis

However, Saudi finance minister Ibrahim Al-Assaf reiterated that the kingdom is capable of dealing with the current instability in oil prices. Al-Assaf said the ratio of public debt to GDP in his country was 1.6% by the end of last year. In this context, the Saudi minister explained that the kingdom continues to give priority to investment programs in the field of infrastructure, education, health and social services, in order to achieve sustainable economic growth that is capable of providing jobs.

Al-Assaf stated the banking sector still maintains good rates of liquidity, profitability and capital, noting that the recent reforms strengthen the regulation of the financial sector, help support sustainable economic development and provide financing for small and medium enterprises.

It is noteworthy that John Sfakianakis, regional director for the GCC at Ashmore, said earlier that the decline in oil prices is normal and that Saudi Arabia is capable of facing the fluctuations in prices due to its large foreign reserves.

There could be a large reserve. However, data suggests Saudi Arabia is drawing down foreign reserves to cover up deficit. The central bank’s net foreign assets fell by 1.4% from a year earlier to $707 billion in February, according to monthly central bank statistics. It was the first year-on-year drop since February 2010, when Saudi Arabia was affected by the global financial crisis. (AME 20.04)

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11.9 SAUDI ARABIA: Shift in Saudi Oil Leadership

On 1 May, two days after making radical changes in the kingdom’s royal succession order and senior government posts, Riyadh announced that governance of the state-owned oil company Saudi Aramco has been restructured. As with the previous changes, a major beneficiary of the latest announcement is King Salman’s favorite son Muhammad, a.k.a. MbS, the thirty-something defense minister and deputy crown prince who has now been named chairman of Saudi Aramco’s newly formed ten-member Supreme Council. The post will give the prince crucial input into future Saudi oil policy, even though his qualifications for that role are meager at best.

Until now, Saudi Aramco has been responsible for exploration, production, and marketing while the Oil Ministry (officially known as the Ministry of Petroleum and Mineral Resources) has concerned itself with policy. An umbrella body called the Supreme Petroleum Council once played an obscure role in the policymaking process, but King Salman abolished it immediately after his January accession.

Although separate entities, the Oil Ministry and Saudi Aramco have worked for years in apparent harmony as symbolized by the role of Ali al-Naimi, the 79 year old company veteran who until last week served as both oil minister and Aramco chairman. He lost the latter, mainly honorary, position last week to Khalid al-Falih, another Aramco lifer. This change could precipitate Naimi’s long-expected retirement as minister. Meanwhile, MbS will likely get to choose the next minister in his role as president of the Council of Economic and Development Affairs. Among the probable candidates is his older half-brother Abdulaziz, the long-serving assistant oil minister who was promoted to deputy minister when Salman became king. But MbS is said to dislike his sibling, so he may choose a nonroyal instead.

Whatever the case, Naimi’s exit could bring changes to Saudi oil policy, which he has guided cautiously and, on the whole, successfully for the past twenty years. He appeared to be as surprised as anyone by how quickly and deeply oil prices fell in the past twelve months. His apparent policy has been to suffer the drop while retaining market share, a tactic that proved at least partially correct in that prices have recovered from the low of below $50 per barrel to around $60 today. But the kingdom needs a minimum price of around $100 per barrel to sustain its current budgetary approach in the long term – a figure that seems unlikely to reoccur any time soon barring a collapse in U.S. shale oil production, which has so far proven surprisingly resilient to the price drop. Moreover, a potential U.S.-led nuclear deal with Iran could increase the amount of oil on the market, further dampening prices.

MbS’s approach to oil policy is unknown, but his father’s policies in the past three months border on the spendthrift. When he became king, Salman ordered a two-month salary bonus for all government employees and retirees. Although such largesse is not unusual for newly crowned Saudi monarchs, Salman also granted all military and security personnel another month’s bonus just last week, apparently for their efforts in the Yemen war – itself a massive unplanned expenditure.

Also notable in this announcement was the exclusion of Crown Prince Muhammad bin Nayef (a.k.a. MbN) from the new Supreme Council. He does not sit on the Council of Economic and Development Affairs either, signaling that he will play little if any role in oil policy – in contrast to MbS, who now holds posts on all three of the kingdom’s main decision making bodies, including the MbN-chaired Council of Political and Security Affairs. The new arrangements are yet another indication that Saudi government structures and political hierarchy are in a state of flux and that MbS is poised to play a preponderant role in the future.

Simon Henderson is the Baker Fellow and director of the Gulf and Energy Policy Program at The Washington Institute. (TWI 01.05)

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11.10 SAUDI ARABIA: Saudi Arabia Rail Project Progresses

Further progress has been made in plans to build the Arabian Gulf region’s rail network, with Saudi Arabia looking to closely align the project with its economic and social priorities.

In mid-March, reports the Oxford Business Group, the state agency that oversees the operation of the rail network, the Saudi Railways Organisation (SRO), signed a SR2.84m ($760,000) contract with Dornier Consulting, tasking the German firm to update and refine the blueprint for the national rail development project.

The objective is to focus the program on the needs of the Saudi economy as well as draw up a conceptual framework consistent with the country’s National Transportation Strategy. This aims to reduce the reliance on automotive transport for both passengers and cargo, and integrate the Kingdom’s transport system to boost economic development.

The new network will dwarf Saudi Arabia’s existing rail system, which currently comprises some 1400 km of track. However, challenges remain in implementing the multibillion-dollar strategy on time and on budget, particularly with regard to the broader GCC-wide network project.

All Aboard

The 15-year rail program, one of the world’s largest infrastructure projects with an estimated budget of $97b to be spent before 2040, foresees up to 15,000 km of track being laid, combining freight with broad-gauge high-speed passenger and urban metro lines.

One element of the first phase is the Landbridge network linking Jeddah on the Red Sea with the city of Dammam on the Gulf, with branch lines to key industrial centers. The line will facilitate the fast transport of goods and raw materials from one side of the country to the other. It will also connect expanding mining, industrial and energy centers with both ports.

Another important part of the rollout is the SAR project, formerly known as the North-South Railway. Once completed, it will add approximately 2750 km of track consisting of two main lines. One will originate in Riyadh and run northwest to the Jordanian border, passing through Qassim, Hail and Al Jouf. The other line will connect the Al Jalamid mine in the north with processing and export facilities in Ras Al Khair on the Arabian Gulf.

An additional key component of the five-year program is Saudi Arabia’s 663 km contribution to the GCC-wide rail system, with the region looking to host a seamless network of rail links criss-crossing its various borders. The ambitious project, which includes a 2177-km network, will link all six Gulf states by rail for the first time.

The rollout of urban rail networks is also expected to gain speed this year, with the Jeddah Metro, Riyadh Metro and the Makkah Mass Rail Transit all set to move forward, offering extensive opportunities for construction and rail service contractors.

Fast Tracking

The original Saudi Railway Master Plan had set out a less ambitious program of 10,000 km of mainline track to be constructed by 2040. However, the increased scope of its reach and the new timeframe reflect the targets to broaden Saudi Arabia’s economic base, allowing for new industrial hubs and expanded port and logistics centers to be effectively linked into the transport grid.

With an expanded rail network, Saudi Arabia also wants to attract more foreign investors. Khalid Al Suwaiket, president of the SRO, said at a conference in Oman earlier this year that improved links to industrial areas and better access to materials may help to encourage external investors looking to set up manufacturing facilities in the region.

One potential snag is that prices for materials such as steel rails, cement and cabling are set to rise given the projected increase in demand, especially at a time when other Gulf states are also developing their own rail networks. Skilled workers, project managers and engineers are also likely to be in high demand.

In addition, according to experts, some GCC countries may struggle to meet the 2018 deadline for the launch of the regional network. With its deep fiscal reserves, however, Saudi Arabia may be better placed than most to cope with any cost overruns and bring its section of the GCC line on time. (OBG 29.04)

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11.11 EGYPT: Egypt Central Bank Leans on Currency Devaluation

A series of moves by the Central Bank of Egypt (CBE) to devalue the pound and limit dollar activity are expected to help shore up foreign reserves and eliminate black-market currency trading.

The Oxford Business Group said the controlled devaluation of the currency earlier this year from 7.14 to 7.62 pounds to the dollar has helped narrow the distance between the official exchange rate and that found on parallel markets. In tandem with the currency devaluation, the CBE imposed daily and monthly limits ($10,000 and $50,000, respectively) on dollar deposits in local banks in an attempt to stifle the black market for foreign exchange.

The IMF praised the CBE’s move, with Masood Ahmed, the IMF’s director of the Middle East and Central Asia Department, saying in April that a more unified market “would help to create the basis for more investment, and better functioning of the exchange markets, and as a result encourage investment and growth”.

Shore-Up Hard Currency

Devaluation is also likely to slow the drain on foreign exchange reserves, which shrank by about 10% in a year to $15.4b in January, according to Jean-Michel Saliba, an economist at Bank of America Corp. Reserves have dwindled from about $36b before the 2011 revolution, dropping to a 10-year low of $13.4b in March 2013.

To ward off further declines, Egypt’s neighbors from the GCC, including Saudi Arabia, Kuwait and the UAE, have over the past four years provided billions of dollars in transfers, grants, aid and concessionary loans. The IMF has also recommended that Egypt raise its foreign exchange reserves to 4.5 months of imports, up from approximately two and a half months now. The authorities, however, said they would aim for 3.5 months of imports within the next five years.

Another key aim of the CBE measure was to shore-up confidence ahead of the key Economic Development Conference, which took place in March. Egypt secured investment contracts worth $36.2b, an additional $18.6b in infrastructure contracts to set up power plants, and $5.2b in loans from international financial institutions.

Investment Minister Ashraf Salman noted in March that a shortage of hard currency was making it difficult for foreign portfolio and industrial investors to repatriate profits, a problem that has also impacted foreign direct investors. The shortage of foreign currency is affecting local business, especially those companies that rely on imports of goods, feedstock, cars or electronics.

The devalued pound should help also stoke activity more broadly in some of Egypt’s key revenue-earning sectors, including manufacturing, agriculture and tourism. Egypt is also looking to stay competitive on exports to the EU, its largest market, while the newly weakened Egyptian pound will make the country a more tempting travel destination. Tourism accounts for more than a tenth of Egypt’s GDP and nearly a fifth of foreign currency revenues. Since the revolution, vital sources of hard currency revenue, such as tourism, have been hit hard. Tourism revenues came to $5b in the 2013/14 financial year, compared to around $12b in 2010.

Inflation to Rise

The flip side to the currency devaluation has of course been an increase in consumer prices, with the cost of imports rising as a result. Given the country’s large price-sensitive population, with roughly a quarter of the population classified as poor according to the state statistical bureau CAPMAS, this is cause for concern as 60% of all goods sold in Egypt are imported. In recent years, the government has managed to roll back subsidies on a number of key items – which has helped to reduce the budgetary burden – and low petroleum prices have at least partially insulated Egyptians from rising import costs, but the price of wheat and other imported items may increase.

Consumer inflation rose for the second consecutive month in March, increasing to 11.5% from 10.6% the previous month according to CAPMAS, although this is still lower than the high of 18.3% y-o-y that the country saw in 2008. Food and utility costs pushed inflation higher, linked to the falling currency. Inflation has also accelerated after the government slashed subsidies last summer, pushing up fuel prices by as much as 78%.

According to UK-based Capital Economics, inflation is set to remain in the double digits until the third quarter of the year, at which point it is likely that the central bank will cut interest rates. (OBG 29.04)

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11.12 MOROCCO: Fitch Affirms Morocco at ‘BBB-‘; Outlook Stable

Fitch Ratings, on 24 April 2015, affirmed Morocco’s Long-term foreign and local currency Issuer Default Ratings at ‘BBB-‘ and ‘BBB’, respectively. The Outlooks are Stable. The issue ratings on Morocco’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-‘ and ‘BBB’ respectively. The Country Ceiling has been affirmed at ‘BBB’ and the Short-term foreign currency IDR at ‘F3’.

Key Rating Drivers

Morocco’s ‘BBB-‘ rating is supported by its macro and political stability, which have helped attract FDI and implement structural reforms. GDP growth was resilient through the 2011/2012 political transition and despite low external demand from the Eurozone. Following a marked deterioration in the budget and current account deficits in 2012, government and net external debt have increased sharply, at levels above its peers’ median. However Morocco has embarked in an ambitious path of reforms that has led to a gradual tightening in the twin deficits and will help rebuild policy buffers. Structural indicators are weaker than peers.

Morocco’s ‘BBB-‘ IDRs also reflect the following key rating drivers:

Fitch expects the current account deficit will decline to 3.9% of GDP in 2015, from 5.6% in 2014 and 9.8% in 2012, primarily driven by a lower energy bill (10.2% of GDP in 2014 after 12.8% of GDP in 2012 and 7.4% expected in 2015) and growth in new industrial exports (+27% cars in 2014). This is helping rebuild official foreign reserves, to $20.4b in 2014 from $17.5b in 2012. Net external debt will reach a peak in 2015 at 11.3% of GDP and start declining thereafter, reversing the trend of recent years.

Fitch expects the central government deficit will be 4.3% of GDP in 2015 from 4.9% in 2014 and 7.0% in 2012 thanks to the completion of the reform of energy subsidies. The cost of subsidies will be 2.4% of GDP in 2015 from 6.6% of GDP in 2012. State investment will remain above 5% of GDP, reflecting the focus on infrastructure. The new financial law (Loi Organique des Finances) to be adopted in 2015 will strengthen the budget’s framework and includes a rule to limit the increase in net debt to investment.

General government debt on a consolidated basis was 49.2% of GDP in 2014, higher than the ‘BBB’ peers’ median (41%) following a marked deficit-related increase in recent years. Fitch expects government debt to gradually decline to 43% by 2018, assuming real GDP growth between 4% and 5% and a gradual tightening in the primary balance deficit.

GDP grew 3% in 2014, after 4.4% in 2013, driven by non-agricultural sectors (+3.6%), including new exporting industries (cars and aeronautics). The slowdown reflected weak agriculture (13% of GDP, -1.3% in 2014) and continued lackluster performance in Europe (80% of foreign tourism, 64% of exports and 72% of remittances). In 2015, Fitch expects GDP will grow by 4.3%, supported by the recovery in Europe, higher agriculture output and continued development of new industry, as it is a key policy priority.

Local elections will take place in September 2015 and general elections will follow in 2016. Fitch expects the electoral period to be smooth, reflecting Morocco’s political and social stability. However, the dynamics of reform could be affected.

Structural indicators are generally weaker than similarly rated peers. UN Human Development index scores are weak, and GDP per capita is lower than the peers’ median. Governance indicators and the business environment are also weaker than peers despite some recent improvement (Ease of Doing Business ranking by the World Bank improved to 71 in 2015 from 87 in 2014).

Rating Sensitivities

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

-Continued fiscal consolidation and reduction in the government debt burden.
-Higher growth trajectory that facilitates an increase in per capita income level and an improvement in social indicators.

The main factors that may, individually or collectively, lead to negative rating action are as follows:

-Inability to narrow the fiscal deficit that undermines the government’s debt dynamics.
-A weakening economic performance.
-A reverse in the current trend of declining current account deficit and falling foreign reserves leading to a sharp rise in net external debt.
-Social instability constraining the political scope for reform.

Key Assumptions

The Stable Outlook anticipates a gradual narrowing of the budget and the current account deficits from the peak of 2012 that will allow public debt to stabilize and a gradual rebuilding of FX reserves. Fitch assumes continuing reform in a context of social and political stability.

Fitch assumes a gradual economic recovery in the Eurozone, to 1.4% in 2015 and 1.7% in 2016 from 0.8% in 2014.

Fitch assumes oil prices to decline to $65 in 2015, from $99 in 2014 and will increase to $75 in 2016. (Fitch 24.04)

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11.13 GREECE: Moody’s Downgrades Government Bond Rating

On 29 April 2015, Moody’s Investors Service downgraded Greece’s government bond rating to Caa2 from Caa1. The short-term rating is unaffected by this rating action and remains at Not Prime (NP). The outlook on the rating is negative. Moody’s government bond rating applies to debt issued on private sector terms only. The key drivers behind the downgrade are:

1) The high uncertainty over whether Greece’s government will reach an agreement with official creditors in time to meet upcoming repayments on marketable debt.

2) The significant implementation risks of a follow-up, medium-term financing program even if an agreement is reached, given the weakened economy and a fragile domestic political environment.

The negative rating outlook reflects Moody’s view that the balance of economic, financial and political risks in Greece is slanted to the downside.

Concurrently, Moody’s has lowered the country’s local- and foreign-currency bond ceilings to B3 from Ba3, which reflects the increased probability that Greece may exit the euro area in the event of a sovereign default.

In addition, Moody’s has also lowered the local- and foreign-currency bank deposit ceilings to Caa3 from Caa1 to capture the heightened risk of a deposit freeze, if depositor confidence weakens further. The short-term local- and foreign-currency bond and deposit ceilings remain Not Prime (NP).

Ratings Rationale

First Driver — Continued Uncertainty On Future Official Sector Support Program

Negotiations between official creditors (European Financial Stability Facility (EFSF, (P)Aa1 stable), International Monetary Fund (IMF), European Central Bank (ECB) and European Commission) and the Greek government appear to have achieved little over the past two months. The Greek government and its official creditors remain far apart on key objectives, with no immediate prospect of agreement being reached on a new financing package. Both sides have reiterated their desire to reach an agreement that would avert a Greek default, and there are indications that the process has taken a new sense of urgency, with a change of negotiators on the Greek government side. However, Moody’s believes that the final outcome will be driven primarily by political decisions both at the European level and in Greece. As such, the outcome of these decisions is highly uncertain and the potential for a policy accident resulting in Greece defaulting on its marketable (or commercially traded) debt, including that held by the ECB, has risen. In Moody’s view, the risks to bondholders are appropriately reflected by a Caa2 government bond rating, which is historically associated with a roughly one in four probability of default over a two-year horizon.

Amid these faltering negotiations, the economy continues to face severe liquidity constraints. Greece’s ability to finance its budgetary expenditures and debt repayments has been under pressure since the official sector program went off track last year. Ordinary net revenues, which include tax revenues, were around 5% below target between January and March. The government has lost market access, facing challenges in rolling over maturing T-bills: foreign investors have largely withdrawn from the Greek T-bill market, and Moody’s understands that Greek banks are restricted by the ECB from increasing their own holdings of T-bills. Low investor confidence has adversely affected banking sector deposits: Moody’s estimates that private sector deposits have fallen by around €32 billion (18% of GDP) since early December 2014 to an estimated €132 billion (74% of GDP) at the end of April.

As a result, the government has been drawing on internal reserves, including tapping deposits of the social security funds, state-owned enterprises and more recently local governments. The government has also been forced to curb expenditures and run arrears to suppliers (expenditures have been around 11% below budgetary targets for the first three months of the year). Rising liquidity constraints and the absence of any material progress on negotiations imply a high level of uncertainty over the Greek government’s ability to meet upcoming repayments on both official and marketable debt. Amortization and interest payments are estimated at €3.6 billion from May 1 to June 30, of which around €2.4 billion is due to the IMF. Moody’s does not rate official sector debt, including obligations to the IMF, and a delayed or missed payment on IMF obligations need not necessarily trigger a debt acceleration that would lead to a default on the marketable debt instruments. However, non-payment or unilateral restructuring of official sector debt would be a strong sign of lack of progress in negotiations. It would suggest a high probability of Greece being unable to obtain the funds it needs to service marketable debt, including the €3.5 billion and €3.2 billion payments due on bonds held by the ECB on 20 July and on 20 August respectively.

Second Driver— Elevated Implementation Risks Against The Backdrop Of A Weakened Economy And Continuing Political Uncertainty

Moody’s believes that there are significant implementation risks associated with a follow-up, medium-term financing program even if an agreement is reached, given the backdrop of a weakened economy and a fragile domestic political environment.

Locked out of the capital markets, Greece is highly likely to need to agree and implement a new program as a condition of receiving additional financing from its official creditors. Greece would also need to achieve and sustain primary surpluses over many years in order to make slow inroads into its extremely high debt burden. To overcome those challenges, Greece will need higher medium-term growth and political resolve. Recent events make both doubtful, raising further concerns over Greece’s ability to sustain financial support from official creditors over the coming years.

Moody’s also notes that the economy’s fragile recovery and the government’s fiscal consolidation efforts have been derailed. The rating agency’s current forecast of 0.5% growth this year is markedly different from the structural adjustment program target of 2.9% and Moody’s previous forecast of 1.2%. Moreover, risks to the growth outlook are firmly towards the downside as lingering uncertainty is likely to have a negative impact on investment and the nascent recovery in consumption.

The primary balance will also likely be close to, or in deficit this year (after registering a surplus of 0.4% of GDP last year), complicating the government’s management of its fiscal and debt position further. Looking ahead, lingering uncertainty regarding the economy’s medium-term growth path and the government’s willingness and ability to record primary surpluses over a number of years complicates the task of bringing the headline debt ratio down.

In addition to the challenges posed by lower growth, the political and social environment will likely continue to affect the implementation of further fiscal consolidation and structural reform agenda, which Moody’s expects would form a condition for future financial support. In the near term, a critical challenge for the government will be its management of the disparate views of the groups that form Syriza, in particular the far left wing of the party. The passage of any follow-up agreement with official creditors and successive reform bills in the Greek parliament will test the strength of the governing coalition. Already, it appears that a range of options including a possible referendum on any new financing agreement have been discussed, all of which results in an elevated level of political uncertainty, which increases the implementation risks to any follow-up program.

Rationale For The Negative Outlook

The negative outlook on the Caa2 rating reflects Moody’s view that the balance of economic, financial and political risks in Greece remains slanted to the downside. The probability of a default on official sector, and hence the increasing risk of default on private sector debt, continues to rise with every week that passes without some form of resolution. Compared with Moody’s base case, scenarios incorporating either a longer stand-off with official creditors and/or greater negative impact to the economy from prolonged uncertainty have a higher probability than more positive outcomes.

Local and Foreign-Currency Bond and Deposit Ceilings

Moody’s has also lowered Greece’s local and foreign currency bond ceilings to B3 from Ba3. The short-term bond ceiling remains Not Prime (NP). The bond ceilings essentially reflect the risk of Greece leaving the euro area and the impact of the resulting currency redenomination on holders of Greek debt. Moody’s acknowledges that default need not entail exit, which would ultimately reflect a political decision. However, the lower ceiling reflects Moody’s view that the probability of the one leading to the other has risen.

Concurrently, Moody’s has lowered the local- and foreign-currency bank deposit ceilings to Caa3 from Caa1 reflecting the increase in the risk of the government placing restrictions on accessing foreign- and local-currency deposits. The short-term bank deposit ceiling remains Not Prime (NP). Moody’s decision to lower the deposit ceilings to one notch below the level of the government bond rating reflects the rating agency’s view that the risk of the government imposing deposit freezes or similar capital restrictions in order to contain deposit outflows and preserve financial stability is now slightly higher than the risk of the government defaulting on its own debt.

What Could Move the Rating Up/Down

Moody’s would consider downgrading Greece’s government bond rating if the probability of a default and/or severity of loss to investors in the event of default were to rise and no longer commensurate with a Caa2 rating. That would most likely occur in the context of a further deterioration in the relations between the Greek government and its creditors, or evidence that the Greek electorate is supportive of a more confrontational stance, potentially including exit from the euro area.

Although not likely in the near term given the prevailing downside risks, Moody’s could consider upgrading Greece’s government bond rating in the event of (1) an increase in the pace of fiscal consolidation and structural reforms; (2) sustained economic growth and primary surpluses, both would support a continued decline in debt levels; and (3) more certainty and visibility on future external financial support and the political environment. (Moody’s 29.05)

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Fortnightly, May 6th 2015

Fortnightly, May 6th 2015

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