TOP STORIES

• 21Ventures Plans to Invest an Additional $20 Million in Israeli Companies in 2008
• General Motors Set to Open R&D Center in Israel
• Inflation in Egypt Slips To New Low
• Inflation in Turkey Reaches Lowest Levels in 37 Years
• MIDDLE EAST: Employees Vote for Smoking Ban in the Workplace

TABLE OF CONTENTS:

1: ISRAEL GOVERNMENT ACTIONS & STATEMENTS

1.1 Government Approves 2008 Budget
1.2 Israel to Get $30 Billion in Military Aid from U.S.

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2: ISRAEL MARKET & BUSINESS NEWS

2.1 21Ventures Plans to Invest an Additional $20 Million in Israeli Companies in 2008
2.2 IPextreme Expands Global Presence with New Representative in Israel
2.3 eASIC & Avnet ASIC Israel Partner to Support Increasing Demand for Structured ASICs in Israel
2.4 Praxair Signs Agreement to Sell Israeli Business
2.5 Kontera Secures $10.3 Million in Funding Led by Carmel Ventures
2.6 Goldrock to Invest $3.3 Million in PNMsoft to Promote PNM'S Global Expansion
2.7 ICL Completes Acquisition of Supresta
2.8 Gaydamak to Buy 110 US Gas Stations
2.9 Elbit Vision Systems Announces New Investment of $1 Million by Shavit Capital Fund
2.10 Bluephoenix Solutions Completes Acquisition of Amalgamated Software North America (ASNA)

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3: REGIONAL PRIVATE SECTOR NEWS

3.1 Israel's Sabra Salads To Partner With Jordanian Firm
3.2 German Domestic Appliances Giant Bosch Launches in Oman
3.3 Turkey's Grid Telekom Builds out Data Center with Force10 Networks Reliable Networking Portfolio
3.4 EnergySolutions Aids Pipeline Optimization Study in Pakistan

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4: ISRAEL MACRO-DEVELOPMENTS

4.1 General Motors Set to Open R&D Center in Israel
4.2 Israel to Promote Palestinian's 'Economic Horizon'
4.3 Israel's Oil Refineries Approves $50 Million Refining Upgrade

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5: ARAB STATE & PAKISTANI DEVELOPMENTS

5.1 Kuwaiti Investments in Jordan Expected To Exceed $10 Billion
5.2 Kuwait Inflation Steady At 3%
5.3 Bahrain Inflation Hits 3%
5.4 UAE Revises Up 2006 GDP Growth to 9.4%
5.5 National Bank Says Inflation in UAE is Beyond Government Control
5.6 Saudi Arabia Tops World In Take-Home Pay
5.7 Saudi Arabia Attracts $18.3 Billion Foreign Investment In 2006
5.8 Inflation in Egypt Slips To New Low
5.9 Egypt May Be About To Realize Its Economic Potential
5.10 Egypt To Sell Four Licenses To Build Steel Mills

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6: TURKISH & CYPRIOT DEVELOPMENTS:

6.1 Inflation in Turkey Reaches Lowest Levels in 37 Years
6.2 Turkey Earns $29.3 Billion From Privatization
6.3 Turkey's Junk Food Market Grows to $2.13 Billion:
6.4 Cyprus Motor Registrations Up 33.3% In July

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7: GENERAL NEWS AND INTEREST

*ISRAEL:

7.1 Netanyahu Re-Elected Likud Leader With 73% of Vote

*REGIONAL:

7.2 King Abdullah Dissolves Jordanian Parliament & Orders Legislative Elections
7.3 Gul Fails in First Round Of Presidential Vote
7.4 Turkey Marks Victory Day on August 30

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8: ISRAEL LIFE SCIENCE NEWS

8.1 Tissera Reports Significant Milestone Achievement in Its Large Animal Diabetic Model Studies
8.2 Protalix BioTherapeutics to License Acetylcholinestrase Development Technology
8.3 Teva Announces Tentative Approval of Sildenafil Citrate Tablets, 20 mg
8.4 Teva Announces Approval of Epirubicin Hydrochloride Injection
8.5 Rosetta Genomics Expands US Operations to Facilitate Expected Product Launches in 2008
8.6 FDA Clears Deep Breeze VRIXP Pulmonary Imaging System
8.7 Rahan Meristem & Evogene to Collaborate on Key Banana Disease
8.8 InspireMD Received Pre-launch Orders for its MGuard Coronary Stent
8.9 NasVax Approved for Phase 1/2a Clinical Study for Improved Flu Vaccine
8.10 Can-Fite Successfully Completes Preclinical Trials With Its Second Drug Candidate CF102

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 Metalink's WLANPlus Significantly Outperforms Other 802.11n Chipsets in Evaluation
9.2 Defense Industries International Gets First Body Armor Order From CIS Country
9.3 Nova Licenses Several Patents to a top Ten Semiconductor Manufacturer
9.4 Optibase Delivers the News Live in Spain
9.5 RADWIN Selected for School Connectivity Project in Israel
9.6 RADA Receives $720,000 Purchase Order for Delivery of UAV Avionics Systems
9.7 Camtek Receives Orders for Multiple Falcon Wafer Inspection Systems
9.8 InRob's JV MTL Platform to Be Marketed Worldwide Through Caterpillar Network
9.9 RADA Received a $660,000 Order for "Eye Witness" HUD Camera Units

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10: ISRAEL ECONOMIC STATISTICS

10.1 July's CPI Increase By 1.1%
10.2 State Of Economy Index Rose 6.4% During First Half
10.3 Water Technology Exports Seen To Grow To Over $1b In 2007
10.4 Israel's Pharmaceutical Exports to Europe Grow in First Half

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In Depth

11.1 MIDDLE EAST: Employees Vote for Smoking Ban in the Workplace
11.2 JORDAN: Fifth Post-Program Monitoring Discussions: June 8, 2007
11.3 JORDAN: Economics & Security Closely Tied In Kazakhstan-Jordan Relationship
11.4 IRAQ: IMF Executive Board Concludes 2007 Article IV Consultation with Iraq
11.5 KUWAIT: Transport on the Move
11.6 BAHRAIN: Streamlining Oil and Gas
11.7 DUBAI: Istithmar Wins Battle for Barneys
11.8 Northern Emirates: Healthcare Gets Capital Injection
11.9 NORTHERN EMIRATES: Gaining as an Energy Partner
11.10 SAUDI ARABIA: Utilizing Oil and Gas
11.11 EGYPT: Banking System Outlook Stable; Positive Medium-Term Prospects
11.12 TUNISIA: Fitch Affirms Tunisia at 'BBB'; Outlook Stable
11.13 TURKEY: Flashing the Energy Card

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1: ISRAEL GOVERNMENT ACTIONS & STATEMENTS

1.1 Government Approves 2008 Budget

On 13 August, the Olmert government approved the 2008 budget. 21 ministers voted in favor, while Shas' four ministers and Minister of Transport Mofaz opposed it. The approval of the $72.5m budget was made possible after the Ministry of Finance agreed to withdraw three austerity measures, amounting to a total of $93m. In place of these cuts, Minister of Finance Bar-On announced that there would be a 3% reduction in ministerial budgets. Bar-On told ministers that the concessions they had achieved carried a price tag, which the entire cabinet would have to bear. He insisted that fiscal discipline would be maintained, meaning that there would be no breaching of budgetary frameworks and deficit targets, but added that welfare, education, and defense would not be affected by the budget cuts. The Ministry of Finance also agreed to waive its demand to extend the suspension until 2011 of the manpower contractors law under which all people employed through manpower agencies for longer than nine months will receive tenure. The law will now go into force in 2008. It was also decided that Bar-On and Histadrut (General Federation of Labor in Israel) chairman Eini would negotiate on the details of the implementation of the law, with the aim of reaching agreement by October. Should no agreement be reached by then, the issue will be decided by Prime Minister Olmert, Labor party chairman and Minister of Defense Barak and Bar-On. The defense budget for 2008 will amount to $11.74b, as recommended by the Brodet Committee. (Globes 13.08)

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1.2 Israel to Get $30 Billion in Military Aid from U.S.

On 16 August, Israel and the United States signed a deal to give Israel $30b in military aid over the next decade in what officials called a long-term investment in peace. The officials insisted that the deal was not dependent on a simultaneous American plan for $20b in sales of sophisticated arms to its Arab allies, including Egypt and Saudi Arabia. But Israeli officials acknowledged that the aid to Israel would make it easier for the Bush administration to win Congressional approval of the arms sales to Arab countries. Prime Minister Olmert of Israel has not objected to those arms sales, saying that he understands the United States' need to support moderate Sunni Arab states that, like Israel, are opposed to Shiite Iran's reach for regional supremacy and nuclear weapons. The new aid to Israel will average $3b a year on a sliding scale, an increase of about 25% from current figures, to begin in October 2008. That year, American economic aid to Israel, which has a vibrant, growing economy, is scheduled to end. Uniquely, officials said, the new deal allows Israel to spend 26.3% of the aid on arms from Israel's domestic military industry; the rest of the money must be spent on American equipment. (Various16.08)

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2: ISRAEL MARKET & BUSINESS NEWS

2.1 21Ventures Plans to Invest an Additional $20 Million in Israeli Companies in 2008

21Ventures (http://www.21ventures.net), a US investment company comprised of American financiers, announced today formal plans to invest an additional $20m in Israeli technology companies in 2008. Since its founding in 2004, 21Ventures has allocated $36m to seed and early stage investments, mainly in the physical security, clean energy and mobile software sectors. This $20m is earmarked exclusively for Israeli based companies and will add to the $16m 21Ventures previously invested in Israeli interests. Sixty percent of the new funds will be allocated to existing investments and 40% to new opportunities. Investments will range from $250,000 to $2m per company. 21Ventures is structured in a novel way. Investors are presented with opportunities on a case by case basis and determine how much, if at all, they would like to invest in a particular prospect. 21Ventures does not take a management fee.

21Ventures recently invested the first tranche of its anticipated $4m investment in Israeli security company Hadas. Hadas specializes in perimeter security solutions for gas and oil pipelines as well as underground and surface infrastructures. It does so through an advanced electronic signal processing system that detects irregular activity in the vicinity of the protected facility in real time, and relays a precise warning on the nature and location of the activity to a control center. Other 21Ventures investments include BioPetroClean, Agent Video Intelligence Inc. and Orion Solar. (21Ventures15.08)

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2.2 IPextreme Expands Global Presence with New Representative in Israel

Campbell, California's IPextreme, a semiconductor Intellectual Property (IP) licensing specialist, announced that it has signed a new representative to further expand the company's Israel sales presence. Starting immediately, Sital Technology will be selling IPextreme's large and growing portfolio of high-value IP originally developed and proven by large semiconductor companies. IPextreme is headquartered in California's Silicon Valley and already has design centers with sales and support operations in Munich, Germany, and Tokyo, Japan. Sital Technology is a leading provider of tools and services for the electronic R&D industry in Israel. Sital combines representation of leading EDA vendors such as Mentor Graphics, Opnet, ClioSoft, with training capabilities for design languages and a high-level design center for HDL and Network design projects. (IPextreme09.08)

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2.3 eASIC & Avnet ASIC Israel Partner to Support Increasing Demand for Structured ASICs in Israel

Santa Clara, California's eASIC Corporation, a provider of Structured ASIC devices, and Avnet ASIC Israel (AAI) announced a partnership to deliver eASIC's breakthrough Structured ASIC technology to the Israeli marketplace. The partnership agreement will enable AAI to offer low-power, low-cost (zero mask cost) and short turnaround 90nm Structured ASICs. Under the agreement, AAI will provide design, technical and sales support to customers using eASIC's products in Israel. Tel Mond, Israel's Avnet ASIC Israel (http://www.avnet-asic.com) is a leading provider of complete range of design and turnkey manufacturing services for fabless companies and OEMs, which develop advanced SoC devices. AAI's portfolio includes design and manufacturing services for ASIC, COT, Analog, and Structured ASIC. In the past 20 years AAI has successfully completed more than 250 tape-outs. Active in the semiconductors market since 1986, Avnet ASIC Israel is a subsidiary of Avnet Israel, which is the Israeli branch of Avnet, Inc. (AAI08.08)

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2.4 Praxair Signs Agreement to Sell Israeli Business

Danbury, Connecticut's Praxair has signed an agreement to sell its majority interest in Maxima Air Separation Center, based in Ramat Gan, Israel, to Discount Investment Corporation (DIC), one of Israel's largest holding companies, a part of the IDB Group. DIC already holds an interest in Maxima. Completion of the transaction is subject to obtaining regulatory and other approvals. Maxima has two air separation plants and had sales of $23m in 2006. Following the sale, Maxima will continue to serve as a distributor of Praxair's products in Israel and will continue to have access to certain Praxair technology. Under the agreement, Maxima will be defined as a Praxair technology associate. Praxair is the largest industrial gases company in North and South America, and one of the largest worldwide. (Praxair13.08)

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2.5 Kontera Secures $10.3 Million in Funding Led by Carmel Ventures

Kontera has secured $10.3m in their second round of funding from Carmel Ventures with participation by Sequoia Capital and Lehman Brothers. ContentLink, Kontera's flagship product, is an In-Text ad unit based on a patent pending real-time contextual analysis technology that finds relevant keywords on a publisher's web page and automatically turns them into a link to the most relevant ad from among Kontera's thousands of advertisers. ContentLink, available with text, images, rich media and video, enables web publishers to monetize untapped and incremental ad revenue, while providing marketers with a better ROI than with other advertising vehicles. With user intent driving the growth of social networking and other forms of user-contributed media, Kontera's solution is uniquely positioned to generate revenue for publishers and improve ROI for advertisers. Only Kontera's In-Text Advertising technology analyzes web content and serves contextually relevant keyword links in real-time.

Founded in 2000 by pioneers and leaders of the Israeli high tech industry, Carmel Ventures (http://www.carmelventures.com) is one of Israel's leading venture capital funds focused on information technology investments with $372m under management. Herzliya Pituah, Israel's Kontera (http://www.kontera.com) is a leading provider of In-Text Advertising Solutions, based on patent-pending contextual analysis technology that increases revenue and ROI for both web publishers and advertisers. (Kontera 13.08)

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2.6 Goldrock to Invest $3.3 Million in PNMsoft to Promote PNM'S Global Expansion

PNMsoft, developer and marketer of software products and professional services for business process management (BPM), announced securing an investment of $3.3m to expand its global operations. The investment in PNMsoft was made by Goldrock, an investment fund that focuses on mature technology companies, and part of the Goldman Investments Group. The Group's investments include Invu Inc, developer of document management software, listed on AIM in 2004, quadrupling in value since; and BATM Advanced Communications Ltd, provider of telecommunication equipment, which is also traded on the London Stock Exchange. PNMsoft is the developer of SEQUENCE, a system that enables the fast and simple setup, operation and management of business know-how and processes. Sequence automated modules run a range of business work flows (production, development, acquisition, finance and more) with significant time and cost savings. Over the past year, Sequence was adopted as BPM infrastructure by many customers, including NTA, metropolitan mass transit system company, the Miller Group - one of Canada's major engineering companies and the water supplier of Ontario, the First International Bank's provident funds, Associated British Foods, one of the largest food suppliers in Europe, and more. PNMsoft (http://www.pnmsoft.com) was also recently admitted to the prestigious Microsoft Business Process Alliance. The Company's R&D operations are based in Netanya, Israel, the international headquarters are located in London. (PNMsoft13.08)

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2.7 ICL Completes Acquisition of Supresta

Israel Chemicals (ICL) has completed the acquisition of Supresta LLC. Supresta is a leading manufacturer and marketer of phosphorus-based flame retardants. Originally the phosphorus chemicals unit of Akzo Nobel, the Dutch chemical company, Supresta was established in 2004 with the acquisition of its operations from Akzo Nobel by a portfolio company of Ripplewood Holdings LLC, a U.S.-based private equity firm. Today, Supresta employs more than 300 workers in two plants, one in the U.S. and one in Germany. It manufactures more than 80 phosphorus-based products used in industrial applications ranging from flame retardants for polyurethane foam and engineering resins to plasticizers for the plastics industry, functional fluids for power stations and other uses. ICL intends to integrate Supresta into its ICL Industrial Products segment to realize synergies in operations, marketing and the purchase of raw materials. The acquisition will diversify ICL Industrial Products' portfolio of flame retardants, enabling it to initiate sales to the polyurethane foam and engineering plastics markets, while also enhancing its geographic marketing reach. In addition, the acquisition will enhance ICL Industrial Products' R&D capabilities through the addition of organo-phosphorus technology and intellectual property towards the development of next-generation products based on phosphorus.

ICL Industrial Products produces about a third of the world's elemental bromine and is a leading provider of bromine-based downstream products such as flame retardants, clear brines for the oil and gas exploration industries and water treatment biocides. It also produces magnesia and chlorine-based salts. Tel Aviv, Israel's ICL (http://www.israelchemicals.co.il) is one of the world's leading fertilizer and specialty chemicals companies. ICL produces approximately a third of the world's bromine and approximately 10% of its potash. ICL is a leading supplier of fertilizers in Europe and a major player in specialty fertilizer market segments. (ICL14.08)

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2.8 Gaydamak to Buy 110 US Gas Stations

Petro Group, controlled by Arcadi Gaydmak through Ameris Holdings, has signed an MoU to buy 110 gas stations and convenience stores on the US East Coast for $60m, plus inventory when the deal is closed, through its subsidiary GPM Investments LLC. Petro Group expects to close the deal, after due diligence, during the fourth quarter. GPM will finance the acquisition from shareholders' equity, bank credit, and through a real estate investment trust (REIT) that will buy 70 of the properties in a buy and lease-back deal. GPM currently operates 280 gas stations and convenience stores in Connecticut, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, and North Carolina. (Globes 15.08)

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2.9 Elbit Vision Systems Announces New Investment of $1 Million by Shavit Capital Fund

Elbit Vision Systems announced that Shavit Capital Fund completed a private placement investment in the Company for an aggregate of $1m. Pursuant to the private placement, the Shavit Capital Fund purchased 3,174,603 ordinary shares of the Company at a price per share of $0.315 and a four year warrant to purchase a further 1,587,302 ordinary shares of the Company at an exercise price per share of $0.45. The terms of the transaction were identical to the terms of the previously announced $2m private placement with a group of Israeli financial institutions which completed in June 2007. Payment of the $1m will be made by no later than August 31, 2007. The obligation to pay is unconditional. Kadima, Israel's Elbit Vision Systems (EVS) (http://www.evs-sm.com) offers a broad portfolio of automatic in-line inspection and quality monitoring systems used to improve product quality and increase production efficiency. The Company's Industrial Division provides automatic optical inspection (AOI) and non-destructive ultrasound inspection systems for heavy manufacturing (automotive, aeronautics, steel and others). EVS maintains headquarters and manufacturing in Israel, R&D operations in Israel, and offers global sales and support coverage. (EVS08.08)

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2.10 Bluephoenix Solutions Completes Acquisition of Amalgamated Software North America (ASNA)

Herzliya, Israel's BluePhoenix Solutions (http://www.bphx.com), a leading provider of value driven modernization solutions for legacy information systems, announced the closing of the strategic acquisition, by way of merger, of Amalgamated Software North America Inc. (ASNA), a private company based in San Antonio, Texas. The consideration being paid is comprised of a cash payment of $7m at closing and additional consideration to ASNA's shareholders if certain profit and revenue targets are achieved by ASNA, in 2007, 2008 and 2009. As previously reported, ASNA has been developing visual programming and systems software for the midrange community since 1982. ASNA's, flagship product "Monarch" is a fully integrated solution for transforming RPG applications to the Microsoft .NET platform. BluePhoenix Solutions is a leading provider of value-driven modernization solutions for legacy information systems. BluePhoenix offerings include a comprehensive suite of tools and services from global IT asset assessment and impact analysis to automated database and application migration, rehosting, and renewal. (BluePhoenix 17.08)

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3: REGIONAL PRIVATE SECTOR NEWS

3.1 Israel's Sabra Salads To Partner With Jordanian Firm

Strauss Group subsidiary Sabra Salads Food Industries is setting up a $1.16m joint venture with a Jordan's Nihad Alhad Hummus. Sabra Salads will launch two products and open up a temporary hummus eatery in Jaffa with the Amman-based company. (Globes 19.08)

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3.2 German Domestic Appliances Giant Bosch Launches in Oman

Bosch, one of the world's top three domestic appliances companies, announced commencement of its operations in the Sultanate of Oman. Oman Trading Enterprises (OTE), part of the Suhail Bahwan Group, will be the sole retailers for the high quality domestic appliance ranges throughout the Sultanate as a result of interest in the products from distributors. OTE is a market leader in premium electronics and home appliances products in Oman, and is now enriching its portfolio of brands with its launch of Europe's number one brand – Bosch. Bosch's Middle East headquarters has been based in Dubai for ten years and has established a strong presence and reputation in the region due to its high performing and reliable products. Oman's consumers will now be able to choose from Bosch's collection of innovative and environmentally friendly products, including washing machines, refrigerators, ovens and dishwashers. The Middle East is the fastest growing region in the worldwide Bosch Siemens network. It is one of the few international domestic appliances manufacturers to have its regional headquarters in the Middle East. (Mena18.08)

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3.3 Turkey's Grid Telekom Builds out Data Center with Force10 Networks Reliable Networking Portfolio

SAN JOSE, California's Force10 Networks, a pioneer in building and securing reliable networks, announced that Grid Telekom, a leading data center and hosting service provider in Turkey, has deployed the Force10 Reliable Networking product portfolio to deliver high performance data center hosting services. The Force10 data center networking solution provides the high performance reliability that will allow Grid Telekom to deliver advanced services while laying the foundation for the delivery of triple play services in the future. At Grid Telekom's primary data center in Istanbul, the Force10 TeraScale E300 is the redundant foundation of the high performance Gigabit Ethernet network while the S50 access switch extends the core-like reliability of the TeraScale E-Series to the edge of the network. The high Gigabit Ethernet density of the TeraScale E300 – up to 288 ports in a single chassis – enables Grid Telekom to simplify its network architecture as well as lower its related capital and operational costs by collapsing multiple layers into a single one. (Force10 13.08)

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3.4 EnergySolutions Aids Pipeline Optimization Study in Pakistan

Energy Solutions International, the Houston, Texas based leading supplier of oil and gas pipeline management software, announced it will work with Sui Northern Gas Pipelines Limited (SNGPL), Pakistan's largest integrated gas company, to conduct a Pipeline and Compressor Optimization Study of SNGPL's 6200-kilometer transmission network using EnergySolutions' PipelineStudio application and consultants. EnergySolutions will help SNGPL review the capacity and effectiveness of its transmission system and train SNGPL personnel to use PipelineStudio for future optimization studies. The study is part of SNGPL's efforts to enhance pipeline operational safety, facility planning, business support and overall profitability. PipelineStudio is the industry-leading pipeline design, engineering and planning solution that combines graphical configuration and reporting tools with industry-proven simulation engines. (Energy Solutions International 14.08)

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4: ISRAEL MACRO-DEVELOPMENTS

4.1 General Motors Set to Open R&D Center in Israel

Press reports indicate that General Motors Corporation is in advanced negotiations to establish an R&D center in Israel with an initial investment of tens of millions of dollars. The center is expected to employ hundreds of engineers and researchers in various fields related to GM's activities worldwide, including the development of alternative driving systems, vehicle electronics and communications systems, robotics, advanced materials, imaging systems, and safety. The R&D center will probably be set up in Ra'anana and will have branches in outlying areas and development towns. GM has been discussing the subject with the Ministry of Industry, Trade & Labor's Industrial Cooperation Authority. The government will probably provide grants for the R&D center, although their size, incentives, and features are not yet known. The company is currently negotiating the center's location with the Office of the Chief Scientist and Ministry of Finance Budget Department. A GM delegation recently visited Israel to reach agreements on these issues.

GM has invested in the development of automotive technologies in Israel since the mid-1990s, through GM-UMI Technology (GM-UMIT), a joint venture with GM importer Universal Motors Israel Ltd. (UMI). Through GM-UMIT, GM has invested in and supported a number of technology incubators over the past decade, and reviews dozens of research proposals every year in order to decide which have promising applications for the vehicle industry. GM-UMIT funds basic and industrial research, proof of concept, and projects in various development stages.

GM makes the largest amount of reciprocal procurements in Israel among vehicle manufacturers. The company made $102m in reciprocal procurements in 2005, 32% more than in 2004. 16 Israeli companies currently supply GM with goods and services. Three of these companies had more than $2.5m in sales to GM and twelve had more than $1m each. (Globes 13.08)

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4.2 Israel to Promote Palestinian's 'Economic Horizon'

On 15 August, government sources said Israel is working to promote an economic plan to complement the agreement of principles ahead of the regional conference later this year. A source said the plan would provide an "economic horizon" with a number of future investment projects for the development of a Palestinian entity. Foreign Minister Livni told foreign ministers and other officials in Europe that the plan needed international support. The "strategic" projects Israel has suggested so far include infrastructure improvements such as electricity and water, city planning in the West Bank and Gaza, rehabilitation of sewage systems and the establishment of a "peace corridor" in Jericho. Livni has presented the plan to the Quartet's Middle East envoy, Tony Blair, whose work also fits into the economic horizon in terms of his assistance in the building of Palestinian governing institutions.

A four-way meeting took place on 15 August at Jericho's Intercontinental Hotel between Livni, Japanese Foreign Minister Aso, Jordanian Foreign Minister al-Khatib and the Palestine Liberation Organization's chief of negotiations, Erekat. The meeting focused on the initiative to further develop agricultural-industrial cooperation between Israel, the Palestinian Authority and Jordan, dubbed "The Corridor for Peace and Prosperity."

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4.3 Israel's Oil Refineries Approves $50 Million Refining Upgrade

The board of Israel's Oil Refineries has approved a $50m upgrade of its refining facilities in order to broaden the types of crude oil it can handle. The upgrade is due to be completed during H1/09. The company says that the upgrade will enable it to refine crude oil with higher refining margins by focusing on medium and light crudes. The upgrade will enable the smooth transition to the refining of these crudes without shutting down the refinery and losing production days, which will also improve use of the refinery. Oil Refineries currently refines 100,000 bpd of crude. Oil Refineries Ltd. (ORL- http://www.orl.co.il), located in Haifa, is Israel's largest oil refinery. ORL operates sophisticated and state-of-the-art industrial facilities with refining capacity of 9 million tons of crude oil per year, with a Nelson complexity index of 7.4, providing a variety of quality products used in industrial operation, transportation, private consumption, agriculture and infrastructure. The company is also active in the area of Aromatics and Polymers through wholly-owned Gadiv Petrochemical Industries Ltd. and 50% owned Carmel Olefins. (Globes 19.08)

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5: ARAB STATE & PAKISTANI DEVELOPMENTS

5.1 Kuwaiti Investments in Jordan Expected To Exceed $10 Billion

The Executive Director of Jordan Investment Board (JIB), expected that the Kuwaiti investments in Jordan would rise by $3b to reach about $10b during the current year. During a meeting with a Kuwaiti media figures, he said Jordan is keen to attract the Kuwaiti investments through providing them the needed facilities at the aim of achieving the sustainable development. It is noteworthy that Kuwait is ranked first in terms of investments in Jordan, which valued $7b in the tourism, industry, foods, real estate, telecommunications, banking, insurance and services sectors. (Petra13.08)

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5.2 Kuwait Inflation Steady At 3%

Kuwait's annual wholesale price inflation was 3.27% in June, about the same level it has been for much of this year. The wholesale price index (WPI), which measures what wholesalers charge for locally produced and imported goods, was 192.6 points in June compared with 186.5 in the same period last year, the Kuwaiti central bank said. In May the index rose 3.28%. Increases in the first six months of the year ranged from 3.76% to 4.13%. By contrast consumer price inflation has been above 5% for the third month in a row with the index rising 5.34% in May on transport, housing and food costs. (GDN09.08)

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5.3 Bahrain Inflation Hits 3%

Bahrain has registered a 3% inflation rate last year. According to a report by Saudi Al Rajhi Bank, Bahrain ranked third among GCC countries after Saudi Arabia and Kuwait with 2.8% inflation rate during the same period. Qatar registered the highest inflation rate of 10%, while the UAE and Oman posted 6.2% and 3.8% respectively. The annual inflation rates in 2007 are forecast at (10%) for Qatar, (6.2%) for UAE, (3.8%) for Oman, (3%) for Bahrain, and (2.8%) each for Kuwait and KSA. The UAE is expected to have recorded the highest real GDP growth in 2006 at (9.7%), followed by Qatar (8.8%), Bahrain (7.7%), Oman (5.9%), Kuwait (5%) and Saudi Arabia (4.6%). The UAE is expected to continue to lead the pack in terms of growth in 2007 rising by (8.2%), followed by Qatar (8%), Bahrain (6.9%), Oman (6%), Saudi Arabia (4.8%), and Kuwait (3.5%). While the economies of the region will remain sensitive to adverse regional geo-political developments and uncertainties, they are, nevertheless, expected to maintain the current uptrend for several years to come, supported by the positive outlook for the world oil market, and a more confident and efficient private sector. (Al Rajhi BankJuly2007)

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5.4 UAE Revises Up 2006 GDP Growth to 9.4%

The United Arab Emirates revised up its 2006 economic growth rate to 9.4% on faster expansion in the oil and gas sector. The second-largest Arab economy expanded to $106.5b last year, from 357.59 billion dirhams in 2005. The Ministry of Economy said in March real gross domestic product grew 8.9% last year. The ministry revised the growth rate to account for higher growth in the oil and gas output, which accounts for 25.9% of GDP. The value of petroleum sector output grew 6.5% to 101.31 billion dirhams, the ministry said, compared with the 99.9 billion dirham figure released in March. The Organization of Petroleum Exporting Countries (Opec) agreed at two meetings late last year to cut production by a total of 1.7 million barrels per day or roughly 6% of group output, in response to a sharp drop in oil prices. The UAE's production was rolled back to 2.5 million bpd from around 2.6 million bpd as part of the cuts. Economic growth in 2005 was 10.5%, ministry data showed based on revised 2004 growth data. In 2003, the economy grew at 11.9%. (Various20.08)

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5.5 National Bank Says Inflation in UAE is Beyond Government Control

The head of research at the National Bank of Abu Dhabi said that the case-by-case approach adopted by the ministry of economy's consumer protection department to curb price increases will be difficult to maintain. The ministry's efforts to curb exploitation of consumers have doubled since the establishment of the new department. Accordingly, some attempts by producers and suppliers to increase prices of some commodities, including powder milk, water, and rice, were met by stiff resistance from the department. The pegging regime with the US dollar represents only half the problem, yet it restricts the government's ability to pursuit an independent monetary policy, he added. Other factors contributing to the problem include shortage of housing supply and increasing salaries. "A 20 to 25% increase in income adds to inflation by default. However, this seems to be a vicious circle, as the reason of raising salaries is the complaints from increasing prices," he said. A standard prescription for any government to combat soaring inflation can include, in addition to increasing interest rates, fiscal measures such as tightening government spending, a difficult option given the massive infra-structure and development projects under way. (GN14.08)

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5.6 Saudi Arabia Tops World In Take-Home Pay

While senior executives in the Gulf see the UAE as the most desirable place to work due to its liberal lifestyle, it is Saudi Arabia where they can have more disposable incomes. However, both Saudi Arabia and the UAE topped the list of places that offer managers the highest purchasing power, according to a recent survey by consultancy firm Hay Group. Top executives in Saudi Arabia enjoyed annual disposable incomes of $229,325 compared to $223,939 for their counterparts in the UAE. Gandhi said the start up of a significant number of new entities, growth in free zones, overseas expansion of local entities and entry of new players from outside the region have all put pressure on the labor market for top executives. Although the gap in their purchasing power is narrow compared to UAE pay packages, managers in Saudi Arabia enjoy much higher saving potential because of lower cost of living compared to the UAE. But despite inflation eroding people's ability to save money, the UAE remains attractive to expatriates because its offers them "a liberal lifestyle, opportunities for leisure, and safety. Several major employers have introduced new incentives like higher bonuses to retain their staff. (Various10.08)

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5.7 Saudi Arabia Attracts $18.3 Billion Foreign Investment In 2006

There has been a marked increase in foreign direct investment (FDI) in Saudi Arabia, according to the Saudi Arabian General Investments Authority (Sagia). Investments from countries other than the US, Japan and EU have risen from 38% in 2000 to 47% in 2006. The volume of foreign investments in 2006 is estimated at $18.293b,, a 51% growth compared to 2005 while the volume of the domestic investments amounted to about $33.333b in the same year registering a growth rate of 9% against the previous year. Sagia has been periodically evaluating the investment environment in the kingdom and conducting the required studies and researches for the development of the investments in cooperation with the local and international research centers including the World Bank.

In a related development, foreigners will now be able to invest in such a sectors as insurance services, wholesale and retail trade, air and train transport, and communication services in Saudi Arabia following a recent landmark decision by the Supreme Economic Council (SEC). The SEC opened new economic sectors for foreign investment in line with King Abdullah's reforms aimed at strengthening the economy, attracting more foreign investment and enhancing private sector participation. The negative list of investment was also revised to comply with Saudi Arabia's commitments under the regulations and conditions of the World Trade Organization (WTO). The Kingdom became the 149th member of the WTO in December 2005. The new negative list excludes distribution services, wholesale and retail trade including medical retail services and private pharmacies . Other sectors open to foreign investment are: distribution of cinema films and videocassettes transportation of passengers inside cities by train, air transportation services and satellite transmission services. The Kingdom continues to ban foreign investment in sectors such as oil exploration, drilling and production. (Various08.08)

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5.8 Inflation in Egypt Slips To New Low

Egypt's consumer price index rose 8% in the year to July, down from 8.5% in June, an official at the Ministry of Economic Development said on 10 August. The inflation rate was the lowest since June last year, when it stood at 6.4%. The official said month-on-month inflation in July was 1%, compared to 0.2% in June and 1.4% in July last year. The decline strengthened the government's case that prices are starting to settle after its decision last year to raise fuel prices. An outbreak of bird flu also pushed up inflation, which peaked at an annual 12.8% in March. The governor of the central bank, Farouk El-Okdah, said last month that he expected inflation to drop to 7% this month and even lower by the end of the year. But Okdah said his projections did not take into account any possible cuts in energy subsidies. Egyptian Finance Minister Youssef Boutros Ghali has said the government will announce fresh cuts in energy subsidies in the next three to four months but declined to say how big the cuts would be. The government's official target for inflation is now between 6 and 8%. (Various10.08)

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5.9 Egypt May Be About To Realize Its Economic Potential

Standard Chartered said the outlook for the Egyptian economy is robust, as long as the government remains committed to achieving its ambitious growth plans. Egypt is the third largest economy in the Middle East with a population of 75 million. Real GDP growth for FY2006/07 was 6.8% and it increasingly looks as though this is a sign of things to come. This was up from 4.5% in 2005 led by consumer spending and investment. The outlook for the next fiscal year is described as "bright". Recent tax cuts have increased disposable incomes and GDP per capita is now $1,629 (up from $1.265 in 2005, according to the IMF). The report also cites a recent survey by MasterCard that showed consumer confidence in Egypt in H1/07 rising to 94.3%, up from 78.2 in H2/06 and higher than any other country in the Middle East.

But the country's weak financial position is acting as a constraint, on government spending, states the report, although the situation is improving as the fiscal deficit narrows as a result of privatization receipts. Strong domestic demand for imports is also slowing growth and is helping to push up prices. At 8.5%, inflation remains high. Egypt's public finances are described as "precarious". In 2006, public debt reached almost 70% of GDP. The aim is to reduce the deficit by more than 1% of GDP annually over the next five years. Steps taken towards achieving this include the energy subsidy reduction plan, the cutting of necessary state jobs and the restructuring of the pension and social assistance programs.

Privatization is also helping. The government has finalized the privatization of the Bank of Alexandria and has privatized over 87 state-owned firms since the reform agenda began. The framework for a sustainable free market economy has also been established, including the creation of industrial free zones and shielding foreign investors from bureaucratic red tape. A lack of transparency and a high degree of bureaucracy continue to hinder economic growth, explains the report. The World Bank's "Ease of Doing Business Report" ranked Egypt 165 out of 175 countries. However, the government has acknowledged the importance of remedying these problems, especially if the country is to attract foreign investment, and has put measures in place to deal with them. For example, a ministerial committee has been established to work solely on settling commercial disputes with the government, cutting the bureaucratic process in half. Authorities have also reduced custom tariffs, cut income taxes in half and simplified tax filings procedures. (BTO09.08)

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5.10 Egypt To Sell Four Licenses To Build Steel Mills

The Egyptian government said it would sell four licenses to build steel mills to reduce the country's need for imported steel. The government would sell two licenses for steel billet mills and two licenses for DRI steel production mills with a total capacity of 7 million tons a year, the ministry of trade and industry said, without giving more details. Egypt, the Arab world's most populous country, went from importing 2 million tons of steel a year less than 10 years ago to become an exporter of 900,000 tons in 2006. The country produced about 4.3 million tons of steel in the same year, according to government data. The International Iron & Steel Institute (IISI) said Egypt's crude steel output stood at 6 million tons in 2006. (Reuters14.08)

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6: TURKISH & CYPRIOT DEVELOPMENTS:

6.1 Inflation in Turkey Reaches Lowest Levels in 37 Years

According to the Turkish Statistics Committee, the inflation in the country has reached its lowest levels in 37 years. In July retail prices have raised by 0.73% compared to the previous month and the wholesale prices - 0.006%. A decrease in general index was realized in the 2003=100 based Consumer Price Index on the previous month by -0.73% and a rise on December of the previous year by 3.11%, on same month of the previous year by 6.90% and on the twelve months moving averages basis by 9.70% in July 2007. The highest increase was 10.33% in the index for hotels, cafes and restaurants compared with the same month of the previous year. Alcoholic beverages and tobacco (10.23%). housing (9.55%). for food and non-alcoholic beverages (9.19%) were the other indices where high increases were realized. In July 2007 within average prices of 447 items in the index, average prices of 93 items remained unchanged while average prices of 192 items increased and average prices of 162 items decreased. EkoTurk 11.08)

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6.2 Turkey Earns $29.3 Billion From Privatization

Turkey has earned $29.3b from privatization initiatives since 1986. Turkish Telekom, Turkish Petroleum Refineries Corp. (Tupras), Eregli Iron and Steel Industries (Erdemir), Petrochemical Holding (Petkim), Izmir port, plot in Istanbul's Zincirlikuyu neighborhood that belonged to the Highways DG, Mersin port, vehicle inspection stations, and Eti Aluminum are some of the giant privatization projects carried out so far. Turkey only earned $17.7b from privatization projects between 1986 and 2005. However, it obtained an income of $8.1b in 2006 and $3.5b so far in 2007. The biggest privatization of Turkey has been the sale of 55% of Turk Telekom to Oger Telekom, which paid $6.5b for more than half of the company. Turkey earned $4.1b from sale of 51% of Tupras shares in 2005, and the income obtained from Erdemir tender the same year was $2.7b. $2.5b was earned from privatization of 51% of Petkim, $1.2b of income was obtained from transfer of management of rights of Izmir port for 49 years. On the other hand, $800m was earned from privatization of plot of Highways DG in Zincirlikuyu, Istanbul. The Privatization Administration Board (OIB) is to open a tender for privatization of bridges and highways before the end of 2007, and complete the tenders in the first half of 2008. Meanwhile, preparations have been completed for block sale of Tekel's cigarette factories. Privatization tender can be opened within 15 days with a decision of the government. (Eko Turk11.08)

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6.3 Turkey's Junk Food Market Grows to $2.13 Billion:

Turkey's junk food market grew by 16.8% to $2.095b according to the 2006 results of the Junk Food Market Research. Ice cream consumption became the driver of the sector. Families spent $412.58m on ice cream while money spent on biscuits remained at $408m. The main reason for the growth in ice cream consumption is increased competition, especially after Ülker entered the market. (TDN13.08)

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6.4 Cyprus Motor Registrations Up 33.3% In July

Cyprus' tax-induced boom in motor vehicle registrations continues, with registrations up 33.3% year on year to 5,985 units in July, of which 4,408 were passenger cars. For the period January-July, total registrations rose by 33.1% to 40,285. In this period the number of saloon car registrations rose by 35.9% to 31,976; the number of light goods vehicles rose by 43.3% to 3,456 and the number of heavy goods vehicles by 12.9% to 951. Car registrations soared after a range of cuts on excise duties late in 2006. (FN13.08)

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7: GENERAL NEWS AND INTEREST

*ISRAEL:

7.1 Netanyahu Re-Elected Likud Leader With 73% of Vote

Likud Chairman Benjamin Netanyahu won an overwhelming victory in the Likud primary elections on 14 August, receiving 73.2% of the final vote. Some 40% of registered Likud member cast their ballots in the party's primaries. Political sources said the former prime minister will work to preserve the movement's public image as a moderate force. This is reflected in Netanyahu's personal message mailed to voters: "Our rivals could portray us as a radical political movement, which cannot be trusted to take the helm," Netanyahu wrote. Netanyahu said he will now begin the real battle for the premiership. Netanyahu's first act is expected to be a public call to Labor Chairman and Defense Minister Ehud Barak to make good on his promise during the Labor primary to agree a date for national elections immediately after the release of the final Winograd report on the Second Lebanon War. Preliminary findings of the report have been damning for Prime Minister Olmert and former Labor part y leader Peretz.

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*REGIONAL:

7.2 King Abdullah Dissolves Jordanian Parliament & Orders Legislative Elections

On 19 August, King Abdullah issued a decree dissolving Parliament and ordered that parliamentary elections be held. Although no date has been set so far for the elections, they are expected to be held in November. The House's term ended in March, but it was reconvened for an extraordinary session to examine and endorse key laws as part of a political reform package. The 14th Parliament's first ordinary session began in December 2003 and ended on March 29 this year. In the Speech from the Throne, King Abdullah emphasized that voters wanted their deputies to tackle major issues like poverty, unemployment and corruption as top priorities and most urgent challenges. During the course of the 14th session of Parliament, the Lower House endorsed around 255 laws. Key legislation pieces included the Anti-Terrorism, Political Parties, Access to Information, Nuclear Energy and Safety and Protection from Nuclear Radiation, Municipalities, and Press and Publications laws. The anti-terrorism bill was introduced following the November 2005 triple suicide attacks on three hotels in Amman, which left 90 dead. The bill contains measures to identify, prosecute and convict terrorists and arms law enforcement and security agencies with powers to gather intelligence and prosecute suspected terrorists, including placing individuals under tight surveillance, seizing financial assets and barring them from travel. The upcoming elections are the second to be held during the reign of King Abdullah. (JT20.08)

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7.3 Gul Fails in First Round Of Presidential Vote

On 20 August, Foreign Minister Gul, the frontrunner to become Turkey's next president, failed to be elected in the first round of voting in parliament. Gul, the nominee of the ruling Islamist-rooted Justice and Development Party (AKP), garnered 341 votes from the 550-seat house, 26 short of the two-thirds majority of 367 needed in the first round. The other two candidates, one from the right-wing Nationalist Action Party and from the centre-left Democratic Left Party, received 70 and 13 votes, respectively.

Earlier, Turkey's ruling party decided on 13 August to remain with Foreign Minister Gul as its presidential candidate despite secular opposition to his bid and months of consequent political turmoil. Gul is now meeting with opposition party leaders to try to win their support for his bid. The decision to stay with Gul was taken at a meeting of the Justice and Development (AK) party's leadership chaired by Prime Minister Erdogan. Turkey found itself in a deep crisis earlier this year after a secularist campaign blocked Erdogan's Islamist-rooted AK party from electing Gul as president. The crisis deepened when the army issued a statement in April warning the government it was ready to step in to protect the secular order. The opposition boycotted two parliamentary votes in April and May, robbing the house of the quorum required to hold a presidential vote, on the grounds that Gul was not truly committed to Turkey's secular system. Demonstrators also took to the streets in mass protests against the prospect of a president from the ruling Justice and Development party, which secularists accuse of seeking to erode the separation of state and religion. The AKP denies charges that it has a secret Islamist agenda. It has disowned its roots, pledged commitment to the secular system and carried out reforms that stabilized the economy and ensured the start of Turkey's membership talks for the European Union. AKP won 46.5% of the vote in July elections, which were brought forward by Erdogan to stem the crisis over the presidency, to securing 341 of the 550 seats in parliament and a mandate to govern Turkey for a second five-year term.

The second round of voting is scheduled for August 24, the third for August 28 and the final and fourth round for September 1. A boycott cannot stop Gul's election, as the Justice and Development Party has the simple majority of votes needed for a third-round victory.

Gul is a moderate, pro-western figure who has steered Turkey through tough diplomatic turns over the past four years, including the start of accession talks with the European Union. A close confidant of Erdogan, the soft-spoken 56-year-old for many represents the moderate face of the AK party, a party born of a banned Islamist movement which now describes itself as a conservative democratic force committed to the mainly Muslim country's secular order. One issue that has so far overshadowed his potential presidency is the Islamic-style headscarf worn by his wife Hayrunisa. Secular Turks consider it a symbol of political Islam and do not want to see at the presidential palace. (Various08.13)

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7.4 Turkey Marks Victory Day on August 30

Victory Day (local name: Zafer Bayram?±) is celebrated on August 30 in Turkey. It is a national holiday that commemorates Turkey's victory in the Battle of Dumlupinar, the final battle in the Turkish War of Independence in 1922. Its origins date back to a battle that began on 26 August 1922 when Greek troops invaded Turkey. The invasion was successfully repelled and the battle ended just four days later on 30 August. Although the day has now lost much of its military significance for the younger generations, it is still a day of national pride on which the country's armed forces lay wreaths at the Ataturk Mausoleum in Istanbul, acknowledging the role Mustafa Kemal Ataturk played in founding the country

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8: ISRAEL LIFE SCIENCE NEWS

8.1 Tissera Reports Significant Milestone Achievement in Its Large Animal Diabetic Model Studies

Tissera achieved a significant milestone in its ongoing large animal diabetic model experiments of pancreatic xenotransplantation, designed for the future treatment of insulin-dependent (type I) diabetes mellitus. Based on the previously reported positive results obtained in pancreatic transplantation experiments in normal non human primates, Tissera's sponsored research team at the Weizmann Institute of Science (http://www.weizmann.ac.il) has moved forward to investigate in diabetic non human primates the functional and therapeutic value of the company's approach. In these studies, non human primates are treated by an agent called streptozotocin which induces them to become diabetic and consequently dependent upon administration of exogenous insulin for the maintenance of reasonable blood sugar levels. After allowing a few weeks for stabilization, appropriately timed pig embryonic pancreatic tissue is transplanted into the diabetic primate, which is thereafter intensively and carefully followed.

In further experiments, this progressive post transplantation reduction of the insulin amounts required for maintenance of near normal blood sugar levels was consistently observed. By the fourth month after transplantation, the insulin dose needed to maintain near-normal blood sugar levels decreased by more than 90% in comparison with the insulin dose needed before transplantation, meaning that endogenous insulin production was predominantly responsible for blood sugar control. The crucial question of the graft origin of this endogenous insulin was addressed by measurement of blood C-peptide, which is a peptide which splits from insulin precursor in the process of insulin formation and thus its blood levels closely reflect pancreatic insulin secretion.

Herzliya, Israel's Tissera (http://www.tissera.com) is a biotechnology company dedicated to the development of novel tissue precursor regeneration technologies for treating gene deficiencies and diseases in which organ transplantation is necessary, while minimizing the dosage of immunosuppressive drugs. Tissera obtained the license for the worldwide exclusive rights to the technology developed a team at the Weizmann Institute of Science in Israel. In this research, scientists successfully implanted in mice embryonic human and porcine organ precursor tissues, which grew into functional organs. (Tissera08.08)

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8.2 Protalix BioTherapeutics to License Acetylcholinestrase Development Technology

Protalix BioTherapeutics has signed an agreement with the Yissum Research and Development Company, the technology transfer arm of the Hebrew University of Jerusalem, Israel, and the Boyce Thompson Institute for Plant Research, at Cornell University, Ithaca, New York, to develop a proprietary plant cell-based acetylcholinestrase (AChE) and its molecular variants for the use in several therapeutic and prophylactic indications, including a biodefense program. Under the agreement, Protalix has licensed the technology underlying acetylcholinestrase from Hebrew University and Boyce Thompson.

The initial feasibility research on AchE has demonstrated the potential for the enzyme and its variants in multiple therapeutic fields. In vitro experiments have also shown that the AChE protein expressed in Protalix's plant cell ProCellEx system demonstrates promising biological activity at both the biochemical and the cellular levels.

Karmiel, Israel's Protalix (http://www.protalix.com) is a clinical stage biopharmaceutical company. Its goal is to become a fully integrated biopharmaceutical company focused on focused on the development and commercialization of proprietary recombinant therapeutic proteins to be expressed through its proprietary plant cell based expression system. Protalix's ProCellEx presents a proprietary method for the expression of recombinant proteins that Protalix believes is safe and scalable and will allow for the cost-effective, industrial-scale production of recombinant therapeutic proteins. Yissum (http://www.yissum.co.il) - the technology transfer company of the Hebrew University of Jerusalem - was founded in 1964 to protect the University's intellectual property and commercialize it. Today, more than $1b in annual sales are generated by products based on Hebrew University technologies licensed out by Yissum. (Protalix08.08)

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8.3 Teva Announces Tentative Approval of Sildenafil Citrate Tablets, 20 mg

Teva Pharmaceutical Industries announced that the U.S. FDA has granted tentative approval for the Company's Abbreviated New Drug Application (ANDA) for Sildenafil Citrate Tablets, 20 mg. Final approval of this product is anticipated upon expiration of patent protection for the brand product in March 2012. Upon final approval, Teva's Sildenafil Citrate Tablets will be the AB-rated generic equivalent of Pfizer's Revatio Tablets, a product indicated for treatment of pulmonary arterial hypertension (WHO Group I) to improve exercise ability. The brand product had annual sales in the U.S. of approximately $ 93m for the twelve months ended June 30, 2007, based on IMS sales data. Teva Pharmaceutical Industries (http://www.tevapharm.com), headquartered in Israel, is among the top 20 pharmaceutical companies in the world and is the leading generic pharmaceutical company. The company develops, manufactures and markets generic and innovative human pharmaceuticals and active pharmaceutical ingredients, as well as animal health pharmaceutical products. (Teva10.08)

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8.4 Teva Announces Approval of Epirubicin Hydrochloride Injection

Teva Pharmaceutical Industries announced today that the U.S. FDA has granted final approval for the Company's Abbreviated New Drug Application (ANDA) for Epirubicin Hydrochloride Injection, 2 mg/mL. Shipment of the product, available in 50 mg/25 mL and 200 mg/100 mL single use vials, will begin immediately. Teva's product is the AP-rated generic equivalent of Pfizer's Ellence Injection, a product indicated for use as a component of adjuvant therapy in patients with evidence of axillary node tumor involvement following resection of primary breast cancer. Teva Pharmaceutical Industries (http://www.tevapharm.com), headquartered in Jerusalem, Israel, is among the top 20 pharmaceutical companies in the world and is the leading generic pharmaceutical company. The company develops, manufactures and markets generic and innovative human pharmaceuticals and active pharmaceutical ingredients, as well as animal health pharmaceutical products. Over 75% of Teva's sales are in North America and Europe. (Teva10.08)

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8.5 Rosetta Genomics Expands US Operations to Facilitate Expected Product Launches in 2008

Rosetta Genomics has initiated the expansion of its US operations with the relocation of its Chief Executive Officer from the company's headquarters in Rehovot, Israel, to New York. The move is intended to facilitate the expected launch of Rosetta Genomics' first products, growth through partnerships and collaborations, as well as overall corporate operations in the US. The company recently announced the expansion of its diagnostic pipeline and expects the first products to be launched in 2008. Rosetta Genomics (http://www.rosettagenomics.com) is a leader in the development of microRNA-based diagnostics and therapeutics. Founded in 2000, the company's integrative research platform combining bioinformatics and state-of-the-art laboratory processes has led to the discovery of hundreds of biologically validated novel human microRNAs. Building on its strong IP position and strategic alliances with leading biotechnology companies, Rosetta Genomics is working to develop a full range of diagnostic and therapeutic products based on microRNAs. The company's primary focus is in the development of microRNA-based products to diagnose and treat different forms of cancer and infectious diseases. (Rosetta Genomics10.08)

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8.6 FDA Clears Deep Breeze VRIXP Pulmonary Imaging System

Deep Breeze announced that the U.S. FDA granted 510K marketing clearance for the VRIXP, a non-invasive, radiation-free pulmonary imaging system to use lung sounds to create dynamic images of the lungs. Deep Breeze plans to launch VRIXP in the U.S. at the 2007 CHEST meeting in Chicago. The Company currently markets the technology in Europe and Asia. The non-invasive and radiation-free lung imaging system records lung sounds from sensors applied to a patient's back while he or she breathes. The system then uses an algorithm to convert these data into images. Changes in tissue composition or alteration in airflow impact how sounds within the lungs vibrate, and subsequently how the VRIXP images appear on the system's computer screen. The VRIXP procedure takes only minutes in a physician's office and may be performed repeatedly for continuous monitoring. Results are delivered to the physician immediately and can be stored in a system database for future use. The radiation-free technology has been used in more than 3,500 patients worldwide without any single adverse event.

Founded in 2001, Or Akiva, Israel's Deep Breeze (http://www.deepbreeze.com) is a privately-held medical device company that is providing advanced pulmonary imaging with its proprietary patented technology, Vibration Response Imaging (VRI). The Company is currently conducting clinical studies globally to evaluate VRI efficacy in fields such as: general pulmonology, chronic obstructive pulmonary disease, asthma, congestive heart failure, interventional pulmonology, lung cancer, lung transplant and critical care patient management. Deep Breeze is researching and developing the VRI technology to be applied in other organs of the human body. (Deep Breeze09.08)

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8.7 Rahan Meristem & Evogene to Collaborate on Key Banana Disease

Evogene and Rahan Meristem will be collaborating to develop bananas displaying resistance to Black Leaf Streak Disease (also known as Black Sigatoka), the most damaging disease threatening banana plantations. Under a recently signed agreement the parties will combine their research and development capabilities to develop the resistant bananas and subsequently market them jointly. Evogene will utilize its novel computational gene discovery technology to discover genes which confer resistance to the disease. Rahan Meristem, the world's leading banana plantlet producer and marketer, will develop and assess the resistant bananas based on its existing leading banana varieties. Black Leaf Streak Disease is the most costly and damaging foliar disease to the export-banana industry. The pathogen causes large lesions that eventually cover the entire surface of the leaves, resulting in devastating yield losses. Currently, the only way to control the disease is through frequent – often more than 50 times per year – oil and fungicide applications. In some tropical areas the cost of spraying accounts for more than 35% of total production costs.

Rehovot, Israel's Evogene (http://www.evogene.com) seeks to be a world leader in delivering improved plant traits to the agro-biotechnology and Biofuel industries through the use of a continuously improving proprietary platform that combines state-of-the-art computational genomics, molecular biology and advanced breeding methods. Evogene was created in 2002 as a spin-off of the agro-biotechnology division of Compugen. Evogene's core in-silico technology, the ATHLETE, is based on Compugen's proprietary LEADS computational platform. Kibbutz Rosh HaNikra's Rahan Meristem (http://www.rahan.co.il) is a plant biotechnology and propagation company specializing in tissue culture, molecular genetics and breeding. The company exists since 1974 and is currently the largest producer of banana plantlet by tissue culture global wide. (Evogene10.07)

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8.8 InspireMD Received Pre-launch Orders for its MGuard Coronary Stent

InspireMD announced receipt of orders for its MGuard Coronary stents. The orders came from key markets in Western Europe and Latin America, valued at more than $1.5m. MGuard Coronary Stent is designed to provide embolic shower protection during and post procedure. It is under investigation to treat patients with Coronary and SVG disease. In ongoing clinical trials conducted in Germany, interim results have shown a procedural success rate of 100% and no report of any major adverse cardiac events. To date, the MGuard Coronary stent has shown safety in human coronary and vein graft indications. MGuard Coronary presents a novel combination of a coronary stent merged with embolic protection device. An expandable, fishnet style, micron level knit sleeve wraps the stent, preventing plaque detachment during and post procedure. As the protection device is an integral part of the stent, MGuard does not add any complexity in deliverability, and provides inherent long acting emboli protection. The sleeve also diffuses stent pressure, thereby reducing injury to the vessel wall and lowering restenosis. MGuard's innovative concept has enjoyed an enthusiastic welcome from world leader intervention cardiologists. CE mark is pending and expected during Q3 2007.

Tel Aviv, Israel's InspireMD (http://www.inspire-md.com) is an innovative developer of next generation coronary and carotid stents. Its solutions are designed to benefit patients by enabling more effective procedures with a lower side effect profile, while limiting the need for additional protective devices. In addition to providing continuous embolic protection and minimize arterial injury, this promising technology is aimed to provide an effective and uniform drug delivery system for drug eluting stents. (InspireMD 14.08)

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8.9 NasVax Approved for Phase 1/2a Clinical Study for Improved Flu Vaccine

NasVax received approval from the Helsinki Committee and the Israel Ministry of Health to perform a Phase 1/2a clinical study for its innovative and leading product, an improved influenza vaccine, through the intramuscular route. The company initiated the clinical study in around 100 volunteers on July 11. This combination Phase 1/2a study addresses the safety and efficacy of the immune response to vaccination. The innovative product is an improved vaccine for preventing seasonal influenza. This product, which combines conventional flu vaccine with the CCS/C adjuvant, will be administered in this clinical study as a single intramuscular injection. The company is also at the initial development stages for improving vaccines to prevent avian flu as well as hepatitis B and anthrax. Ness Ziona, Israel's NasVax is a biotechnology company developing innovative biopharmaceutical products for improving immune responses and administration of vaccines. NasVax engages in the development of vaccines based on its unique technology platform for improving the immune response to vaccines and enabling both injection and intranasal administration. This improved technology utilizes CCS/C, a novel biocompatible adjuvant and delivery system, which has been shown to stimulate not only an increased antibody response but also produce a response in T-cells, hence further improved potency. This potent system opens the way for developing further product applications for preventing or treating both infectious and noninfectious diseases. (NasVax14.08)

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8.10 Can-Fite Successfully Completes Preclinical Trials With Its Second Drug Candidate CF102

Can-Fite BioPharma announced the successful completion of preclinical trials with CF102, the second molecule in the Company's development pipeline, which is the basis for a drug indicated for the treatment of liver cancer and hepatitis. Success of the preclinical trials will enable Can-Fite to submit to the US FDA an application for phase I human clinical trials. The Company estimates that the clinical phase of the trials will begin in the up-coming months. CF102 has been evaluated in an IND enabling pharmacokinetic, metabolism, toxicology and safety pharmacology program in the US and Europe. Theses preclinical studies progressed smoothly and no issues that could adversely affect the clinical development program were identified. In particular, CF102 has been shown in these pre-clinical studies to be safe. CF102 is thus positioned to move forward to Phase 1 clinical trials. The company plans to file an IND and commence Phase 1 during the next couple of months.

Petah Tikva, Israel's Can-Fite BioPharma (http://www.canfite.co.il) is a public company traded on the Tel Aviv Stock Exchange. The Company was founded on the basis of scientific findings made by Prof. Fishman and focuses on the development of molecule-based drugs that bind to receptors of cancerous or inflammatory cells and inhibit their development. (Can-Fite 20.08)

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 Metalink's WLANPlus Significantly Outperforms Other 802.11n Chipsets in Evaluation

Metalink announced that its WLANPlus chipset has achieved impressive performance results in independent tests conducted by The Tolly Group. These rigorous tests benchmarked Metalink's WLANPlus against three products using different 802.11n chipsets. The tests confirmed that the use of Metalink's solution doubled performance as compared to the closest competitor tested and in many of the tests by as much as ten-fold. These tests further position WLANPlus as the best-of-breed 802.11n draft 2.0 compliant product and the only one powerful enough to enable high-performance wireless applications. The WLANPlus chipset family provides a state of the art solution for data, VoIP, gaming and HD video streaming applications, with complete and reliable coverage throughout the home. WLANPlus supports up to 300Mbps transmission speeds at both the 2.4GHz and 5GHz frequency bands, and offers over twice the reach of competing 802.11n solutions, provided by the implementation of a Maximum Likelihood (ML) decoder combined with advanced Forward Error Correction (FEC) scheme, using Low Density Parity Check (LD%) technology. Yakum, Israel's Metalink (http://www.MTLK.com) is a leading provider of high performance wireless and wireline broadband communication silicon solutions. Metalink's WLAN and DSL technologies are designed to enable true broadband connectivity in every home, and its products revolutionize the broadband experience by facilitating the convergence of telecommunication, networking and entertainment. Metalink's WLANPlus is a high-throughput, 802.11n-draft-compliant wireless LAN technology optimized for the networked home entertainment environment. (Metalink08.08)

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9.2 Defense Industries International Gets First Body Armor Order From CIS Country

Defense Industries International has received its first order from a CIS country for a body armor product, totaling $1.2m. The order is expected to be delivered during Q3/07. Ashkelon, Israel's Defense Industries International (http://www.defense-industries.com) is a leading manufacturer and global provider of personal military and civilian protective equipment and supplies. Defense Industries' main products include body armor, bomb disposal suits and bullet-resistant vests and jackets; ballistic wall covers, ceramic armor plates and lightweight armor UHMW-PE plates; personal military equipment, battle pouch units and combat harness units; dry storage units, liquid logistics, tents and vehicle covers; winter suits, sleeping bags and backpacks. (DII08.08)

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9.3 Nova Licenses Several Patents to a top Ten Semiconductor Manufacturer

Nova Measuring Instruments has licensed several of its patents for more than $1m to a top-ten semiconductor manufacturer. The license covers the use of integrated metrology and integrated process control before and during the photolithography manufacturing step. In September 2006 Nova invited approximately 100 companies to submit bids to acquire or license certain patents from its very large portfolio of over 60 patents. These patents have substantial value now that the industry has commenced widespread adoption of integrated metrology and the methods covered by the patents are critical for advanced manufacturing of semiconductors. Following the announcement last September, Nova has been in active discussions with numerous patent holding companies interested in purchasing the patents. In the course of these discussions, Nova was approached by certain semiconductor manufacturing companies about licensing the technology for use in their fabs. The first license agreement was concluded and the license fee has been received. Rehovot, Israel's Nova Measuring Instruments (http://www.nova.co.il) develops, produces and markets advanced integrated and stand alone metrology solutions for thesemiconductor manufacturing industry. Nova is traded on the NASDAQ & TASE under the symbol NVMI. (Nova 08.08)

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9.4 Optibase Delivers the News Live in Spain

Optibase announced the delivery of an IP over satellite contribution solution for TV station Canal33 in Madrid, with local partner EQUIPOS Y SISTEMAS S.A. (ESSA), an integrator of telecommunication equipment in Spain. Optibase's Media Gateway (MGW) platforms provide advanced MPEG-4/H.264 encoding and streaming, thus offering high quality video at extremely low bitrates required for live news broadcasts. Optibase's advanced MGW H.264 solution and ESSA's transmission equipment provides Madrid's Canal33 TV station the ability to broadcast live news of local events such as sports, elections and public demonstrations. The live footage is transmitted from outside broadcasting vans via satellite to the Canal33 headend, offering high picture quality without compromising low bit rates. Herzliya, Israel's Optibase (http://www.optibase.com) provides professional encoding, decoding, video server upload and streaming solutions for telecom operators, service providers, broadcasters and content creators. The company's platforms enable the creation, broadband streaming and playback of high quality digital video. Optibase's breadth of product offerings are used in applications, such as: video over DSL/Fiber networks, post production for the broadcast and cables industries, archiving; high-end surveillance, distance learning; and business television. (Optibase 11.08)

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9.5 RADWIN Selected for School Connectivity Project in Israel

Tel Aviv, Israel's RADWIN (http://www.radwin.com), a leading provider of advanced wireless broadband solutions, announced that it won a prestigious contract to connect multiple schools in the Emek Yizrael school district in northern Israel. RADWIN's WinLink 1000 wireless broadband solutions were deployed to drive high-speed broadband services to schools in remote areas that are out of reach of wired broadband infrastructure. RADWIN's sub-6 GHz solutions enable private networks such as education institutions, governments, public and private enterprises to extend network connectivity rapidly and cost-effectively. RADWIN's unique Multi Point-to-Point architecture enables deployment of multiple radios in one hub site from where they provide a dedicated, high-capacity connection to each remote site. (RADWIN 13.08)

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9.6 RADA Receives $720,000 Purchase Order for Delivery of UAV Avionics Systems

RADA Electronic Industries has received a $720,000 purchase order to deliver various avionics units for UAV application to an unnamed customer. Additional production orders expected to be received from the same customer during the next 3 years with total value of additional $1m. Delivery of units currently on order is expected to be completed until the end of 2008. Netanya, Israel's RADA Electronic Industries (http://www.rada.com) is involved in the military and commercial aerospace industries. The Company specializes in Avionics systems (Digital Video Recorders, Ground Debriefing Stations, Stores Management Systems, Flight Data Recorders, Inertial Navigation Systems), Trainers Upgrades, Avionics systems for the UAV market, and Electro optic cameras for airplanes and armored vehicles. (Rada 14.08)

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9.7 Camtek Receives Orders for Multiple Falcon Wafer Inspection Systems

Camtek received follow on orders for five Falcon wafer inspection systems from a leading international semiconductor manufacturer. The systems will be installed at two plants in Asia during the third and fourth quarters of 2007. The orders, totaling several million dollars, include Falcon models for 3D metrology and inspection of bumped wafers, and for 2D inspection of wafer-level packaged MEMS devices at various stages of their production. Camtek's line of automated wafer inspection systems, Falcon, helps semiconductor manufacturers, bumping houses and packaging foundries monitor processes and enhance yield. Falcon dedicated models deliver superb 2D and 3D inspection and metrology capabilities for wafers before or after test, along the bumping process or after dicing, as well as the special needs of MEMS applications. With headquarters in Migdal Ha'Emek Israel, Camtek (http://www.camtek.co.il) designs, develops, manufactures, and markets automatic optical inspection systems and related products. Camtek's automatic inspection systems are used to enhance both production processes and yield for manufacturers in the printed circuit board industry, the high density interconnect substrate industry and the semiconductor manufacturing and packaging industry. (Camtek15.08)

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9.8 InRob's JV MTL Platform to Be Marketed Worldwide Through Caterpillar Network

InRob announced that the new Robotic MTL 257B platform will be marketed through Caterpillar's network of distributors around the world. InRob developed a dedicated robotic control system to convert Caterpillar's MTL 257B into an unmanned platform. The MTL is a compact multi-terrain, rubber-tracked machine designed for work in a broad range of applications and terrain conditions, including soft underfoot and slopes. This robotic version is ideally suited for a wide range of military, para-military, law enforcement, and civilian operations. InRob Tech (http://www.inrobtech.com) is an Israeli-based high-tech company specializing in the planning, manufacturing and service support of advanced wireless and remote control systems, operating all types of robots and other vehicles. The Company is Israel's leader in its field, and supports the IDF (Israeli Defense Forces), Israeli police, and other military and civilian companies dealing with security. Founded in 1988, the Company works closely with other high-tech companies to provide the most advanced and comprehensive UGV solutions to the market. (InRob15.08)

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9.9 RADA Received a $660,000 Order for "Eye Witness" HUD Camera Units

RADA Electronic Industries has received a $660,000 purchase order to produce and deliver a derivative of RADA's "Eye Witness" HUD Camera to an unnamed customer. The "Eye Witness" is one of RADA successful products, in production for more than 8 years and with total deliveries of over 1,000 units. Delivery of units on order is expected to be completed until the end of Q1 2008. Netanya, Israel's RADA Electronic Industries (http://www.rada.com) is involved in the military and commercial aerospace industries. The Company specializes in Avionics systems (Digital Video Recorders, Ground Debriefing Stations, Stores Management Systems, Flight Data Recorders, Inertial Navigation Systems), Trainers Upgrades, Avionics systems for the UAV market, and Electro optic cameras for airplanes and armored vehicles. (RADA16.08)

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10: ISRAEL ECONOMIC STATISTICS

10.1 July's CPI Increase By 1.1%

The Central Bureau of Statistics announced on 15 August that the Consumer Price Index (CPI) rose by 1.1% in July 2007. Excluding fruits and vegetables and housing, the CPI rose by 0.5%. Inflation in January-July was 2.1%. The CPI excluding fruits and vegetables rose by 2.3% and the CPI excluding housing rose by 1.9%. Trend figures for April-July indicate that inflation on an annualized basis is 3.1%, which is above the ceiling of the Bank of Israel's 1 - 3% inflation target. The shekel's depreciation against the dollar during July contributed about 0.8% to the CPI rise. Other contributors were prices rises for bread, electricity, fuel, and books. The domestic and foreign recreation item in the CPI rose by 5.3% because of the shekel's depreciation against the dollar and euro. The housing item rose by 4.3%, apartment rent by 2.2%, fuel and oil by 1.8%, bread by 1%. Bread prices will probably also contribute to a rise in the August CPI. CPI items that declined in July, ameliorating the rise, included a 4% seasonal drop in prices for both fresh fruit and shoes, a 3.5% drop in clothing prices and a 2% drop in prices for poultry. Were it not for these items, the July CPI would have risen by 1.5%. (CBS15.08)

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10.2 State Of Economy Index Rose 6.4% During First Half

The Bank of Israel announced that the State of Economy Index rose by 6.4% in H1/07, during which retail trade rose by 4.1% and industrial output rose by 9%. However, there were declines in tourist arrivals (-5%) and new housing starts (-17%). Private consumption and investment drove most of the growth during the first half. The growth in private consumption was mainly due to the substantial improvement in the labor market, the rise in salaries and in employment. The standard of living rose by 10%. The Bank of Israel says that the government deficit in 2007 will be less that the Ministry of Finance's ceiling target of 2.9% of GDP. It is now thought that the deficit will be less than 2% of GDP. The Bank of Israel adds that government spending in the first half of the year was $1.1b below projections, mainly because of under-performance by civilian ministries. The government has a budget surplus of $1.3b. Non-financial economic activity continued to grow in H1/07 and apparently the economy is now in an advanced stage of the growth cycle. The Bank of Israel says that almost all economic indicators point to an expansion in non-financial economic activity. (BoI08.08)

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10.3 Water Technology Exports Seen To Grow To Over $1b In 2007

A Ministry of Industry, Trade & Labor survey of Israel's water technologies industry predicts that exports will grow 28% to $1.1b in 2007. The sector had $850m in exports in 2006, up 21% on 2005. The ministry attributes the sector's rapid growth to higher sales by existing companies and exports of newly launched products by start-ups. Some 270 companies and institutes are active in the water technologies sector, including 60 start-ups. The industry has an estimated 8,000 employees. The global water market is currently estimated at $410b and is expected to exceed $600 billion by 2015. The Ministry said that Israel is already is a key player with a large share in the global water technologies industry. Israel is a leader in four areas: construction of seawater desalination plants, irrigation systems, wastewater treatment and reuse, and management and monitoring of water sources. The world's largest seawater desalination plant is in Ashkelon. It is highly unusual for either Israeli companies or venture capital funds to invest in cleantech start-ups. Most cleantech investments in Israel are made in established companies with sales. Two exceptions are venture capital funds BHCO Group and NRVision Ltd. (Globes 19.08)

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10.4 Israel's Pharmaceutical Exports to Europe Grow in First Half

Israel's pharmaceutical exports to the EU totaled $252m in H1/07, 42% more than in H1/06. Total pharmaceutical exports rose 6% to $1.54b. Israel exports pharmaceuticals to 120 countries worldwide. Pharmaceutical exports to the US accounted for 75% of the industry's total export revenue, amounting to $1.15b in the first half, 2% less than in the corresponding period. Exports in terms of volume to the US rose by 67%. The Manufacturers Association attributes the anomaly to a 90% plunge in US prices for three generic drugs made by Teva after their 180-day exclusivity periods expired. Compared with the first half of last year, pharmaceutical exports to the Netherlands rose 123% in the first half of 2007; exports to France rose 113%; exports to Spain rose 75%; and exports to Ireland rose 56%. Exports to Eastern Europe have also increased: exports to the Czech Republic rose 176%; Russia - 72%; and Hungary - 48%. Exports to India rose 64% and exports to China and Thailand both rose by 25%. (Globes 15.08)

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In Depth

11.1 MIDDLE EAST: Employees Vote for Smoking Ban in the Workplace Pressure is mounting on Arab Middle Eastern companies to ban smoking in the workplace, according to the latest survey by GulfTalent.com, the region's leading online recruitment portal. The survey found that an overwhelming 98% of professionals favor some form of smoking restriction in their workplace. Of the total respondents, who included both smokers and non-smokers, 54% preferred a complete ban on smoking inside office premises, while a further 44% believed that the workplace should be largely smoke-free, with smoking only permitted in certain designated areas. Only 2% of professionals surveyed were completely opposed to any form of smoking restriction.

Currently around 10% of companies have no smoking restrictions in place, while a large number of companies who do have official smoking bans fail to enforce them fully – with many staff, including some senior managers, reportedly flouting the rules.

According to GulfTalent.com, many human resource departments across the region have recently introduced smoking restrictions in their workplaces. Those with restrictions already in place are looking at ways to improve compliance by staff. Some HR managers interviewed favored stronger anti-smoking legislation by their respective governments to assist them with internal enforcement of the policy within their organizations.

Smoking Prevalence

GulfTalent.com's survey found that overall, 33% or one-third of Middle East professionals smoke. This varies significantly by country, with Egypt and Jordan topping the list at 38%, while Oman is the lowest, with only 20% of employees smoking.

Prevalence of smoking among professionals, by country:

Egypt 38%
Jordan 38%
Saudi Arabia 36%
Lebanon 36%
UAE 32%
Qatar 32%
Bahrain 29%
Kuwait 28%
Oman 20%

On a nationality level, smoking is most prevalent among Arab professionals at 36%, followed by Western professionals at 28% and Asian professionals at 27%. In terms of gender, smoking is far more prevalent among men than women, with 36% of male professionals smoking compared to 18% of their female counterparts.

On a corporate level, 55% of companies currently have a complete ban on indoor smoking, while 36% permit smoking in designated areas only. The penetration of smoking bans varies greatly across the region. Oman leads the anti-smoking drive, with 65% of companies having a complete smoking ban. Kuwait is the most smoker-friendly country with only 42% of firms banning smoking in the workplace.

Percentage of companies with a complete smoking ban:

Oman 65%
UAE 62%
Bahrain 58%
Qatar 58%
Saudi Arabia 56%
Lebanon 46%
Jordan 43%
Egypt 43%
Kuwait 42%

By industry, the healthcare sector is most health-conscious, with 74% of organizations having a complete smoking ban, partly as a result of specific anti-smoking legislation applied to the healthcare industry. The legal profession appears to be the least concerned, with only 31% of law firms applying a smoking ban.

The Smoking Debate

The issue of smoking in the workplace has assumed increasing prominence in recent months. Non-smokers are increasingly vocal in expressing their pain and suffering from smoking colleagues, while a growing body of medical evidence points to the health risks of inhaling smoke from others – the so called ‘passive smoking'. Seventy-five percent of non-smokers participating in GulfTalent.com's survey said that they were bothered by passive smoking.

At the same time, with outside temperatures across the Persian Gulf approaching 50 degrees Celsius, there is some public sympathy for smokers who have to leave their air-conditioned offices and stand in the blazing summer heat in order to smoke.

Legislative Developments

Overall, the Middle East countries are still among the most smoker-friendly in the world, with public bans on smoking limited or not enforced and low tobacco taxation making the purchase of cigarettes extremely affordable. An international brand of cigarettes costs just $1.70 per pack across the UAE, Kuwait and Saudi Arabia, compared to $4.50 in the US and $11.50 in the UK.

However, the governments are increasingly under pressure to counter the spread of smoking to protect the health of their citizens, particularly the huge population of young people. Smoking-related illnesses are believed to cost Middle East governments and employers billions of dollars each year in healthcare costs and insurance premiums.

The Saudi Health Ministry recently banned smoking in government buildings, while the municipalities of Riyadh and Jeddah have banned shisha (hookah, or nargila) smoking in all cafes and restaurants within the city. The Dubai Municipality has promised a blanket ban on smoking in all enclosed spaces – to be enforced across all shopping malls, cafes, restaurants, universities and business premises from November 15, 2007. The UK was the latest European country to enforce a similar public smoking ban, despite opposition from some retail outlets, including several shisha cafes in London's Arab district.

Smoking and Productivity

Employers interviewed by GulfTalent.com were divided in their opinion on the relative productivity of smokers and non-smokers. Some believed smokers to be less productive due to frequent cigarette breaks and higher levels of sickness and absenteeism. A few employers reported having put in place a cap on maximum permitted number of cigarette breaks staff are allowed to take each day. However, the majority of employers surveyed did not believe in a link between smoking and productivity, and considered cigarette breaks to be no more disruptive than tea or coffee breaks enjoyed by non-smokers.

As far as smokers themselves are concerned, some blamed office smoking bans for lower productivity, as they would not be able to function optimally without smoking. Others welcomed the bans as an added incentive to try to quit smoking altogether.

GulfTalent.com's study was based on an online survey of 5,000 professionals in nine major Arab countries in the Middle East and interviews with a number of HR managers. The survey was conducted as part of an exercise to understand the key issues affecting employees at work. Headquartered in Dubai, GulfTalent.com is the Middle East's leading recruitment website for experienced professionals, covering Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, Jordan, Lebanon, Egypt and the United Arab Emirates. (Al Bawaba17.08)

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11.2 JORDAN: Fifth Post-Program Monitoring Discussions: June 8, 2007

Background & Focus of Discussions

Jordan's economic performance remains strong. Growth is robust, core inflation is contained, the current account deficit is narrowing, reserves are comfortable, and the fiscal situation continues to improve.

Yet challenges remain, on which discussions focused: (i) a large current account deficit, (ii) still high public debt, and (iii) rapid credit growth.

• Current account: With supportive policies, the current account deficit should decline steadily over the medium term, and the external debt burden should be cut by half by 2012. Foreign direct investment (FDI) inflows are expected to provide medium-term financing support.

• Public debt: Medium-term fiscal adjustment will reduce the debt-to-GDP ratio to well below the official 60% of GDP target by 2011. Given higher medium-term financing requirements, the authorities are considering new debt instruments (sukuk, regional local-currency denominated bonds).

• Credit growth: While banking sector indicators are strong, the effects of past rapid credit growth require careful monitoring.

Staff views and recommendations

• Adhere to the 2007 fiscal target and aim for more ambitious medium-term fiscal adjustment. This will help reduce public debt, inflation, and the current account deficit. Given risks, including from higher-than-budgeted fuel subsidies, contingency measures should be implemented if the 2007 targets appear in danger.

• Support the Central Bank of Jordan's (CBJ) plans to strengthen further the supervisory and regulatory framework. A Financial Sector Assessment Program (FSAP) update is needed.

• The CBJ's plan to simplify the interest rate structure and remove excess liquidity through the sale of certificates of deposit (CDs) is appropriate. Staff suggested replacing the one-week repo facility with an overnight facility and reducing the repo rate below the discount rate to reflect maturity differences. Collateralized interbank lending and increased CD auction frequency should help strengthen the interbank market.

Authorities' views

• The authorities consider the outlook for the Jordanian economy as strong, including on growth, inflation, and the current account.

• The debt target remains a key policy anchor and fiscal policies aim to support this target. These include spending cuts, revenue gains (mainly through improved revenue administration), and, if needed, further fuel price increases. Achieving a lower debt-to-GDP ratio than the 60% target by 2011 is well within reach.

• Bank supervision and regulation will continue to be strengthened. Stress tests suggest that banks are resilient and the CBJ is committed to undertaking further steps to ensure the banking system remains sound.

I. INTRODUCTION

1. In the recent Article IV consultation, staff reported on Jordan's strong economic performance in past years and on policies to sustain this performance. The policy framework discussed in the last staff report remains valid: a medium-term public debt target, continuation with a currency peg, and policies to narrow the current account deficit (fiscal consolidation, prudent monetary policy, and measures to improve the business environment).

2. In the context of the present post-program monitoring (PPM) discussion report, the focus will be on three potential medium-term challenges: (i) the large current account deficit; (ii) the still-high public debt ratio; and (iii) rapid credit growth.

II. RECENT DEVELOPMENTS AND OUTLOOK FOR 2007

3. Jordan's strong economic performance continues. Growth was 6½% last year, and was evenly spread between domestic and external demand. Average inflation increased to 7½% in January–April (yoy), reflecting mainly fuel and food price increases, but core inflation remains well contained. Aided by a broad-based import slowdown and strong export growth, the current account deficit narrowed last year to 13½% of GDP. Trade data for early 2007 show import growth slowing further and exports rising by more than 20%. With continued strong private capital inflows, reserves rose to $6.3 billon at end-April (more than five months of prospective imports).

4. The fiscal situation also continues to improve in the face of increased spending pressures. During 2006, strong revenues and fuel price increases more than offset higher spending on transfers (including wage bonuses) and investment. Preliminary estimates suggest that the fiscal deficit (including grants) was about 3¾% of GDP last year, compared to 5% in 2005, contributing to the fall in the public debt-to-GDP ratio to 72½% at end-2006. In implementing the amended 2007 budget, the authorities are targeting a deficit of 2¾% of GDP, as the increase in public sector wages and pensions in the supplementary budget is being offset by nonpriority spending cuts (mainly transfers to public sector employees) and additional revenue gains (particularly income tax overperformance).1 Strong fiscal performance appears to have continued through the first quarter of this year, with an overall surplus of about 1% of GDP, in line with normal seasonal patterns.

5. Meanwhile, private sector credit grew by almost 25% last year, but broad money growth was much lower, given reductions in credit to government—due to an increase in privatization receipts—and a large contraction in other items net because of bank capital increases. The pace of credit expansion has, however, slowed sharply over the past year due to the past impact of higher CBJ interest rates, tighter supervision, and the stock market correction.

III. NEAR-TERM ECONOMIC OUTLOOK AND KEY CHALLENGES

6. The macroeconomic outlook remains positive:

• Average inflation is expected to decline this year to below 6%. Given that large fuel price hikes contributed about 2% to the inflation outturn last year, this appears achievable. Recent double-digit import price increases could, if they persist, make the task more challenging.

• Growth is expected to be about 6%, helped by large FDI projects. Liquidity in the region is high, and Jordan continues to be a favored investment destination. Other available indicators, including industrial production, imports, and credit growth, suggest a modest decline in growth from 6½% in 2006.

• A further narrowing of the current account deficit is likely. The strong export momentum of recent years is likely to continue, reflecting strong U.S. and regional demand, a fairly-valued dinar, and large recent investments in traditional export sectors. Import growth is projected to stabilize with falling import unit prices (in line with World Economic Outlook (WEO) forecasts) and import volumes are expected to grow more in line with overall economic activity, following a level jump in recent years on account of FDI, oil prices, and the impact on consumption of the large Iraqi influx.

7. What are the remaining economic challenges?

• A large current account deficit: Despite the recent narrowing, Jordan's deficit remains one of the highest among emerging market (EM) countries. The deficit is fully financed by FDI and other long term capital inflows and reserves are at an all-time high. But Jordan could potentially be exposed to sudden shifts in investor sentiment and to regional uncertainties.

• Still-high public debt: Jordan has managed to rein in its public debt burden, but, at over 70% of GDP, it remains higher than generally considered prudent for EM countries. Jordan also remains reliant on volatile foreign grants. As shown by the public debt sustainability analysis (DSA), while Jordan's debt burden is expected to decline sharply even under adverse shocks, its profile depends on continued strong fiscal adjustment.

• Credit growth: While bank prudential indicators are strong and financial sector supervision has strengthened, Jordan's rapid private sector credit growth (until recently), which exceeded that of most peer countries, requires constant monitoring. Moreover, new forms of lending, carrying greater risks (such as margin and noncollateralized loans) have grown rapidly, although their share remains low.

IV. POLICY DISCUSSIONS

8. The mission focused on the above key challenges. The macroeconomic framework is different from that discussed in the recent Article IV consultation only to the extent that it reflects recent economic developments, including a lower-than-envisaged external current account deficit for 2006, and an amended official budget (although the government plans to stick to the original budget deficit target).

A. Current account

9. The authorities were optimistic about Jordan's current account and financing prospects. Staff agreed that the key sources of last year's current account improvement— slower import volume growth, strong export momentum, and high remittance and tourism inflows—are likely to be repeated this year and over the medium term. The financing situation also remains positive, as the large pool of investable funds in the region continues to flow into special economic zones, greenfield projects, and new public-private infrastructure initiatives. Strong investment indicators for the first quarter support this view. With respect to the peg, the rapid narrowing of the current account deficit, continued large FDI inflows, and surplus foreign exchange conditions in the banking system do not suggest a need to move away from the long-standing fixed exchange rate regime. Indeed, with 2007 inflation expected to be close to that in trading partners and given strong export growth and foreign reserves accumulation, there are currently no indications of an exchange rate misalignment.

10. External debt dynamics also support the picture of underlying strength. With a falling current account deficit and continued strong FDI inflows, reserve ratios to imports and short-term debt should remain comfortable, and external debt could be halved in five years (to 22% of GDP). As discussed in the external DSA, these baseline projections are robust to several shocks, but are sensitive to assumptions on private capital inflows. In particular, should FDI flows revert to historical norms, the envisaged decline in external debt would not take place, leaving the economy more exposed to exogenous shocks.

B. Public debt

11. The picture is similarly positive on Jordan's public debt sustainability prospects. In the context of the 2007 budget presentation, the authorities announced a new 60% of GDP debt ceiling by 2011. They intend to incorporate this in a revised Public Debt Management Law shortly after the November parliamentary elections. Absent severe shocks, the authorities and staff agreed that a more ambitious target could be achieved. (Under staff projections, Jordan's debt burden is set to fall to 52% of GDP by end-2011.) However, maintaining the announced target would provide flexibility to deal with shocks.

• The authorities are committed to achieving the original 2007 budget deficit target. Staff cautioned that the fiscal position was subject to risks that include a high budget sensitivity to oil prices (a US$5-a-barrel price increase adds about 1% of GDP to the deficit), possible food subsidy overruns (based on the high first quarter outturn), and likely spending pressures in an election year. Staff suggested that the authorities identify contingency measures, possibly to include cuts in budgeted cash transfers to the private sector and nonpriority current and capital spending, as well as increases as needed in domestic fuel prices. The authorities indicated that they did not intend to implement an automatic adjustment formula at this time, but if the price of oil increased much further, they would raise fuel prices (the budget provides for oil related transfers).

• With medium-term domestic financing requirements set to increase—reflecting a winding down of Paris Club rescheduling and privatization—the authorities are planning to expand their set of debt instruments. To this end, they are considering issuing Islamic financing instruments (sukuk) and long-term regional local currency denominated bonds. Staff supported these goals and indicated that, given Jordan's favorable economic conditions and ample regional liquidity, demand for these instruments could be high.

• Discussions are underway between the ministry of finance (MoF) and the CBJ to settle the long-standing issue of government debt to the CBJ. Staff recommended that securitization of government debt to the CBJ take place soon, and that the MoF share its borrowing plans with the CBJ on a quarterly basis, to help the latter's liquidity management.

• Given its potential fiscal importance, the mission also discussed the plans for public-private partnership (PPP) projects. The authorities believe PPPs could generate public savings and harness private expertise and, to that end, they are preparing a legal and institutional framework for PPPs with World Bank assistance. The mission emphasized that the primary focus should be on strengthening public investment planning and creating an appropriate legal and institutional framework, with a strong role for the MoF in safeguarding public finances.

12. In support of their medium-term public debt targets, the authorities will continue with structural fiscal reforms. Priorities include tax and expenditure policy, public financial management (PFM), revenue administration, and pension reforms. While progress in some areas has been good (establishment of a macro-fiscal unit at MoF, improved budget framework for own-budget agencies), other areas have seen delays (Treasury Single Account (TSA), budget processes, and income and sales tax regimes). Staff indicated that the current economic environment lent itself well to these reforms and that further progress was needed on the TSA, budget coverage and classification, and the medium-term expenditure framework.

C. Credit growth

13. While banking sector indicators remain sound, despite last year's major equity market correction, the authorities intend to monitor the situation closely. Risky loans (margin, non-collateralized, credit card) have grown rapidly, and some banks may not have the capacity to assess associated risks. Bank profitability and other soundness indicators have yet to be tested in an economic downturn. Some small banks are actively seeking market share, with loan-to-deposit ratios increasing to 100% in certain cases. The CBJ has strengthened supervision, introduced a prompt corrective action framework, and has enforced a finer classification of credit facilities and stricter provisioning rules since June 2006. Parliament recently passed the Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) legislation, prepared with World Bank assistance. Looking ahead, the CBJ plans to introduce Basel II-based reporting by fall, to seek improvements in banks' risk management systems, and to introduce shortly new corporate governance guidelines for banks that would aim, among other things, at keeping banking operations at arm's length from owners.

14. The CBJ indicated that it would continue to absorb excess liquidity through CD issuance. Staff agreed that this would help strengthen the interbank market and help slow domestic credit and import growth. Staff also suggested that the CBJ increase the frequency of its CD auctions and promote the use of collateralized interbank lending (through the use of a master repo agreement) to help banks better manage their liquidity and limit interbank interest rate volatility.

15. Staff agreed with the authorities' plans to simplify the interest rate structure by reducing the interest rate corridor width by 125 basis points. Staff also suggested replacing the seven-day CBJ repo facility with an overnight facility to ensure symmetry with the overnight deposit window. The move took effect early May. Given surplus liquidity, the move did not represent an easing of monetary conditions.

V. STAFF APPRAISAL

16. Jordan's macroeconomic outlook is positive, but challenges remain. Barring large negative shocks, growth should remain strong, inflation is expected to decline modestly, the current account deficit will likely narrow further, and public debt should continue to fall. At the same time, external sector imbalances are large, the public debt burden remains high, and rapid private sector credit expansion warrants close monitoring.

17. With supportive policies, the current account deficit should decline steadily over the medium term (to 6¼% of GDP by 2012). These policies include sustained fiscal adjustment, prudent monetary policy, and improving the business environment.

18. Fiscal adjustment should aim to reduce the public debt burden to well below the new 60% of GDP target by 2011, given remaining risks. In the near term, this should include adopting contingency measures if the 2007 deficit target appears in danger of being breached. Also, given the budget's sensitivity to international fuel price developments, domestic oil prices should be increased to compensate fully for any further increase in world oil prices and a fully automatic price adjustment mechanism instituted as soon as feasible. Over the medium term, most of the adjustment should be on spending. Further support could be given by pressing ahead with the structural reform agenda, against the backdrop of a positive economic environment. Given Jordan's financing requirements, expanding the set of debt instruments to include sukuk and regional local currency-denominated bonds should help widen the investor base, possibly lower borrowing costs, and establish Jordan's presence in international capital markets.

19. The authorities' plans to strengthen further the banking sector supervisory and regulatory framework are appropriate. The CBJ has already taken many steps to improve its oversight of the banks. That said, Jordan's credit growth in recent years stands out from other emerging market countries. And bank soundness indicators have yet to be tested in an economic downturn. Staff therefore looks forward to new corporate governance regulations, improved risk management, and an early FSAP update. Efforts should be made to approve the Credit Bureau legislation soon to help banks better assess credit risk. (IMF10.08)

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11.3 JORDAN: Economics & Security Closely Tied In Kazakhstan-Jordan Relationship

The Jamestown Foundation (http://www.jamestown.org) reported that on August 9 Kazakhstan's President Nursultan Nazarbayev met Jordan's King Abdullah II in Astana, confirming his intention to expand ties between the two countries. In addition to Jordan, Kazakhstan is also pursuing closer bilateral relations with Egypt as part of an overture to the Middle East. The main areas of cooperation are economic, cultural, and humanitarian, but Astana also hopes they will extend to fostering political dialogue and security cooperation. “Kazakhstan confirms its intention to develop in every possible way and in various spheres of bilateral relations with Jordan,” Nazarbayev said. “We are interested in deepening the political dialogue and coordinating efforts on the international arena. Trade and economic, cultural, and humanitarian aspects of our cooperation are of great significance.”

Jordanian ministers and businessmen arrived in Kazakhstan in advance, negotiating a number of trade agreements. Jordan expressed interest in buying 300,000 tons of wheat from Kazakhstan. Direct flights between the countries will be established, with embassies being opened later this year, facilitating deeper economic and cultural ties. While emphasis was placed on economics, security topics were also on Nazarbayev's agenda.

Both sides agreed to expand their anti-terrorist cooperation: "We intend to develop our relations in the field of fighting terrorism, extremism, and international crime. Jordan, which is located in such a complex region in the world as the Middle East, has broad experience in this respect,” observed Nazarbayev. Kazakhstan's security structures are increasingly interested in tapping this experience in order to strengthen domestic security capabilities. Astana's security relations with Jordan reflect this approach. The two countries will step up intelligence cooperation, specifically relating to terrorism, but also sharing information about international criminal networks and religious extremism. As Nazarbayev told the media, “Cooperation between the security services of our countries will make a great contribution to the fight against terrorism and extremism.”

At a political level, Nazarbayev is pleased that Jordan has joined the Conference on Interaction and Confidence-building Measures in Asia (CICA), which Nazarbayev sees as a key cooperative strategy for regional development. Nazarbayev described Jordan's decision to join CICA as “an important result of political partnership.” He sees advantages in Jordan's membership, as it is an influential country in the Arab and Muslim worlds.

Nazarbayev and King Abdallah II called for preserving Iraq's territorial integrity through the “consolidation of its political forces.” Nazarbayev has strongly supported, at considerable risk, the U.S. intervention in Iraq and has maintained Kazakhstan's public support through its ongoing deployment of elements of its peacekeeping battalion (KAZBAT). But he has also done this for his own reasons, gaining in the course of this deployment an opportunity to showcase KAZBAT, winning significant support from the United States and NATO to help Kazakhstan expand the battalion into a brigade; holding out the prospect of greater involvement in future peace support operations.

However, he chose his wording carefully at the joint press conference, referencing the UN rather than any individual country and referring to the present coalition forces deployed in Iraq as playing a key role in future efforts to bring large-scale aid to Iraq.

In everything Nazarbayev says concerning Middle Eastern political issues, he is mindful of Moscow, seeking to avoid any hint that he follows Washington's lead on foreign policy issues. The two leaders also discussed each country's need to emphasize the principles of Islam and the need to confront the activities and ideologies of militants. But despite arriving at consensus, they failed to agree on any specific joint initiatives to these ends.

Nazarbayev has developed a range of new ties with countries in the Middle East. Although some of these links remain at an early stage, he envisages opening up the National Security Committee to greater international intelligence cooperation. Jordan and Kazakhstan will share intelligence on terrorists, extremists, and international criminal activity of interest to either side, yet Astana has a special interest in unlocking the experience of security agencies in the Middle East in combating and monitoring terrorists. (JF15.08)

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11.4 IRAQ: IMF Executive Board Concludes 2007 Article IV Consultation with Iraq

On August 1, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Iraq.

Background

The last Article IV consultation with Iraq was the first one in 25 years and was concluded on August 1, 2005. A Stand-By Arrangement (SBA) was approved by the Executive Board on December 23, 2005 in support of an economic program covering through March 22, 2007, which was later extended through September 28, 2007. The SBA-supported program underscores the authorities' commitment to stabilize macro-economic conditions in Iraq, while at the same time implement structural reforms to pave the way for sustainable economic growth. Under the program the authorities have taken measures needed to achieve macro-economic stability. Despite an unsettled political situation, capacity constraints, and the deterioration in security in 2006, progress has been made in implementing structural reforms, although much remains to be done.

Economic growth has been slower than expected at the time of the last Article IV consultation, mainly because the expected expansion of oil production has not materialized. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼% in 2006. Average annual crude oil production has remained at about 2 million barrels per day since 2004. Annual consumer price inflation increased to almost 65% at end-2006 from 31½% at end-2005 mainly due to supply bottlenecks, in particular of fuel products. Core inflation (excluding fuel and transportation) remained high at about 32%. Following policy efforts to bring inflation under control and some easing of fuel shortages, inflation has since then declined to 46% in June 2007, and core inflation has decreased to 19%.

Since November 2006 the Central Bank of Iraq (CBI) has allowed the exchange rate of the Iraqi dinar to appreciate by 15% and raised its policy interest rates in two steps to 20%. In addition to reducing inflation, these policies have also had some success in de-dollarizing the economy and increasing the demand for dinars. The CBI gross international reserves increased to $18.7 billion at end-2006 (almost 6 months of import cover).

Following a fiscal surplus of 11% of GDP in 2005, the fiscal outturn for 2006 showed a surplus of almost 12%. This outcome is partly the result of underspending on investment reconstruction projects, including in the oil sector. The surpluses contributed to an accumulation of balances in the Development Fund of Iraq to a level of $8.6 billion at end-2006.

Progress in implementing the structural reforms has been made. Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized. Negotiations on a new legal framework for the oil sector are ongoing. An interim audit of the CBI's 2006 financial statements and an audit of its net international reserves have been finalized. Progress has also been made in developing the financial system with the introduction of a payments clearing system and a Real Time Gross Settlement system. The process of restructuring Iraq's two largest state-owned banks has started. The Ministry of Finance has adopted a new chart of accounts and budget classification, but completion of a census of all public service employees has proven more time-consuming than foreseen and is still underway.

The Paris Club agreed on November 21, 2004 to a debt reduction for Iraq, equivalent to 80% in net present value (NPV) terms, to be achieved in three stages. The first and second stages each comprised a 30% debt reduction in NPV terms and went into effect in November 2004 and in December 2005 (following approval of the SBA), respectively. The final stage will comprise an additional 20% debt reduction, and depends on completion by end-December 2008 of the final review of the third year of one or more upper credit tranche arrangements with the Fund. Iraq continues to make progress in resolving debt to official and private creditors.

Executive Board Assessment

Directors commended the Iraqi authorities for keeping their economic program on track by strengthening economic policies and making progress in structural reforms, despite an unsettled political situation and a very difficult security environment. They noted, however, that the expansion of oil production is lagging, and that inflation, while on a downward path, remains high, reflecting in large part continued shortages, notably of fuel products. Directors considered that Iraq's economic prospects hinge critically on an improvement in the security situation.

Directors encouraged the authorities to take measures to speed up reconstruction and increase investment, especially in the oil sector. To that effect, they welcomed measures adopted by the authorities to increase the implementation rate of the public investment program, and urged them to take additional measures, if needed, and to strengthen the protection of oil installations.

Directors commended the government's commitment to pursue a prudent fiscal policy by keeping current spending in 2007 within the budget limits and to maintain fiscal sustainability over the medium term. They supported the authorities' decision to resist undue spending pressures and to strictly contain the wage and pension bill, as well as transfers. Directors encouraged the authorities to enact as soon as possible amendments to the new pension law to ensure the fiscal sustainability of the pension system.

Directors welcomed the increase in official fuel prices to regional levels. This will enable the government to continue avoiding direct subsidies on fuel products, except for kerosene. They were encouraged by the authorities' intention to consider developing a rule-based mechanism for setting domestic fuel prices in the future, which would prevent the re-emergence of budgetary subsidies, help fight corruption, and free up resources for much needed investment spending.

Directors were encouraged by the reduction in inflation. They generally supported the policy of the CBI to continue allowing the gradual appreciation of the dinar through end-2007. This would contribute to further reducing inflation and de-dollarizing the economy. Directors called on the CBI to stand ready to accelerate the pace of appreciation and tighten monetary conditions further if inflation deviates from its downward path and dollarization is not reduced as expected. Key to fighting inflation would be to continue restraining public spending pressures and stepping up efforts to reduce shortages, especially by actively supporting private sector fuel imports.

Directors stressed the need to implement priority structural reforms as expeditiously as circumstances permit. They encouraged the authorities to broaden the coverage of the Financial Management Information System, modernize and streamline the tax system with a view to expanding the tax base and improving incentives for economic activity, and to press ahead with the restructuring of the banking system so as to increase financial intermediation, especially for the private sector. Directors also welcomed the government's efforts to rehabilitate viable public enterprises on a commercial basis, while underscoring that any government financial support should be efficient and fully reflected in the budget.

Directors urged the authorities to improve the transparency and accountability of public financial management and step up their fight against corruption. They were encouraged by the authorities' intention to join the Extractive Industries Transparency Initiative and implement a comprehensive oil metering system as soon as possible.

Directors underscored the need to put in place a new legislative framework for the hydrocarbon sector as soon as possible, which, along with an improvement in the security situation, would help strengthen the investment environment to significantly increase oil production.

Directors welcomed the steps taken in strengthening financial safeguards at the central bank. They urged the CBI to step up its efforts to address all the recommendations of the Fund's interim safeguards assessment report, as well as the Ernst & Young interim 2006 audit report.

Directors commended the authorities' intention to maintain an open trade regime. They supported the authorities' efforts to secure World Trade Organization accession. While keeping the present low import tariff, Directors stressed the importance of increasing revenues by scaling down exemptions and strengthening the customs administration.

Directors commended the authorities for the new investment law, which provides an important framework for attracting much-needed foreign investment. They encouraged the authorities to establish the National Investment Commission as soon as possible. Directors welcomed the authorities' efforts to conclude debt agreements with the remaining official and private creditors. They urged the government and those official creditors still to provide debt relief to conclude debt agreements expeditiously.

Directors stressed the critical need to further improve the statistical database. (IMF14.08)

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11.5 KUWAIT: Transport on the Move

Even as Iraq continues to strive towards political stability, the Oxford Business Group observed that Kuwait's role as a logistics and transport provider to both its neighbor and the region continues to grow, bolstered by a still active US military presence. Last month, shares in Kuwait-based Agility Logistics rose nearly 7% after it announced its partnership with US-based DynCorp in a $50bn contract with the US military. The ten-year contract, which covers a variety of transport and support services, is said to be worth up to $5bn a year. Agility's role in the deal extends to supply-chain and warehouse functions.

The agreement follows on from a number of additional contracts Agility has recently renewed with the US military, including a $60m US Air Force base maintenance deal in Spain and a separate food supply deal worth $2.8bn. A three-year contract, worth an estimated $345m, recently saw Agility taking over a variety of logistics services, from motor pool to mess operations, at coalition and US bases throughout Iraq. Kuwaiti companies are in a prime position to tap into this lucrative market. Tarek Sultan, CEO of Agility Logistics, told OBG, "the statistics are really quite clear: a growing number of global growth dollars are coming from the Middle Eastern market".

Kuwait's location is a vital factor to the sector's success, particularly for the lucrative Iraq-related military contracts. Given the limited - albeit dynamic - scope of Kuwait's market and the challenges of upgrading the country's major ports, the focus for many logistics companies is to expand their regional footprint and take advantage of the country's ideal placement to grow their businesses in neighboring states.

Sitting at the mouth of waterways to Iraq and Iran, Kuwait has the potential to serve as a major deep-sea staging point for a variety of regional logistics activities. Its Shuaiba and Shuwaikh ports often find themselves struggling to compete with the larger and higher-capacity facilities in the United Arab Emirates (UAE), but plans are afoot to launch a new mega-port on Boubyan Island that will provide easy access to Umm Qasr, in Iraq, and - if all goes according to plan - rail links to Iraq, Iran and Saudi Arabia.

Mohammed al-Muaili, vice president for Kuwait-based fleet operator Mubarrad Transport, told OBG, "As Kuwait has a relatively small domestic market, the focus of the transport industry should be on increasing the country's status as a regional transit centre. The country is a natural hub for the region, given its location and accessibility."

While Kuwait's logistics companies continue to reap the benefits of the post-invasion boom of 2003, many of them have been on an aggressive expansion streak overseas, as they look to diversify away from a heavily saturated military logistics market and reduce their dependency on this niche sector. Industry analysts have suggested that the military market has already passed its zenith and, in the future, the majority of freight entering Kuwait will be civilian and commercial, rather than military. This is not only due to the subtle diminishment of military operations but also to the growth in the expatriate population and increase in private sector activity in the country.

Agility, for example, has expanded its commercial operations in the US and Europe, multiplying its warehouse space in Paris, Amsterdam and Houston. It has also set about spending over $100m in acquiring new companies in Australia and China, including Guangzhou-based Guangzhou Runtong International Transportation Company. According to Wolfgang Hollermann, the CEO for the Asia Pacific region for Agility, the acquisitions are part of a strategy to boost the company's presence in the Pacific Rim. "In our strategy," he said, "Asia plays a top role for potential investments."

Another Kuwait-based company, Kuwait and Gulf Link Transport, has been bolstering its port operations in both the UAE, where it is pouring $250m into upgrading the container terminal at the Saqr Port in Ras al-Khaimah, and in Egypt, where it is planning on spending over $1bn on a container terminal at Damietta. (OBG10.08)

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11.6 BAHRAIN: Streamlining Oil and Gas

The Oxford Business Group reports that in a bid to consolidate its oil and natural gas industry, Bahrain has announced the establishment of a single company to co-ordinate the kingdom's energy. On August 1, Abdul Hussain bin Ali Mirza, minister for oil and gas affairs, announced that an agreement had been signed to set up the Holding Company for Oil and Gas (HCOG). With an established capital of $2.6bn, the new company will fall under the remit of the National Oil and Gas Authority (NOGA), of which Mirza is also chairman.

Under the agreement with Bahrain's various state oil and gas companies, HCOG will control the government's stakes in the country's main energy firms and undertake investments in the sector on behalf of NOGA. It will also be empowered to establish new companies and have or acquire stakes in projects within Bahrain or globally. The companies covered within HCOG's holdings include the entirely state-owned Bahrain Petroleum Company (BAPO) and Bahrain Gas Company Expansion as well as Bahrain Aviation Fuelling Company (BAFCO) (60%), Gulf Petrochemical Industries (33.3%) and the Bahrain National Gas Company (BANAGAS) (75%). The actual recorded value of the state-owned stakes in each of these companies will also be transferred to HCOG.

The decision to streamline the kingdom's energy industry is in line with plans approved by the cabinet on July 29 and is in part due to efforts to meet the needs of the private sector, said Mirza. HCOG will "open a new era in attracting greater investments into the kingdom's oil and gas sectors," said the minister. Mirza said HCOG would be responsible for signing contracts with individuals, companies and organizations in the energy industry. Though initially based in Manama, the company may branch out and establish offices abroad, he said.

The greatest advantage that HCOG will bring to the oil and gas sector will be the reduction of the number of companies and agencies foreign investors, clients and service providers will have to deal with. The move is also expected to cut administrative costs, speed up the decision-making process and help provide more of a one-stop shop. The founding of the holding company is part of a broader government program to reform and consolidate the kingdom's economic operations.

The decision to set up HCOG comes at a time of unprecedented international interest in Bahrain's energy sector. On July 31, Mirza announced that 25 foreign firms had expressed interest in conducting exploration work in the waters off the kingdom's coast. Earlier this year, the government opened up four new offshore blocks for initial exploration, with September 19 as the final deadline for bids to be lodged.

While no precise date has been given for HCOG to start operations, the minister said NOGA has already created all of the necessary regulatory measures and a team of executives is in place. All that remains is for a royal decree to be issued for the company to be launched, said Mirza.

Though one of the early leaders in the Gulf region's oil industry, with production starting more than 70 years ago, it has been long eclipsed by its larger and more resource rich neighbors. Industry experts estimate that the current reserves stand at 125 million barrels of oil and 92 billion cu meters of gas. (OBG10.08)

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11.7 DUBAI: Istithmar Wins Battle for Barneys

Japan's Fast Retailing has raised the white flag in its drawn-out struggle with Dubai investor Istithmar to gain control of top-end US clothing retailer Barneys New York. The Oxford Business Group announced that Fast Retailing was pulling out of the race for Barney's on August 8, after Istithmar upped its offer for the US chain to $942.3m. Though this was still below the Japanese firm's offer of $950m, Jones Apparel Group - the parent company of Barneys - would have had to pay an indemnity of $34.7m to Istithmar if it reneged on an earlier agreement to sell the company to the Emirati investor.

Though the dust has yet to settle, Istithmar has come out the clear winner, though at a price beyond what it initially thought it was going to pay for chain, which has 34 stores and outlets across the US. On June 22, Istithmar offered a bid of $825m for Barneys that it thought had been accepted.

The public announcement of the Dubai offer then sparked a heated bidding war, with Fast Retailing entering the fray with a counter offer of $900m in July. Having matched this, Istithmar again had the inside running, due to the penalty clause. Then on August 5, the Japanese company upped the ante again, increasing its offer by another $50m, with Istithmar responding the next day with its final, and ultimately winning, offer.

Though given a deadline of August 9 to lodge one more bid, Fast Retailing instead issued a statement on the Tokyo Stock Exchange, saying it had withdrawn its amended proposal to buy the US chain. Jones Apparel then announced it had signed a final agreement with Istithmar to sell Barneys, saying the deal was definitive. Istithmar's winning bid also puts Jones Apparel in the winner's circle, with the sale price more than double the $400m it paid for Barneys just three years ago.

So, what has Istithmar, a division of Dubai World, got for its money? Founded in 1923, Barneys currently has five main stores in New York City, Beverly Hills, Chicago, Boston and Dallas, along with two regional full-price stores, 14 reduced-price shops operating under the name CO-OP Barneys New York, and another 13 outlet stores. Among the luxury lines it carries are Marc Jacobs clothing and Christian Louboutin shoes. Currently, it has a staff of around 1,400. The company, which along with designer clothing for men, women and children, also sells shoes, accessories and home furnishings, had declared sales of $104m last year.

David Jackson, Istithmar's CEO, said Istithmar would expand Barneys New York into markets in Asia and the Middle East if it gained control of the company. "The number of high-net-worth individuals being created in the Middle East and China and other places [..] we see that there is an even greater market for Barneys," he said. By contrast, Fast Retailing had wanted to gain control of the chain to give it an opening into the US market, building on its existing 1800 stores across 12 countries and increasing the profile of its own brands such as Theory, Comptoir des Cotonniers and Princesse tam.tam.

Istithmar obviously places a high value on Barneys, paying well over what Jackson had said in July was a full and fair offer and the true worth of the company. However, having said at the time that in situations such as the Barney's bidding war one had to wait for the opponent's final offer and then "decide what you do at that point", the decision was obviously made that the move into upmarket apparel was worth making.

Having agreed to pay over the odds, Istithmar will have to sit back and take stock of what it will take to make Barneys New York an international brand name. The most apparent starting point is branching out in Dubai itself. Barneys New York has long operated under the slogan "Taste Luxury Humor". Though Istithmar may have had its sense of humor stretched by having to pay more than $100m extra for the chain than it originally planned, it has the luxury of being able to taste success. (OBG10.08)

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11.8 Northern Emirates: Healthcare Gets Capital Injection

The UAE's Ministry of Health announced a strategic reform plan for the healthcare sector. The ministry aims, over the next three years, to unify healthcare policies across the country and will seek to offer more specialized treatment. The 35 initiatives include creating an electronic network linking hospitals and health centers, and developing a medical archiving system and national health database in addition to upgrading the Emirates' healthcare facilities.

Detailing the objectives of the plan, Minister for Health Hamid Al Qatami said, "The strategy reflects the ministry's determination in upgrading services. The ministry will also focus on enhancing its regulatory role and will strive to raise the level of its high caliber scientific, technical and administrative personnel." The ministry will no longer play a dual role as the Emirates Health Authority will provide medical services while the ministry of health will remain the sector's regulator.

In an effort to accommodate the rapid growth in demand for healthcare services in the Northern Emirates, the ministry has announced significant upgrades in the sector, including plans to spend over $545m in new medical facilities. "The ministry's ultimate objective is to lay the foundation for sustainable development within the healthcare sector, which follows international best practices," said Al Qatami. Rapid population expansion, changing social demographics and a high prevalence of diseases such as diabetes have all contributed to the need for a large capital injection into healthcare facilities.

In Sharjah, the ministry announced the construction of a 200-bed, $95m, obstetrics and gynecology hospital, five primary health clinics and a $7.6m dental clinic in Khorfakkan. The ministry stated $5.5m has been earmarked for building an open heart surgery centre in the emirate, which is claimed to be the first of its kind in the emirates. In Ajman, a $41m expansion project at the Sheikh Khalifa Hospital will add a gynecology ward, with work scheduled for completion by end of 2008. By next year, the ministry will launch a $13.6m hospital at Massfout, a $5.5m dental clinic, an $8.2m preventive medicine clinic and a $2.7m primary health centre.

The ministry said $163.4m had been earmarked for the construction of the Ras al-Khaimah Specialists Hospital, with work planned to start early next year. Plans for the emirate also include $27.3m for the renovation of the hospital in Sham, $2.7m for a health centre and $6.8m for a nursing institute. A primary healthcare centre will open next month in Gulfar. Looking to the East in Umm al-Quwain, the ministry announced that contractors would be invited to submit offers in September for building a 200-bed hospital for an estimated cost of almost $109m. Centers for preventive medicine, school, dental and primary health are also in progress.

In Fujairah, Al Qatami said $6.8m would be spent on building a nursing school and $16.4m to add a maternity and childcare ward at Fujairah hospital. The $19m Massafi hospital is anticipated to be completed during 2007.

The new health authority has been tasked with introducing a training program for doctors, which will include rotational training at the newly created referral centers. "Hospitals will be remodified under the EHA," said Dr Miriam Mohd Matar, assistant undersecretary for public health and primary healthcare at the ministry of health. "For example, Ajman will become our referral centre for orthopedic and trauma diseases, and Sharjah, will have a referral centre for antenatal care and gynecology. Staff from each centre will rotate to gain training in each of these specific areas." (OBG16.08)

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11.9 NORTHERN EMIRATES: Gaining as an Energy Partner

Estimates suggest that by 2050, up to half of the electric energy for the United Arab Emirates (UAE) could come from renewable sources. As the price of oil hit a record high on August 1, the Northern Emirates are eager to mitigate the rising cost of oil by investing in alternative energy sources to meet increasing power demand. The emirates have recently announced the formation of various new international partnerships in energy supply projects in an effort to cope with energy and water supply shortages.

On the same day oil prices hit the record books, British Petroleum (BP) and the government of Sharjah announced they would be working together on developing a new long-term energy strategy. "We are assisting the government of Sharjah with a review of its long-term gas strategy and what alternative sources of energy may be feasible," said a BP spokesman.

The partnership is part of Sharjah's objective to develop an energy Master Plan for the period up to 2025. State-owned Sharjah Electricity and Water Authority (SEWA) has turned to BP, Europe's second largest oil company, and Abu Dhabi's Dolphin Energy to supply the emirate with gas in the short term. The emirate was forced to partner with other gas suppliers due to the rising cost of meeting the domestic power demand.

Another reason behind this newly formed partnership is strategic. For more than a year, Iran has delayed Sharjah's gas imports from Crescent Petroleum, a privately owned UAE-based oil company. The emirate has been forced to operate without its daily supply of 2bn cu ft of gas due to Iranian demands to renegotiate the gas sales price, which has put immense pressure on Sharjah's power supply network.

Similar to other Northern Emirates, Sharjah's current population is rising steadily and currently sits at 650,000. This is in part attributable to a growing number of people choosing to live outside Dubai because of rising rental prices and the rapid industrial boom. As a result, the emirate's power demand has increased dramatically, reaching 1650MW for 2007. The output of Sharjah's Sajaa field can only meet 60% of this demand.

On August 1, SEWA began operating two new power-generating units with a combined capacity of 80MW at Wasit Power Station, boosting the plant's total capacity to 960MW. Earlier this year, SEWA implemented plans for a third and fourth unit at Sharjah's Hamriyah power station, with a combined capacity of 200MW. These new projects aim to increase power generating capacity to 2382MW during the current summer to ensure smooth and regular supply of water and electricity to SEWA's clients, SEWA Director General Waled bin Khadem told local media.

Fujairah is quickly becoming the UAE's preferred destination for new power plants, energy storage and water treatment facilities. The emirate is being considered for a number of new projects as it is the only emirate positioned along the Gulf of Oman. Fujairah will be home to a new $2.8bn power and water desalination plant, built by Abu Dhabi Water and Electricity Authority (ADWEA), which is partnering with the UK's International Power (IP) and Japan's Marubeni Corporation. The power plant will produce 2000MW of power and around 130m gallons per day of water and is expected to start up in 2010, according to an IP statement.

Plans also exist in the emirate for a $2bn liquefied natural gas storage (LNG) facility. The state-run Dubai Multi Commodities Centre has partnered with LNG Impel, a subsidiary of Canada's Galveston LNG, for the development of the facility, a senior official stated. Fujairah is under consideration due to its strategic geographic location as tankers do not have to pass the heavily congested chokepoint of the Strait of Hormuz. In addition to its convenient location outside the Arabian Gulf, the eastern emirate of Fujairah is one of the world's biggest ship refuelling ports. Also, its location enables savings on transport costs, as shippers have to pay a war risk insurance premium for entering the Gulf. The planned facility will have the capacity to store up to 3m cubic meters of LNG. (OBG10.08)

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11.10 SAUDI ARABIA: Utilizing Oil and Gas

According to a recent report, as noted by the Oxford Business Group, Saudi Aramco's crude oil production has reached 10.8 million barrels per day. The kingdom plans to raise production further, but is also looking increasingly for gas to fuel the future. The mid-year accountability report said the country's gas producing potential has become a top priority to fuel domestic expansion.

Global oil demand is forecast to expand by 1.9 million barrels a day, or 2.2 % year-on-year, reaching 95.8 million bpd by 2012, according to the International Energy Agency (IEA). The fastest growth will occur in the Middle East and Asia where total demand in China is expected to reach almost 10 million bpd in 2012, significantly greater than its current domestic production of about 3.9 million barrels a day.

Saudi Arabia has estimated reserves of 264 billion barrels, roughly a quarter of the world's total. The Saudi government is now beginning to employ some of its fields of heavy oil in Wafra. Heavy crude is expensive and complicated to process so the kingdom plans to use it for domestic industrial purposes, making more light crude, with its higher margins, available for the export market.

Oil, gas and refining were estimated to be worth 59.4% of GDP in 2005. The government wants to increase the role natural gas plays in the economy. This prioritization, similar to other Gulf countries, comes from a need to diversify the economy by fuelling local industries in a bid to develop a more balanced economy. The government has stated the kingdom would use growing supplies of natural gas and feedstock from related petrochemicals facilities to fuel clusters of industries, such as car manufacturing, building materials, household appliances and metals. Gas is presently the cheapest and cleanest fuel available for industries, which are of major importance to the overall diversification process. Ample gas reserves would power a profitable industrial sector.

Ali Naimi, Saudi Arabia's oil minister recently told a conference in Riyadh, "This program will allow the kingdom to enter into a new phase of industrial investment." Naimi said the government would work with the private sector to meet this goal of utilizing natural gas. The main focus is in the Empty Quarter (Rub al-Khali), the largest sand desert in the world, which occupies much of southern Saudi Arabia. The exploration is being carried out by the South Rub al-Khali Company (SRAK), which is an incorporated joint venture operating on behalf of its three shareholders, Royal Dutch Shell (40%), France's Total and Saudi Aramco (30% respectively). It may be some time before any significant finds are made, and even then the quality of the gas underneath the sand dunes is not clear, according to industry experts.

The IEA also expects natural gas consumption to increase around the world over the next 25 years by an average 2% per year to reach 4.7trn cu meters by 2030. Although Europe is expected to be importing about 90% of its natural gas needs by that time, the fastest growing countries will once again be China, where demand will grow 5.1% per year, India at 4.2% and Brazil at 3.8%. Therefore, any significant expansion to Saudi Arabia's gas capabilities will be welcome news to domestic industry, not to mention the kingdom's potential longer-term export earnings. (OBG10.08)

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11.11 EGYPT: Banking System Outlook Stable; Positive Medium-Term Prospects

The outlook for Egypt's banking system is stable, reflecting continued progress with the reform program together with an improving operating environment, says Moody's Investors Service in its latest Banking System outlook for the country published on 6 August. "Considerable progress is being made, with a number of the issues that have been problematic in past years currently being addressed," says Constantinos Kypreos a Moody's AVP/Analyst and author of the new report.

This is gradually leading to an overall strengthening of the banking sector. As part of the Central Bank of Egypt's (CBE) banking sector reform program, the following have taken place:

• Banking sector consolidation has intensified, with the number of banks operating in the country down to 41 (September 2004: 57). State-owned banks have been selling their stakes in joint-venture banks (as well as other equity holdings) and in the process realizing significant capital gains, which are used to build provision reserves, while weak and inadequately capitalized banks/branches of foreign banks have either merged with other banks or ceased operations.

• The financial and operational restructuring of the state-owned banks has allowed for experienced bankers from the private sector to be recruited; early retirement schemes have been introduced to reduce employee numbers, while the restructuring by outside consultants of the IT, human resources, and risk management functions is progressing well.

• A final agreement was reached with the Ministry of Investment relating to state-owned banks' non-performing loan (NPL) exposures to public sector enterprises. On top of the E£6.9 billion already paid to Bank of Alexandria (BoA), E£19 billion will be allocated to the remaining state-owned banks; approximately half this amount has already been paid, in January 2007. With regard to private sector NPLs, new legislation, procedures as well as a special unit within both the CBE and the banks were introduced, which has allowed for more than 50% of these NPLs to be rescheduled or settled. The government is also committed to recapitalising the state-owned banks from the proceeds of a policy loan from the World Bank and African Development Bank.

• CBE's banking supervision capabilities are being upgraded, although ongoing development of the regulatory and supervisory framework is required. "With the above in mind, but also in light of an improving operating environment, we see limited downside risk to the bank financial strength ratings (BFSR) of the rated Egyptian banks" says Kypreos. "However, any potential upgrades would be more of a medium-term proposition, as we believe it will take time for the (state-owned) banks to resolve their financial issues, address their bureaucratic habits and capitalize on the longer term potential offered by the underdeveloped retail and SME sectors," the analyst adds.

Moody's also expects the differentiation in ratings between private and state-owned banks to remain, as the leading private sector banks benefit from stronger management teams, better operating systems, better asset quality and higher levels of capital and earnings.

Egyptian banks' global local currency deposit ratings are supported by their Baseline Credit Assessment, as well as by the rating of their underlying support provider, Egypt's A3 local-currency deposit ceiling. On average, the rated Egyptian banks receive a 3.4-notch uplift from their Baseline Credit Assessment (state-owned banks: four notches), based on strong imputed systemic support. Moody's views Egypt as a high support country. (Moody's06.08)

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11.12 TUNISIA: Fitch Affirms Tunisia at 'BBB'; Outlook Stable

On 8 August, Fitch Ratings (http://www.fitchratings.com) affirmed Tunisia's ratings at Long-term foreign currency Issuer Default (IDR) 'BBB' and Long-term local currency IDR 'A-' (A minus). The Outlook for both ratings is Stable. The Short-term foreign currency IDR is affirmed at 'F2' and the Country Ceiling is affirmed at 'BBB+'.

Tunisia continues to enjoy good and stable growth with low inflation and modest current account and budget deficits. The country also benefited from a number of positive developments in 2006, in particular the sale of a minority stake in the national telecom company, Tunisie Telecom, which allowed the state to speed up public and external debt reduction. International liquidity indicators also improved markedly, as a result of large foreign currency inflows. Fiscal performance was better than expected, with a budget deficit of 3.1% of GDP, and GDP growth accelerated to 5.4% from 4.2% in 2005, driven by sustained growth in manufacturing and services. The banking sector also showed some improvement, with reduced non-performing loans and improved profitability.

However, economic growth averaging over 5% over the last four years has not been sufficient to reduce unemployment, which remained over 14% in 2006. Only a small fall can be expected in the short- to medium-term, as Tunisia continues a gradual process of economic reform. This strategy has helped ensure the sustainability of reforms, by avoiding radical change that could lead to social or political disruption. The resulting economic and political stability is one of Tunisia's main credit strengths. Economic policies have wide support from the population, as priority has always been given to social policies, in particular to job creation. Although the majority of the population is Muslim, radical Islamism has been practically eradicated from political life.

However, other rating peers in the 'BBB' category are reforming more quickly and seeing faster improvement of key indicators of creditworthiness. In particular, although Tunisia's public and external debt ratios have fallen, and are forecast to continue improving, both remain significantly above 'BBB' medians and are expected to remain so for the foreseeable future. The budget deficit is expected to fluctuate between 2.5% and 3% of GDP in 2007-2009, which should allow a reduction in public debt to just below 50% of GDP by 2009. However, this figure is still high compared to Tunisia's peer group median of around 30%. Fiscal performance remains affected by a high public wage bill and substantial state subsidy of basic products (oil in particular).

The current account deficit is expected to remain at around 2.5% of GDP and with FDI having grown markedly and foreign debt repayment prioritized, Tunisia's net external debt has fallen below 60% of current external receipts. However, this compares with a 'BBB' median of just over 30%. Even though further improvement is expected in the forecast period, Tunisia's ratio is only expected to approach that of its peers until 2009.

Tunisia has demonstrated substantial resilience to external shocks, such as the impact of 11 September 2001 on tourism receipts and the dismantling of the Multi-Fibre Arrangement (MFA) on its textile exports. Export competitiveness has improved and exports of higher-value-added manufactured goods, such as automobile components, are growing fast. The textile industry has also withstood the opening of the EU market to Asian exporters in 2005. The opening of Tunisia's market to European exports in 2008 and, over the longer term, to services, represents a further challenge, with large areas of the economy, such as services, still protected by trade barriers and facing the threat of increased competition. This is particularly the case for the banking sector, which, in Fitch's view, is one of Tunisia's main credit weaknesses. The central bank (BCT) has gradually introduced measures to restructure and modernise the financial sector. Nevertheless, additional measures will be necessary to prepare the financial system for the opening of Tunisia's capital account and the floating of the Tunisian dinar (TND) scheduled for 2009. (Fitch Ratings08.08))

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11.13 TURKEY: Flashing the Energy Card

Ankara caused indignation in the US and Cyprus in mid-August after solidifying a natural gas agreement with Iran and confirming plans to explore for oil and gas in the eastern Mediterranean. The Oxford Business Group observed that while Washington is clearly unimpressed by the expanding cooperation between the Turks and Iranians in energy exploration and delivery, Nicosia is up in arms about Turkish plans to exploit underwater resources in their vicinity, despite doing so themselves. The Europeans have reason to be ambivalent.

When a Turkish delegation visited Tehran on August 12 to add flesh to the bones of a memorandum of understanding (MoU) in energy, the US was understandably irked. Though UN sanctions against the Islamic Republic do not directly apply to energy trade or investment in Iran, any commercial and trade deals that help lift Iran from its nuclear-induced isolation is likely to trigger US censure. That Turkey's state-owned exploration company TPAO is prepared to develop and operate three natural gas fields in Iran, investing a projected $3.5bn to this end, has hardly alleviated Washington's displeasure

US Ambassador to Turkey Ross Wilson recently elaborated on these concerns: “the MoU between Ankara and Tehran could pose a serious challenge to the decade-long work conducted by Turkey and the US to exploit and deliver Caspian gas resources to Turkey and international markets. Gas resources in Kazakhstan, Azerbaijan and western Turkmenistan may not be developed as far as they could, should a surge in gas exports from Iran steal the show. The MoU between Iran and Turkey intends to deliver 30bn cubic meters (bcm) of Iranian and Turkmen gas to Europe through Turkey.”

Though clearly concerned about Iran's continued nuclear defiance, the Europeans and Turks are swayed by other considerations, that is, local energy demand. The Turkish/Iranian energy deal would help wean Europe off Russian energy supplies - an important priority considering Moscow's tendency to restrict energy flows and apply arbitrary price increases to less-muscular neighboring states. Moscow has also shown an increased appetite for political rupture with Europe and the US, whether over spies or missile defense.

The planned delivery of Iranian gas through the EU-backed Nabucco pipeline project would play a key role in reducing Europe's dependency on Russian energy supplies. According to the EU Commission, 30% of the EU's oil imports and 50% of its gas imports come from the Russian Federation.

Aside from its role as an energy bridge, Turkey too wants to diversify the sources from which it extracts its energy supplies, with 97% of national gas needs coming from neighboring states energy experts say. According to a 2006 report by the International Energy Agency (IAE), 65% of Turkey's natural gas requirements are delivered from Russia.

The Turks meanwhile remain as pragmatic as ever. Grumbling from Washington over Turkish / Iranian energy deals may echo Turkish calls for Washington to confront the Kurdistan Workers' Party (PKK) in northern Iraq.

Turkey is also embroiled in an energy exploration row with the Greek Cypriot government. In retaliation for a move by Nicosia to tender oil and gas exploration and drilling rights off the Mediterranean island's south coast, Ankara has given TPOA the green light to explore oil and gas in the eastern Mediterranean region.

The tit-for-tat response was met by a predictable Greek-Cypriot riposte, threatening once again to block Turkey's EU accession process and refusing to allow the opening of the energy chapter for accession. This is despite Turkey's claimed rights over underwater resources in the region. The area Greek Cyprus has targeted for exploration is 70,000 square kilometres in size, versus a comparatively modest 4,000-square-kilometers targeted by Turkey. An estimated $400bn worth of oil (6-8bn barrels) lie off the coast of Cyprus, according to regional energy experts.

Brussels is more than aware of Turkey's importance as an energy conduit feeding Europe and is divided about Nicosia's continuous spoiling tactics and threat to derail Turkey's EU accession drive. As with the status of the troublesome island, the energy dispute between Nicosia and Ankara is likely to continue to fester while Turkey continues to grow as a regional energy bridge. (OBG17.08)

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- Israeli Shekel conversions done at a rate of NIS 4.30 = $1.00
- Turkish Lira conversions done at a rate of NTL 1.5 = $1.00
- Cypriot Pound conversions done at a rate of C£ 1.00 = $1.60
- Jordanian Dinar conversions done at a rate of JD 1.00 = $1.41
- UAE Dirham conversions done at a rate of Dh 3.70 = $1.00
- Omani Rial conversions done at a rate of OR 0.385 = $1.00
- Pakistani Rupee conversions done at a rate of Rs 60 = $1.00

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