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Timothy Fox - Head of Research & Chief Economist
Published Date: 11 September 2019
In its latest Article IV report, the IMF has called for further fiscal consolidation in Saudi Arabia in a bid to “rebuild fiscal buffers” and reduce vulnerabilities. The Fund has recommended reducing the government wage bill, moderating capital spending growth and raising VAT in addition to implementing planned energy and water price reforms. The IMF is projecting a budget deficit of -6.5% of GDP this year, wider than the official budget projection of -4.2% of GDP and our own more conservative estimate of -5.5%. However, the government has argued that the IMF’s oil price projections are pessimistic and that fiscal buffers are larger than assessed by the IMF. In our view, government spending has been the main engine of non-oil sector growth in the Kingdom this year, and tightening fiscal policy through higher taxes and/or lower spending is likely to have a negative impact on near term GDP growth.
Egypt’s CPI inflation fell to a more-than-six-year low in August, dropping to 7.5% y/y, from 8.7% in July. The continued disinflation, even despite new fiscal reforms, paves the way for further monetary easing by the CBE following the greater-than-expected 150bps cut implemented on August 22. While back-to-school activity could prompt some upwards price pressures in the September print, real rates are currently at 6.75%, giving the central bank plenty of room to implement another sizeable rate cut at its next meeting on September 26. By comparison, Turkey’s real rate currently stands at 4.74%, but this will likely be slashed on Thursday when the CBRT could cut rates by more than 300bps.
Economic data showed further evidence of tightening in the UK labour market with the 3 month average unemployment rate falling to 3.8% in July, down from 3.9% in June. During the same period, average weekly earnings rose from 3.8% to 4.0 underpinning inflationary pressures.
Source: Emirates NBD Research
Treasuries closed lower as investors continue to reprice expectations from the ECB meeting later this week. Further pressure on prices also came from auction of USD 38bn worth of bonds. Yields on the 2y UST, 5y UST and 10y UST closed at 1.67% (+8 bps), 1.59% (+9 bps) and 1.73% (9 bps) respectively.
The move in regional bonds are moving in line with change in benchmark yields but at a slower pace. The YTW on Bloomberg Barclays GCC Credit and High Yield index rose +1 bp to 3.10% even as credit spreads tightened 7 bps to 142 bps.
Emaar Properties raised USD 500 mn in a 10y sukuk which was priced at MS+235 bps. Further, according to reports, Dubai Government is talking to banks for a potential USD denominated bond sale.
The dollar has been relatively underpinned by the recent firmness of Treasury yields with markets awaiting key central bank meetings. The JPY in particular has remained soft driven by a continued unwinding in the Japanese currency's safe haven premium. U.S. Treasury Secretary Steven Mnuchin signalled "lots of progress on talks" recently with regard to trade negotiations with China. Overnight the resignation of U.S. National Security adviser John Bolton might also help contribute to an increase in risk appetite given his hawkish reputation favouring conflicts.
Global markets closed marginally higher as investors continue to remain cautious ahead of central bank meetings over the next 10 days. The S&P 500 index closed flat while the Euro Stoxx 600 index added +0.1%.
Regional equities mainly closed higher. The DFM index and the Qatar Exchange added +0.4% and +0.7% respectively. The Tadawul dropped -1.1% as the market adjusts to the inclusion in the EM index. Arabtec rallied +11.3% after the company confirmed that it is talking to merge with Trojan Holdings.
Oil prices closed down yesterday as markets absorbed the departure of White House administration hawk John Bolton from his position as National Security Advisor and potential implications for oil supply. Brent crude futures were down as much as 2% last night, before paring some losses to close down 0.3% at USD 62.38/b. WTI meanwhile closed down 0.8% at USD 57.4/b. Both benchmarks have recouped these losses in early morning trading today on the back of inventory data from the American Petroleum Institute which showed that crude supplies fell by 7.2mn b last week.
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