SAMA shakeup, UAE banks, latest on COVID-19 - Capital Economics
Middle East & North Africa Economics

SAMA shakeup, UAE banks, latest on COVID-19

Middle East Economics Weekly
Written by James Swanston

The change of governor at the Saudi Central Bank (SAMA) adds to the signs that the government will lean more heavily on SAMA to support its efforts to diversify investments and the Saudi economy. Elsewhere, the fall in profits reported by some banks in the UAE suggests that credit conditions are likely to tighten, which will act as a headwind to the recovery. Indeed , stricter containment measures there, and elsewhere in the Gulf, will put recoveries on ice for the time being.

Saudi: squeezing SAMA to fund PIF

The change at the helm of the Saudi Central Bank (SAMA) adds to signs that the government will lean more heavily on SAMA to support its efforts to diversify investments and the Saudi economy.

SAMA Governor Ahmed al-Kholife was replaced on Sunday by his predecessor Fahad al-Mubarak, who led SAMA between 2011 and 2016. The shake-up at SAMA came alongside comments from Crown Prince Mohammed bin Salman that the Kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), would more than double its total assets under management, from SAR1.5trn (c. $400bn) to SAR4trn (c. $1.07trn) by 2025.

The PIF is taking a lead role in many of the megaprojects in the Kingdom and has become a major investor in global financial markets. It looks increasingly likely that PIF will lean on SAMA to help it achieve its goals. Indeed, late last year SAMA’s mandate was expanded to include “promoting economic growth”.

In years to come, that may provide cover for a move to a more flexible exchange rate. But, for now, it probably signals that PIF will be allowed to dip more freely into the government’s savings at SAMA. Indeed, SAMA has already made transfers of funds from the government’s reserves to PIF – most recently, at the height of the COVID-19 crisis as PIF bought beaten up global equities. The government, through PIF, has tried to use its equity stakes as leverage to attract foreign investment.

While transfers from SAMA to PIF don’t directly reduce the Kingdom’s FX savings, they do reduce their transparency. Only a certain share of the PIF’s assets are held in foreign currency and can be utilised (if necessary) to support the dollar peg. What’s more, there are question marks over the liquidity of these assets – large equity stakes held by PIF may be harder to sell than SAMA’s traditional holdings of US Treasuries. This is not a major issue now, but could be the next time that the peg comes under pressure.

UAE’s banking sector feels the pain

Two of the UAE’s largest banks, First Abu Dhabi Bank and Emirates NBD, both announced this week a sharp dip in profits in 2020 as both increased provisions for bad loans. Emirates NBD revealed that its non-performing loans (NPLs) rose from 0.6% of total loans in 2019 to 6.2% last year. While neither bank provided expectations for NPLs going forward, the effects of the COVID-19 crisis mean that bad loans will probably rise further. Banks are likely to respond by tightening credit conditions, keeping lending growth subdued. This will act as a headwind to what will otherwise be a strong recovery over 2021-22, particularly in Dubai.

COVID restrictions tighten as vaccine rolled out

Worsening virus outbreaks in the Gulf have led to stricter virus containment measures in Bahrain and Oman, while rumours are growing that Dubai may reimpose a lockdown. This will put recoveries on ice, but vaccine rollouts should pave the way for activity to pick up strongly in the middle of the year.

At the same time, vaccination programmes have finally got underway in Egypt and Morocco. The Moroccan government aims to vaccinate 80% of its population over the next twelve weeks which, if achieved, should mean restrictions can be lifted sometime in Q2. For the time being, the roll out in Egypt is likely to be slower. But there are rumours that Egypt is being lined up to produce a vaccine (although it’s not clear which one). If this materialises, this could help to boost vaccine supply and allow for a quicker lifting of restrictions.

The week ahead

January’s PMIs are likely to show activity picked up as vaccine rolled out began. Egypt’s central bank is likely to keep rates on hold. (See Preview.)


Data Previews

Egypt Interest Rate Announcement Thu. 4th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Overnight deposit rate (%)

8.25

8.25

Rates to remain hold until later this year

We think that the Central Bank of Egypt (CBE) will keep its overnight deposit rate unchanged at 8.25% when the MPC meets on Thursday.

Despite inflation having eased from 5.7% y/y in November to 5.4% y/y in December, it now leaves the headline rate just above the lower bound of the CBE’s new inflation target of 7±2%, which replaced the previous target range of 9±3% earlier this month. We had previously argued that a lower inflation target would temper policymakers’ appetite for further rate cuts. (See here.)

We think this will be reinforced by rising inflation over the next 6-9 months. Stronger food and energy inflation, combined with our view that the pound will weaken, will push up the headline rate to around 7% y/y in Q3. This will prompt the MPC to keep rates unchanged for much of this year. (See here.)

Further out, though, we think inflation will fall back towards the lower bound of the CBE’s target range towards the end of this year and stay there throughout 2022. As a result, we think the overnight deposit rate will be lowered by a total of 150bps, to 6.75%, by end-2022. This is more easing than the consensus currently anticipates. (See Chart 1.)

Chart 1: Egypt Overnight Deposit Rate (%)

Sources: CEIC, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

31st Jan

No significant data or events

1st Feb

Kuw

Consumer Prices (Dec.)

+0.3%(+2.8%)

-0.2%(+2.4%)

Leb

Consumer Prices (Dec.)

+0.5%(+133.5%)

+22.5%(+178.5%)

2nd Feb

No significant data or events

3rd Feb

Egy

Whole Economy PMI (Jan.)

48.2

Sau

Whole Economy PMI (Jan.)

57.0

UAE

Whole Economy PMI (Jan.)

51.2

4th Feb

Egy

Interest Rate Announcement

8.25

8.25

Selected future data releases and events

5th Feb

Tun

Consumer Prices (Jan.)

+0.3%(+4.9%)

+1.0%(+5.3%)

8th Feb

UAE

Consumer Prices (Dec.)

-0.1%(-2.4%)

+1.9%(-0.4%)

10th Feb

Egy

Consumer Prices (Jan.)

-0.5%(+5.4%)

+0.7%(+5.5%)

11th Feb

OPEC

OPEC Monthly Oil Market Report

15th Feb

Tun

GDP (Q4, q/q(y/y))

+19.8%(-6.0%)

+3.0%(-3.2%)

16th Feb

Oma

Consumer Prices (Jan.)

-0.1%(-1.5%)

0.0%(-1.2%)

18th Feb

Sau

Consumer Prices (Jan.)

-0.2%(+5.3%)

+0.5%(+6.0%)

Qat

Consumer Prices (Jan.)

0.0%(-3.4%)

+1.1%(-1.4%)

22nd Feb

Mor

Consumer Prices (Jan.)

-0.5%(-0.3%)

+0.6%(+0.5%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Refinitiv, Capital Economics


Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World 1

2008-18

Ave.

GDP

Consumer Prices

2018

2019

2020

2021

2022

2018

2019

2020

2021

2022

Saudi Arabia

1.2

3.5

2.4

0.3

-4.3

2.3

6.3

2.5

-2.1

3.4

3.8

1.8

Egypt

0.9

3.9

5.4

5.5

1.0

6.0

6.3

14.4

8.6

5.2

5.8

4.5

UAE

0.5

2.8

1.7

3.0

-9.0

9.8

6.8

3.1

-1.9

-2.0

2.5

3.0

Algeria

0.4

2.8

1.5

0.8

-9.3

4.5

4.0

4.3

2.0

2.0

5.0

6.5

Morocco

0.2

3.8

3.0

2.3

-6.5

9.5

4.3

1.8

0.2

0.6

1.0

1.3

Qatar

0.2

7.4

1.4

-0.4

-2.8

4.5

4.3

0.3

-0.6

-2.6

1.3

2.5

Kuwait

0.2

1.1

1.2

0.4

-7.8

4.0

5.3

0.6

1.1

2.0

3.3

2.5

Oman

0.1

4.1

2.0

0.5

-7.3

7.0

2.8

0.9

0.1

-0.7

2.8

1.3

Tunisia

0.1

2.3

2.5

1.0

-8.0

8.0

3.5

7.3

6.7

5.6

5.3

5.8

Jordan

0.1

3.2

2.0

2.5

-1.5

2.8

2.3

4.5

0.8

0.3

2.0

3.8

Lebanon

0.1

3.4

0.2

-3.0

-40.0

-10.0

6.8

6.1

2.9

87.8

59.0

9.5

Bahrain

0.1

3.8

2.0

1.8

-4.5

6.0

3.3

2.1

1.0

-2.3

1.0

1.8

Middle East & North Africa

4.0

3.7

2.7

2.0

-5.2

4.9

5.6

5.3

1.5

4.1

4.9

3.3

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest
(28th Jan.)

Last Change

Next Change

Forecasts

End
2021

End
2022

Saudi Arabia

Reverse Repo Rate

0.50

Down 75bp (Mar. ’20)

None on the horizon

0.50

0.50

Egypt

Overnight Deposit Rate

8.25

Down 50bp (Nov. ’20)

Down 50bp (Q4 2021)

7.75

6.75

UAE

Repo Rate

0.75

Down 75bp (Mar. ’20)

None on the horizon

0.75

0.75

Algeria

Discount Rate

3.25

Down 50bp (Mar. ’20)

None on the horizon

3.25

3.25

Qatar

Deposit Rate

1.00

Down 50bp (Mar. ‘20)

None on the horizon

1.00

1.00

Kuwait

Discount Rate

1.50

Down 100bp (Mar. ’20)

None on the horizon

1.50

1.50

Morocco

Key Rate

1.50

Down 50bp (Jun. ’20)

None on the horizon

1.50

1.50

Oman

Overnight Repo rate

0.50

Down 100bp (Mar. ’20)

None on the horizon

0.50

0.50

Tunisia

BCT Key Rate

6.25

Down 50bp (Sep. ’20)

None on the horizon

6.25

6.25

Jordan

Overnight Deposit Rate

1.75

Down 100bp (Mar. ’20)

None on the horizon

1.75

1.75

Lebanon

Repo Rate

10.00

Down 200bp (Dec ‘09)

None on the horizon

10.00

10.00

Bahrain

1-week deposit facility

1.00

Down 75bp (Mar. ’20)

None on the horizon

1.00

1.00

Sources: Bloomberg, Capital Economics

Table 3: Currencies and Stock Markets

Currency

Latest
(28th Jan.)

Forecasts

Stock Market

Latest
(28th Jan.)

Forecasts

End
2021

End
2022

End

2021

End
2022

Saudi Arabia

SAR/USD

3.7508

3.7500

3.7500

TASI

8,756

10,850

13,050

Egypt

EGP/USD

15.66

16.00

17.00

EGX30

11,578

13,800

16,400

UAE

AED/USD

3.6728

3.6725

3.6725

DFMGI

2,701

2,975

3,500

Algeria

DZD/USD

133.0

160.0

170.0

Qatar

QAR/USD

3.6400

3.6400

3.6400

QSE

10,564

12,650

14,800

Kuwait

KWD/USD

0.3026

0.3040

0.3040

KWSE

5,732

7,000

7,000

Morocco

MAD/EUR

10.81

11.25

11.50

MADEX

9,537

9,950

10,000

Oman

OMR/USD

0.3840

0.3845

0.3845

MSM30

3,648

4,500

5,200

Tunisia

TND/EUR

3.27

3.60

3.80

TUNINDEX

6,635

7,150

7,250

Jordan

JOD/USD

0.71

0.71

0.71

ASE

1,717

2,050

2,350

Lebanon

LBP/USD

1505.7

7,500

7,500

BLOM

660

625

650

Bahrain

BHD/USD

0.3769

0.3761

0.3761

BHSE

1,457

1,850

2,100

Sources: Bloomberg, Capital Economics


James Swanston, MENA Economist, james.swanston@capitaleconomics.com