Fortnightly - October 22, 2014

EDI Fortnightly Report

TOP STORIES

TABLE OF CONTENTS:

 1: ISRAEL GOVERNMENT ACTIONS & STATEMENTS

1.1  Netanyahu Government Approves 2015 Budget After Marathon Debate
1.2  Sheshinski Recommends Progressive Tax Rate for Mining Activities 
1.3  Government Seeks Buyer for Israel Military Industries

 2:  ISRAEL MARKET & BUSINESS NEWS

2.1  Destination Maternity Expands With Israel Franchise 
2.2  Tamar to Supply Israeli Gas to the Egyptian Market  
2.3  Israeli Social Gamer Diwip Sells for $100 Million   

 3:  REGIONAL PRIVATE SECTOR NEWS

3.1  Boeing Sees Funding Boom for Middle East Plane Deliveries
3.2  Yahoo Said to Cut About 80 Jobs in Jordan, Closing Office
3.3  Lockheed Martin $90 Million Contract for Qatar Apache Systems
3.4  Saudi Airports Rated Worst in the Middle East
3.5  Great Lakes Dredge & Dock Corp. to Deepen and Widen the Suez Canal

 4:  CLEAN TECH & ENVIRONMENTAL DEVELOPMENTS

4.1  GIZ Earmarks €6.5 Million to Address Environmental Challenges in Jordan 
4.2  Jiza to House Jordan’s First Residential Eco-Village 
4.3  IFC to Fund Construction of Seven Solar Power Plants in Jordan 
4.4  UAE to Help Finance Oman's $200 Million Wind Farm Project 

 5:  ARAB STATE DEVELOPMENTS

5.1  Lebanese Budget Deficit Drops on Higher Revenues
5.2  Funding Approved for Lebanon's Water Supply Project 
5.3  Remittances to Lebanon to hit $7.7 Billion 
5.4  Construction Commences on Jordan’s Wadi Al Karak Dam
5.5  Iraq Still Owes Kuwait $5.7 Billion for Invasion

♦♦Arabian Gulf

5.6  Half of UAE’s $13 Billion 2015 Budget to Be Spent on Social Services
5.7  UAE Launches Innovation Plan
5.8  Saudi Inflation Remains Unchanged at 2.8% in September

♦♦North Africa

5.9  Egypt Will Return $500 Million to Qatar In October

 6:  TURKISH, CYPRIOT & GREEK DEVELOPMENTS

6.1  Turkey Cuts Growth Estimates While Raising Inflation Forecast 
6.2  Turkey’s Energy Imports to Pass $181 Billion 
6.3  Cyprus Uses Recycled Water as a Steady Source for Irrigation 

 7:  GENERAL NEWS AND INTEREST

♦♦ISRAEL:

7.1  Sea of Galilee Begins its Winter Climb
7.2  Jewish Legion Founder's Final Wish Honored As Ashes Buried in Israel 

♦♦REGIONAL:

7.3  Hijri New Year Begins on 24 October 

 8:  ISRAEL LIFE SCIENCE NEWS

8.1  Israeli & Jordanian Researchers Team on Leishmaniasis Treatment
8.2  Evogene’s Evofuel & Embrapa Advance Castor Cultivation in Brazil 

 9:  ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1  Mellanox Selected for New HP 64-bit ARM Data Center Platform
9.2  Essence's Latest Version of WeR@Home Released 
9.3  MIRAGE 2.0 Group Messaging Enhances Real-Time Experience 

 10:  ISRAEL ECONOMIC STATISTICS

10.1  Israel’s CPI Surprising September Decline

 11:  IN DEPTH

11.1  MENA: Reforming Energy Subsidies Could Boost Growth in Region
11.2  ARAB STATES: Half of Arab State Citizens Subscribe to Mobile Networks
11.3  LEBANON: S&P Affirms Ratings at 'B-/B'
11.4  SAUDI ARABIA: Falling Oil Prices and Saudi Decision Making
11.5  EGYPT: Moody's Upgrades Egypt's Outlook to Stable
11.6  EGYPT: Egypt Initiates Plan To Ensure Food Security
11.7  EGYPT: Signs of Rebound in Egypt’s Tourism Sector
11.8  EGYPT: Aiming at 20% of Power from Renewables by 2020
11.9  MOROCCO: Phosphate Companies Target Higher Output
11.10  TURKEY: Turkey Lowers Economic Targets
11.11  TURKEY: Turkey Uses Defense Industry As Political Instrument
11.12  TURKEY: As US Economy Recovers, Turkey's Falters

1:  ISRAEL GOVERNMENT ACTIONS & STATEMENTS

 1.1  Netanyahu Government Approves 2015 Budget After Marathon Debate

On 9 October, the Netanyahu government approved the 2015 budget, following a marathon debate that went on late into the night.  At the last moment, just ahead of the cabinet meeting, Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid agreed to expand tax breaks, amounting to tens of millions of shekels, for 42 peripheral communities, counter to the recommendations of Finance Ministry experts.

20 ministers voted in favor and only Minister of Environmental Protection Peretz voted against.  Most of the ministers did not bother to stay until the vote at 1.30 am and left a note recording their vote.  The 2015 budget will amount to NIS 328 billion, NIS 12.5 billion more in real terms than the 2014 budget.  The budget includes a one-time amount of NIS 4.3 billion for the Defense Ministry to finance strengthening and developing the required means following Operation Protective Edge.  After reaching an agreement with Health Minister German, the Health Ministry's budget will increase from NIS 2.8 to NIS 3.1 billion.  The Welfare Ministry will receive NIS 1.7 billion to fight poverty and another NIS 1.4 billion allotment which includes considerable funds earmarked for Holocaust survivors.  The Interior Ministry will receive an additional NIS 1 billion and the Education Ministry will have NIS 1.8 billion added to its 2015 budget, with an additional NIS 200 million earmarked for higher education.  The budget deficit target is 3.4%.  (Various 08.10)

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 1.2  Sheshinski Recommends Progressive Tax Rate for Mining Activities

A government panel on 20 October proposed sharply raising taxes on mining activities, but it softened the blow by recommending a progressive, rather than flat, rate ranging from 25 to 42%.  The hike drew the ire of the country's largest mining firm, potash and specialty chemicals maker Israel Chemicals (ICL), which has lobbied heavily against the tax.

In a final report, the 2nd Sheshinski Committee recommended a progressive tax of 25% after companies reach an annual return on investment of 14%, rising to 42% for a return above 20%.  In an interim report issued in May, the panel had recommended a flat 42% tax rate.  Companies would also pay the government royalties of 5% of their revenue.  ICL, which mines minerals from the Dead Sea, said the recommendations were populist and called on Finance Minister Yair Lapid to reject them.

Israel's government currently takes in about 23% in taxation from mining companies but that would ultimately rise to 46 to 55%, or an additional $107 million.  The first Sheshinski Committee in 2011 raised taxation on oil and gas companies after two huge natural gas finds off Israel's Mediterranean coast.  The prospect of paying less to the state than previously expected pushed ICL's shares up 1.3% in Tel Aviv.  Still, the shares are still down 46% since the start of 2013, partly due to the threat of higher taxes as well as falling potash prices.  ICL, which last month listed its shares in New York, is 14% owned by Potash Corp of Saskatchewan.  (Ynet 20.10)

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 1.3  Government Seeks Buyer for Israel Military Industries

The Israeli government has approached the world's leading investment banks including UBS, HSBC, Meryl Lynch, JP Morgan, Citi Bank and Deutsche Bank as it attempts to find a buyer for Israel Military Industries (IMI).  Defense industry sources have estimated in the past that the state would be able to sell IMI for NIS 2.5 - 3 billion.  This price includes the company's physical infrastructure, its intellectual property and its estimated NIS 8 billion orders backlog with various customers in Israel and overseas  Simultaneously with inquiries to the investment banks, the Government Companies Authority is preparing to publicly announce in two months that it will brief private investors about the beginning of proceedings to sell the company, and asking for preliminary bids to acquire it.  The bids will be assessed by the Companies Authority and the Ministry of Defense, which will later allow access to information rooms, including the company's confidential financial particulars.

In the middle of 2014, as part of the privatization plan, early retirement of hundreds of IMI workers began according to agreements reached on the matter with the Histadrut (General Federation of Labor in Israel).  By the end of the year, 600 employees are expected to retire.  (Globes 12.10)

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2:  ISRAEL MARKET & BUSINESS NEWS

 2.1  Destination Maternity Expands With Israel Franchise

Philadelphia’s Destination Maternity Corporation, the world's leading maternity apparel retailer, announced it will expand into Israel through an international franchise agreement with H&O Fashion (H&O), one of Israel's largest and dominant fashion-retail chains.  Through this relationship, Destination Maternity will introduce its Motherhood Maternity, A Pea in the Pod and Destination Maternity brands into Israel, with the first franchise locations expected to open in Spring 2015.  Destination Maternity brands will be sold through both shop-in-shops in select H&O stores as well as freestanding Destination Maternity stores.  H&O operates 45 stores in Israel under the H&O, Carters, and Oshkosh brand names.  The deal was accomplished with assistance from the Commonwealth of Pennsylvania’s Middle East Regional Office.  (Destination Maternity 15.10)

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 2.2  Tamar to Supply Israeli Gas to the Egyptian Market

The partners in the Israeli Tamar gas field report this morning that they have signed a memorandum of understanding (MOU) with Egyptian company Dolphinus Holdings for the export of up to 2.5 BCM of surplus natural gas from Israel to private Egyptian industrial customers, over a period of seven years.  The supply of gas will be on an interruptible basis, and will be of gas that the Tamar partners have available after meeting the needs of Israeli customers, but the partners undertake to supply a minimum of five BCM over three years.  The gas will be transported via the Israel Natural Gas Lines system to Ashkelon, and from there to Egypt via the EMG (East Mediterranean Gas) pipeline.

Since the gas supply is interruptible, Dolphinus' Egyptian customers will not commit to buying a minimum quantity.  The price set in the MOU is similar to that in other agreements for exporting gas from Israel and is mainly based on a formula that includes linkage to the price of a barrel of Brent crude and a "floor price".  The Tamar partners say that to the best of their knowledge, Dolphius represents a consortium of large non-government industrial and commercial gas consumers in Egypt, gas distributors and ventures of Dr. Alaa Arafa.  The partners in the Tamar field are Noble Energy (36%), Isramco (28.75%), Avner (15.625%), Delek Drilling (15.625%) and Dor Gas (4%).  (Globes 19.10)

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 2.3  Israeli Social Gamer Diwip Sells for $100 Million

Imperus Technologies Corporation of Mississauga, Ontario executed a share purchase agreement with Diwip (https://www.diwip.com), a Tel Aviv-based company that runs, among other things, Best Casino, a series of top-grossing Facebook gambling-but-not-for-money games.  Imperus will acquire all of the issued and outstanding shares of Diwip, although the transaction is subject to a number of conditions, including among other things, the approval of the TSX Venture Exchange and, if required, the approval of the shareholders of Imperus.  Social gaming apps, many of them on Facebook, provide the same games and experience as their casino brethren, but without requiring users to put up money to bet or fork out funds for membership.  Diwip’s games, including video slots, blackjack, poker, roulette, and others, are free, as are the games offered by other social gaming companies.  Although users don’t put up money to play, they do spend money on virtual goods to enhance their playing experience.  The games attract millions of users each month, so there are plenty of advertising and partnership opportunities for companies to pursue. 

Under the deal, Imperus will pay $50 million in cash and stocks up front for Diwip, with up to $50 million due over the next several years, depending on performance and revenue.  (Imperus Technologies 14.10)

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3:  REGIONAL PRIVATE SECTOR NEWS

 3.1  Boeing Sees Funding Boom for Middle East Plane Deliveries

Boeing said on 20 October that commercial financial institutions in the Middle East are increasingly funding the region’s record number of airplane deliveries.  Boeing forecasts that airlines in the Middle East will require 2,610 new airplanes over the next 20 years, worth an estimated $550 billion.  While one-third of that demand – 900 airplanes – will replace today's fleets, 66% of the demand is expected to be driven by the rapid fleet expansion in the region.  (AB 20.10)

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 3.2  Yahoo Said to Cut About 80 Jobs in Jordan, Closing Office 

Yahoo! is closing its office in Amman, Jordan, as the Web portal cuts back on its international operations.  The plans will result in the loss of about 80 positions, though relocations will be offered to some employees.  Yahoo will continue to support its websites in the Middle East from Dubai and other regional offices, the Sunnyvale, California-based company said.  Jordan’s office has helped support the Arabic-language portal Maktoob, Yahoo said.  The cuts come as the company comes under growing pressure from shareholders to better manage the company’s assets.  Activist shareholder Starboard Value LP, is seeking to break up the company and explore a possible merger with AOL Inc.  (Bloomberg 14.10) 

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 3.3  Lockheed Martin $90 Million Contract for Qatar Apache Systems 

Lockheed Martin received a $90.6 million foreign military sale contract from the U.S. Army to provide Modernized Target Acquisition Designation Sight/Pilot Night Vision Sensor (M-TADS/PNVS) systems to the Qatar Emiri Air Force.  Qatar marks the 14th international customer for the M-TADS/PNVS system.  Fielded in 2005, M-TADS/PNVS provides Apache pilots with long-range, precision engagement and pilotage capabilities for safe flight during day, night and adverse weather missions.  The Qatar sale is an option under the U.S. Army's Lot 9 contract, awarded to Lockheed Martin in May.  The option includes production of M-TADS/PNVS targeting and pilotage systems and spares for the Qatar Emiri Air Force's new fleet of AH-64E Apache attack helicopters.  It extends production in Orlando and Ocala, Florida, through 2017.  (Lockheed Martin 13.10) 

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 3.4  Saudi Airports Rated Worst in the Middle East 

Saudi Arabian airports have been ranked the worst in the Middle East in an online survey.  Three Saudi airports were included in the top five worst in the region, compiled by readers of the Canadian website sleepinginairports.net.  Jeddah King Abdulaziz International Airport was the worst – also taking out second place in a global list of the worst airports to sleep in.  Dammam King Fahd International Airport and Riyadh King Khalid International Airport were ranked fourth and fifth, respectively.  Sana’a International Airport in Yemen’s capital was voted second, followed by Damascus International Airport, Syria.  By contrast, the airports rated the best in the region were Dubai International, Doha Hamad International, Abu Dhabi International, Muscat International and Tel Aviv Ben Gurion International.  (AB 19.10)

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 3.5  Great Lakes Dredge & Dock Corp to Deepen and Widen the Suez Canal

Oak Brook, Illinois’ Great Lakes Dredge & Dock Corporation, the largest provider of dredging services in the US and a major provider of environmental and remediation services, announced that the Suez Canal Authority signed a contract with the Consortium consisting of Great Lakes (25%) and Dredging International NV (75%) for Lot 6 of the widening and deepening of the Suez Canal.  The contract is valued at $540 million and is part of a larger project to expand global trade and strengthen the economy in Egypt.  The contract awarded to the Consortium involves the widening and deepening to -79 feet of the western branch of the Suez Canal at Great Bitter Lake, Deversoir Reach and Kabret Reach, which is a 25 km. stretch of the canal.  Dredging International will mobilize four cutter suction dredges and two hopper dredges and auxiliary equipment while Great Lakes will mobilize its Middle East-based heavy duty, high production cutter suction dredges, the ‘Carolina’ and the ‘Ohio,’ pipelines and auxiliary support equipment.  The vessels will mobilize to Egypt in November and commence dredging operations before year-end.  The Consortium’s scope of work is expected to be completed by the end of Q3/15.  (Great Lakes 20.10)

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4:  CLEAN TECH & ENVIRONMENTAL DEVELOPMENTS

 4.1  GIZ Earmarks €6.5 Million to Address Environmental Challenges in Jordan

Jordan’s Environment Ministry signed four grant agreements with the German Development Cooperation (GIZ) to improve the management of solid municipal waste, adaptation to climate change and protection of ecosystems.  The agreements, which were signed on the sidelines of the Eco-Cities of the Mediterranean 2014 Forum, are worth €6.5 million and will tackle three of the Kingdom’s critical challenges.  The first agreement seeks to address the increasing amount of solid waste generated in governorates hosting Syrian refugees, which has placed a surging pressure on waste collection and management, particularly in the northern region.  Under the second agreement, GIZ, on behalf of the German federal ministry for economic cooperation, will implement a project to take ecosystem services and biodiversity into account in national policy decisions.  The third and fourth agreements seek to support the Kingdom’s efforts in mitigating and adapting to climate change, according to the minister.  (JT 20.10)

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 4.2  Jiza to House Jordan’s First Residential Eco-Village

More than 100 green housing units will be built in Jiza to constitute Jordan’s first residential eco-village.  The green housing will be built under an agreement signed by the Jordan Green Building Council (JGBC) and the Housing Cooperative of the Vocational Training Centre’s Employees on Monday on the sidelines of the Eco-Cities of the Mediterranean 2014 Forum.   The project will pave the way for Jordan’s first green infrastructure, with the construction of 110 housing units as optimized models on a 150,000-square-metre plot of land in Zeinab Village in Jiza, in south Amman.  Under the project, solar and wind power will be utilized in electricity generation for cooling and heating purposes. In addition, recycled grey water will be used for irrigation.  A technical team of experts from the private and public sector will supervise the construction of the project.  (JT 20.10)

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 4.3  IFC to Fund Construction of Seven Solar Power Plants in Jordan

The International Finance Corporation (IFC), a member of the World Bank Group, said it has finalized a $207.5 million loan package to fund the construction of seven solar photovoltaic plants in Jordan.   The package is the largest private sector-led solar initiative in the Middle East and North Africa, according to the corporation.  The IFC said it tailored an innovative program to support the government’s first phase of a planned total of 12 solar power plants, and will provide loans worth $91.5 million from its own account.  Another $116 million will be mobilized from Arab Bank (Bahrain), European Arab Bank, the Dutch development bank FMO, Finn Fund, and OPEC’s Fund for International Development, according to the IFC.  The seven plants have a combined capacity of 102 megawatts (MW), and will become Jordan’s “first private industry-scale solar photovoltaic parks”.  They will generate 212 gigawatt hours each year of non-polluting, sustainable power and cut carbon dioxide emissions by 123,000 tonnes annually.  Jordan has already signed deals for 12 solar projects with total capacity of 200MW.

The solar projects follow IFC’s $221 million financing for Jordan’s 117MW wind farm in 2013, and are a part of a broader strategy to help boost power supplies in the Kingdom, where electricity demand is increasing by 8% every year.  The new solar plants will also reduce Jordan’s reliance on imported fossil fuels.  According to experts, the Kingdom has one of the highest annual daily averages of solar irradiance in the world with an estimated 330 days of sunshine per year.  (JT 16.10)

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 4.4  UAE to Help Finance Oman's $200 Million Wind Farm Project

Oman plans to build its first major wind farm at a cost of $125 million to generate electricity in its southern governorate of Dhofar, as part of efforts to limit the use of oil and gas in power generation.  The wind farm at Harweel will have a capacity of 50 MW, enough to meet about 50% of demand in the governorate during the winter, and is expected to begin operating early in 2017.  The project will be coordinated by Abu Dhabi Future Energy Co (Masdar) and funded by the government of Abu Dhabi, RAEC officials said.  The United Arab Emirates is a significant aid donor for Oman.  The turbines will be made in a Western nation while local contractors will be given a large share of the construction work, RAEC said.  The company plans to launch seven more renewable energy projects in 2015: five solar energy projects at a total cost of $7.8 million and two wind power plants.  (Reuters 12.10)

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5:  ARAB STATE DEVELOPMENTS

 5.1  Lebanese Budget Deficit Drops on Higher Revenues

A rise in government revenues helped the budget deficit in the first six months of 2014 to fall to 23.14%, compared to 28.1% in the same period of last year, according to figures released by Lebanon’s Finance Ministry.  Total government revenue in the first six months of 2014 stood at close to $5.264 billion, compared to $4.9 billion, an increase of 7.4%.  However, total government expenditure in the first six months of 2014 remained almost unchanged at $6.8 billion.  (TDS 15.10)

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 5.2  Funding Approved for Lebanon's Water Supply Project

Funds totaling to $617 million has been raised for the Water Supply Augmentation Project in Lebanon. The World Bank, Islamic Development Bank and Government of Lebanon will provide financing of $474 million, $128 million and $15 million respectively for this project.  The project will involve the construction of hydraulic infrastructure, including the a 73-meter-high dam in the Chouf village of Bisri with a 125 million cubic meters storage capacity, the second-largest dam in Lebanon after Karoun.  The water project will be implemented over nine years to allow for startup work ahead of construction, and two years will be allotted for operation and maintenance works.  This is a significant project for Lebanon as it will address the water shortages faced by over half of Lebanon's population residing in the Greater Beirut and Mount Lebanon area, who receive an average of only three hours of water per day and resort to illegal wells, expensive tanker trucks and bottled water for their home use.  (bcn 09.10)

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 5.3  Remittances to Lebanon to hit $7.7 Billion

The World Bank projected expatriates’ remittance inflows to Lebanon to reach $7.67 billion in 2014, constituting an increase of 1.6% from $7.55 billion in 2013 and compared to inflows of $6.91 billion in 2011 and $6.92 billion 2012.  The World Bank also revised upward its 2013 estimate for remittance inflows to Lebanon from an April estimate of $7.2 billion.  Lebanon would be the 18th largest recipient of remittances globally and the 13th largest recipient among 135 developing economies in 2014.  Also, it would be the second largest recipient of remittances among 16 Arab countries.  Further, Lebanon would post the 12th highest growth rate in remittance flows among the 15 largest recipients of remittances in developing economies this year, better than India (+1.5%), Egypt (+0.9%) and Ukraine (-6.9%).  In comparison, the World Bank forecast remittance inflows to developing countries to rise by 5.1%, while flows to Arab countries would increase by 2.4% and inflows to Upper Middle Income Countries would grow by 6.2% in 2014.

Globally, Lebanon would receive more remittances than Russia ($7.33 billion), Sri Lanka ($7.2 billion) and Morocco ($6.82 billion), and less than Poland ($7.96 billion), Italy ($8.22 billion) and Indonesia ($8.35 billion).  Remittance inflows to Lebanon would be second only to Egypt ($18 billion) among Arab countries, and lower than those to China ($64.1 billion) and Mexico ($24.2 billion) among UMICs.

Expatriates’ remittances to Lebanon were equivalent to 16.8% of GDP in 2013 and 16.1% of GDP in 2012.  The World Bank forecast remittance inflows to Arab countries at $50.5 billion in 2014, equivalent to about 2.1% of the region’s GDP this year.  (TDS 13.10)

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 5.4  Construction Commences on Jordan’s Wadi Al Karak Dam

Construction work has commenced on the Wadi Al Karak Dam in Jordan, according to the Ministry of Water and Irrigation.  Indian group Continental Construction Corporation in a joint venture with General Equipment Company is executing the construction of the 30 meter high dam, which measures 201.4 meters in length.  Located approximately 40 kilometers south of Amman, the new dam will have a capacity to store two million cubic meters (mcm) of water.  It is being constructed at a cost of $ 15.5 million.  While the US Department of Agriculture provided $ 10.5 million as a grant, the remaining $ 5 million for the project was provided by the Jordanian Treasury.  The water will be used for the irrigation of crops as well as livestock, in order to support the development of local communities in Karak.  In addition, the dam will collect water from flash floods in the surrounding catchment area and store it to recharge underground aquifers.

Wadi Al Karak Dam is one of several dams the ministry is constructing across the country to enhance its water storage capacity.  In August, the ministry announced a water harvesting plan to raise rainwater storage in dams by over 25% within five years.  Under the plan, new dams will be constructed to raise the overall storage capacity from the current 327 mcm to more than 400 mcm.  (bnc 19.10)

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 5.5  Iraq Still Owes Kuwait $5.7 Billion for Invasion

Kuwait told the UN that Iraq still owes it some $5.7 billion in compensation for the 1990/1 invasion.  Khaled Ahmad Al Mudhaf, who heads the board in charge of overseeing the payments, said Iraq’s last payment was $1.19b on 24 July.  Kuwait’s infrastructure was badly damaged during the invasion.  The United Nations Compensation Commission awarded about $52.4b to more than 100 government and international organizations after a review that concluded in 2005.  The largest payment, $14.7b, was awarded to Kuwait Petroleum Corporation for production and sales losses resulting from damage to the country's oil fields during the invasion.  The payments are funded by a 5% tax on the export of Iraqi oil.  (AB 07.10)

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♦♦Arabian Gulf

 5.6  Half of UAE’s $13 Billion 2015 Budget to Be Spent on Social Services

Almost half of the UAE’s AED49.1 billion ($13.36 billion) federal budget for 2015 will be spent on social sectors such as health, education and social services.  The Council of Ministers approved the 2015 budget, an increase of AED2.9 billion, or 6.3%, from FY 2014.  A breakdown of government expenditures showed AED24 billion, or 49%, will be allocated to social services, while AED20 billion, or 41%, will be spent on government sector affairs.  The budget allocated AED1.8 billion (3.7%) to the infrastructure and economic sectors, AED 1.6 billion (3.2%) to financial assets and AED1 billion (2.1%) to federal spending.  (AB 12.10)

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 5.7  UAE Launches Innovation Plan

Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE on 19 October, a new strategy to make the country one of the world's most innovative within seven years.  Announcing the National Innovation Strategy, Sheikh Mohammed said it would focus on seven sectors - renewable energy, transport, education, health, technology, water and space.  Its first phase includes 30 national initiatives to be completed within three years including new legislation, innovation incubators, investment in specialized skills, private-sector incentives, international research partnerships, and an innovation drive within government, news agency WAM reported.  Current annual investment in innovation is worth AED14 billion in the UAE, of which AED7 billion goes to research and development but spending will rise significantly in the years to come.  (AB 19.10)

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 5.8  Saudi Inflation Remains Unchanged at 2.8% in September

Saudi Arabia’s Central Department of Statistics and Information (CDSI) released Consumer Price Index data for September, showing a rise in prices by 2.8% year-on-year, staying unchanged from the previous month.  Foodstuffs and housing have continued to be the main sources of inflation as they all accelerated in August and September in year-on-year terms..  The contribution of food and rent and housing-related services rose to 54% compared to 48% in the previous month.  This was mainly due to rising inflation in these two components coupled with falling core inflation.  Foodstuffs saw prices rise by 2.9% year-on-year in September, continuing its upward trend for the second consecutive month despite a deflationary trend in international food prices.  In monthly terms, food prices rose by 0.9% in September compared to an average of 0.1 in the first eight months of 2014.  This was driven by a rise in prices of vegetables and fish and seafood, which saw prices increasing by 5.8% and 3.2% respectively.

In year-on-year terms, rental inflation also continued to accelerate during September following a brief slowdown in July.  Rental inflation accelerated to 3.4% year-on-year in September compared with 3.1% and 2.8% for August and July respectively, and continues to be the largest contributor to headline inflation with 0.8%.  The rent component -which rose by 3.8% year-on-year in September - plays a major part in the inflationary pressure in this group.  The delay in government initiatives to reform the housing market means that earlier anticipation over the prospect to purchase permanent homes has subsided, leading to acceleration in rental activity instead.  (CDSI 20.10)

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♦♦North Africa  

 5.9  Egypt Will Return $500 Million to Qatar In October

Egypt will return a $500 million deposit from Qatar, made last year during the presidency of Mohamed Morsi, following a request from Doha, the governor of Egypt's central bank said on 8 October.  Hisham Ramez added that Qatar had not yet asked for the return of a $2.5 billion deposit which was due to be repaid in November.  Qatar backed Egypt with $7.5 billion in deposits during the presidency of the Muslim Brotherhood's Mohamed Morsi, but the relations between the two countries soured due to Doha's opposition to Morsi's ouster in July 2013.  Doha has refused to renew other deposits upon their maturity.   By the end of 2013, Egypt had returned $3 billion to Qatar as the bonds matured.  Egypt's net international reserves inched up to $16.8 billion in August, but are expected to decline if Egypt returns the two deposits.  Qatar's Gulf neighbors Saudi Arabia, the UAE and Kuwait have supported the interim authorities that replaced Morsi, providing Egypt with billions of dollars in aid.  (Ahram 08.10)

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6:  TURKISH, CYPRIOT & GREEK DEVELOPMENTS

 6.1  Turkey Cuts Growth Estimates While Raising Inflation Forecast

Turkey has slashed its growth estimates and raised its inflation forecast for 2014 and 2015, Deputy Prime Minister Ali Babacan said on 8 October, citing unfavorable conditions in the global economy.  Turkish government officials have warned that tensions in Iraq and Syria, as well as Ukraine, combined with slower growth in Europe could hit the economy, putting pressure on the central bank to cut rates and support growth. 

Fighting inflation will continue to be the fundamental priority of Turkey’s economic plan in 2015 to 2017, Babacan said, along with boosting growth and reducing the current account deficit.  Babacan told a press conference that year-end inflation was likely to reach 9.4%, well above the central bank’s forecast of 5.3%, before falling to 6.3% in 2015, up from estimates in a previous three-year economic program.

Turkey is struggling to control inflation even as its economy slows and conflict intensifies in neighboring countries.  Estimates of economic growth for the next two years have also been slashed. Turkey’s economy was set to grow by 3.3% this year, Babacan said, and 4% next year.  Babacan said narrowing Turkey’s current account deficit was the second priority in the economic program, and added that the government aimed to reduce the deficit to 5.2% of gross domestic product by 2017, from 5.2% expected this year.  Turkey is especially sensitive to changes in global liquidity because of its large current-account deficit which was easier to finance during the years of cheap U.S. funding.  The tide has turned against emerging markets as the U.S. Federal Reserve is set to gradually raise interest rates.  (Al Arabiya 08.10) 

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 6.2  Turkey’s Energy Imports to Pass $181 Billion

Turkey’s energy import bill will total $181.3 billion in the next three years, figures show.  According to the economic program for 2015-2017 announced by Deputy Prime Minister Babacan on 8 October, around $56 billion is expected to be spent on energy imports until the end of this year.  Energy imports will cost Turkey approximately $57 billion in 2015, around $60 billion in 2016 and nearly $64 billion in 2017.  The program includes measures to reduce projected energy spending and how to improve energy efficiency.  It proposes new oil and gas exploration projects both in Turkey and abroad; further development of local resources such as coal and geothermal; and more research into shale gas and other new technologies in the energy sector.  It also aims to reduce the current foreign energy dependence of about 70% by increasing investments in energy sources, including renewable and nuclear energies in the near future. Oil, natural gas and coal imports meet Turkey’s 70% energy demand.  Turkey spent nearly $56 billion on energy imports last year.  According to the U.S. Energy Information Administration, Turkey imported nearly 671,000 bpd of oil, 44 billion cubic meters of gas and 32 million tons of coal in 2013.  (TDS 10.10)

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 6.3  Cyprus Uses Recycled Water as a Steady Source for Irrigation

Recycled water produced by sewerage units constitutes a steady source for irrigation purposes and is expected to cover approximately 30% of Cyprus` irrigation needs, Water Development Department official Andreas Manoli has told CNA.  Manoli spoke of the excellent quality of recycled water in Cyprus, as it is produced after having undergone tertiary treatment and is suitable for use in all crops apart from leafy green vegetables consumed raw, such as lettuce and cabbage.  “Our obligations under European directive 91/271/EEC are to construct sewerage projects in all communities with a population of over 2,000 residents”, he said.

This obligation will have a total cost of 1.7 billion euro, he noted, adding that another 500 million needs to be spent in order for the projects under way to be completed until 2027.  “From the projects which have already been completed and the ones to be completed in future we produce water which has undergone tertiary treatment, which is of an excellent quality for irrigation purposes”, he said.  Asked for what crops recycled water can be used, he said that “it can be used for the irrigation of all crops apart from leafy green vegetables which are eaten raw such as lettuce and cabbage.  (FM 20.10)

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7:  GENERAL NEWS AND INTEREST

♦♦ISRAEL:

 7.1  Sea of Galilee Begins its Winter Climb

Recent heavy rains throughout the country have left their mark on Israel's main water source:  The Kinneret (Sea of Galilee).  The lake began its annual climb on 19 October, for the first time in five months.  The height of the Kinneret is the primary standard by which Israel's water supplies are measured.  As of Tuesday morning, it stood at 212.79 meters below sea level – a half-centimeter higher than the day before.  However, the Kinneret still has nearly 5 meters before it reaches its maximum level.  Each centimeter of Kinneret height represents 1.7 million cubic meters of water – roughly a third of Israel's average domestic and industrial daily needs.

The Kinneret has two official red line levels:  The maximum level is 208.8 meters below sea level, at which the Degania dam must be opened to prevent flooding.  On the other end of the scale, the Water Authority makes all efforts to prevent the Kinneret from falling below 213 meters below sea level, in order to prevent deterioration in water quality.

The Kinneret supplies nearly a quarter of Israel's annual water needs, but desalination of ocean water is in the process of surpassing this amount.  Four major desalination plants – in Ashkelon, Palmachim, Hadera and Sorek – currently supply a total of 500 million cubic meters of water each year.  A fifth plant, in Ashdod, is to supply another 100 million when it is completed, sometime in the middle of next year.  Another 30 smaller desalination plants throughout the country produce a total of some 50 million cubic meters annually. 

Water in Israel has typically been delivered, via the National Water Carrier, from the plush north to the arid south. With the growth of the desalination plants along the Mediterranean Coast, great amounts of water now travel from west to east, where they meet up with the National Water Carrier for further distribution.  (Arutz7 20.10)

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 7.2  Jewish Legion Founder's Final Wish Honored As Ashes Buried in Israel

The name John Henry Patterson may not mean much to most Israelis, but his contribution to the state was fundamental.  Now, 67 years after his death, his wish to be buried in Israel will soon be fulfilled. 

Lt. Col. John Henry Patterson was one of the founders of the Jewish Legion, which fought under the British Army in World War I, and commanded two Jewish Legion battalions in the war.  Prime Minister Benjamin Netanyahu has termed the legion "the first Jewish military force since the Bar Kochba revolt and the basis upon which the IDF was established."  The prime minister has spearheaded the effort to fulfill Patterson's wish to be buried in Israel alongside his soldiers in Moshav Avihail, north of Netanya, site of the Jewish Legion Museum.  Patterson's ashes are scheduled to be buried on a date close to his birthday, 10 November, in a special plot overlooking the section of the cemetery dedicated to the legion, next to an Israeli flag.  After the burial, a ceremony honoring Patterson's legacy will be held at the museum.  The Landmarks program from the Prime Minister's Office, dedicated to improving heritage infrastructure, is sponsoring the event.  The process of bringing the ashes of Patterson and his wife, Frances Helena, to Israel has taken three years.  (Various 12.10)

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♦♦REGIONAL:

 7.3  Hijri New Year Begins on 24 October

This year beginning on 24 October, the Hijri New Year, also known as Islamic New Year, is the day that marks the beginning of a new Islamic calendar year, and is the day on which the year count is incremented.  The first day of the year is observed on the first day of Muharram, the first month in the Islamic calendar.  The first Islamic year beginning in 622 AD during which the emigration of Muhammad from Mecca to Medina, known as the Hijra.  While some Islamic organizations prefer determining the new month (and hence the new year) by local sightings of the moon, many Islamic institutions and countries, including Saudi Arabia, follow astronomical calculations to determine future dates of the Islamic calendar.

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8:  ISRAEL LIFE SCIENCE NEWS 

 8.1  Israeli & Jordanian Researchers Team on Leishmaniasis Treatment

Scientists from Israel, Jordan and Switzerland are conducting collaborative research aimed at finding a cure to human Leishmaniasis.  Pharmaseed (http://www.pharmaseedltd.com), Dead Sea and Arava Science Center, Jordan University of Science and Technology Prof. Nabil Hailat and the Swiss Tropical and Public Health Institute are joining efforts to find Leishmaniasis treatment.  The consortium from Israel, Jordan and Switzerland are treating cutaneous leishmaniasis, a variant of the parasitic disease leishmaniasis, also known as “Jericho buttons.”  Leishmaniasis, which is transmitted by sandflies, is common in the Middle East.  The mild manifestation of the condition causes sores that leave scars, while its more serious manifestations damage internal organs and can cause death in patients with weakened immune systems.  (Globes 20.10)

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 8.2  Evogene’s Evofuel & Embrapa Advance Castor Cultivation in Brazil

The Brazilian Agricultural Research Corporation (Embrapa), Brazil’s leading agricultural research institution, and Evogene signed a joint research agreement between Embrapa and Evofuel, Evogene’s wholly-owned subsidiary, for the advancement of castor cultivation in Brazil.  The cooperation will primarily focus on technologies for controlling castor-specific diseases as well as practices for castor cultivation in rotation with soybean.  The agreement is set to bring Embrapa’s substantial experience in research and development of castor together with Evofuel’s proprietary castor varieties, which are adapted to mechanized harvest and modern agricultural protocols, to offer Brazilian growers a full-scale solution for an economically viable, sustainable, and large-scale cultivation of castor.

The collaboration with Embrapa follows three years of successful field trials of Evofuel’s castor varieties in Brazil.  The trials demonstrated the suitability and economic benefits of growing Evofuel's proprietary castor varieties as a second crop with soybean for production of oil feedstock for biofuels and other industrial uses.  In March this year, Evofuel announced an agreement for the commercial production of castor in 2016 with SLC Agricola, one of Brazil’s largest landowners and agriculture businesses.

Rehovot’s Evofuel (http://www.evo-fuel.com) is engaged in the development and commercialization of high yielding castor seeds as a cost-competitive, sustainable, and second-generation feedstock for the growing biofuel market.  Initially established in 2007 as a division within Evogene (http://www.evogene.com), Evofuel was spun out as a wholly owned subsidiary in 2012.  (Evogene 20.10)

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9:  ISRAEL PRODUCT & TECHNOLOGY NEWS

 9.1  Mellanox Selected for New HP 64-bit ARM Data Center Platform

Mellanox Technologies announced that its ConnectX-3 Pro 10Gb/s Ethernet adapters with RoCE are integrated on the motherboard (LoM) in the new HP ProLiant m400 server cartridge.  The HP Moonshot System combines an advanced 64-bit ARM CPU with high performance Mellanox ConnectX-3 Pro 10Gb/s Ethernet adapters to deliver balanced compute, memory and I/O resources in a dense and efficient form factor.  Mellanox 10/40GbE adapters deliver the highest performance and most efficient Ethernet solution available, as well as industry-leading end-to-end latency.  Furthermore, ConnectX-3 Pro-based adapters support RDMA over Converged Ethernetv2 (RoCEv2).  This advanced Remote Direct Memory Access (RDMA) technology offloads the data transport to free up the CPU to perform data intensive web, cloud and data analytics applications.

Yokneam’s Mellanox Technologies (http://www.mellanox.com) is a leading supplier of end-to-end InfiniBand and Ethernet interconnect solutions and services for servers and storage.  Mellanox interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance capability.  (Mellanox 20.10)

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 9.2  Essence's Latest Version of WeR@Home Released

Essence launched the newest version of its smart living solution: WeR@HomeTM 4, the complete smart home management system featuring the simplest, most comprehensive and integrated user experience available.  WeR@HomeTM 4 enhances the customer experience via a brand new mobile application with smart rules enabling end users to manage and "be in touch" with their homes throughout the day, such as scheduling sequential, pre-defined events or remotely managing ad-hoc events.

Based on Essence One-PlayTMapproach, WeR@HomeTM 4 includes home security and safety at the core and is readily and easily expandable with third-party services and devices. Z-wave compatibility and cloud-based integration allow service providers to expand their smart home offerings with external applications and devices, such as lighting controls, plugs, and thermostats. WeR@HomeTM recently won the European Consumers Choice Award for its core security service, earning the highest score in the home category.

Herzliya’s Essence (http://essence-grp.com) is a global M2M provider of scalable, end-to-end connected-living solutions for security, communication, and healthcare service providers.  Over the past 20 years, Essence has built an impressive installed base, with more than 10 million products deployed and used by Tier-1 service providers worldwide. Essence is committed to developing and supporting solutions that both enhance partners' businesses and enable people to live fuller and better lives.  (Essence 20.10)

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 9.3  MIRAGE 2.0 Group Messaging Enhances Real-Time Experience

Tel Aviv’s Mobli Media (http://www.mobli.com) has announced MIRAGE 2.0, an updated version of its ephemeral instant messaging app.  MIRAGE (http://www.mirageapp.co) was launched by Mobli in July 2014.  The stand-alone app is an instant messaging platform that enables users to send and receive messages that disappear after a few seconds.  The app’s interface is based on a one-tap principle.  As soon as the user opens the app, all of his contacts are immediately available.  Even if a contact does not have the app installed, he can receive the message from a link via SMS.  The new version features multiple additional enhancements including a. Contact list editing - Drag and drop your contacts to rearrange your home screen, b. Inbox - Tap and hold your inbox to see the MIRAGEs you’ve received; you can view them in any order you’d like and c. Search Bar – A new search bar on the app’s home screen.  (Mobli Media 21.10)

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10:  ISRAEL ECONOMIC STATISTICS

 10.1 Israel’s CPI Surprising September Decline 

The Central Bureau of Statistics announced that Israel's Consumer Price Index (CPI) for September dropped by 0.3% to 102 points.  The CPI fell in August by 0.1%, as Israel's economy is essentially in a state of deflation, with the CPI having fallen by 0.3% over the twelve months up to and including September, and by 1.2% if the housing item is excluded.  Notable price declines in September were fresh fruit (10.9%), culture & entertainment (1.3%), footwear (1.1%), food (1%) and transport (0.3%).  There were increases in fresh vegetables (1.6%) and education services (1.2%).  For the year to date, the general CPI, the index excluding fresh fruits and vegetables, and the index excluding energy, have each fallen by 0.3%.  The index excluding housing has fallen by 1.4%. The index of owner-occupied housing services fell by 0.1%, but the rentals index rose by 0.2%.  (Various 16.10)

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11:  IN DEPTH

 11.1 MENA:  Reforming Energy Subsidies Could Boost Growth in Region

The World Bank Group’s latest Middle East and North Africa Economic Monitor projects regional growth to average 4.2% in 2015, slightly more favorable than the 2013 - 2014 figures.  Economic growth could reach 5.2% depending on domestic consumption, easing political tensions which could improve investors’ confidence in Egypt and Tunisia, and full resumption of oil production in Libya.

“The violent conflicts in Syria, Iraq, Gaza, Yemen and Libya with their spillovers to Lebanon and Jordan could make MENA’s economic prospects bleak,” says Inger Andersen, World Bank Regional Vice President for the Middle East and North Africa.  “But the region's huge potential--its young, educated population, strategic location and natural resources - makes it imperative that the world come together and support a turnaround, much as it did in 1944 when Europe was mired in conflict.”

Regional conflicts including the civil war in Syria now in its fourth year, the Islamic State’s (IS) control of large swathes of Syria and Iraq, a devastating Hamas-launched war in Gaza in July - August 2014 and ongoing insurgencies in Yemen will slow growth in these areas in 2015.  In the transition countries, growth is projected to pick up to 3.1% in Egypt, 2.7% in Tunisia and 4.6% in Morocco, but macroeconomic imbalances and a huge and unfinished reform agenda, including subsidy reform, stand in the way of attracting domestic and foreign investment to trigger sustainable growth.  As for the other countries, Algeria and Iran, growth rates will stay in the range of 2-3% and average 5%in high-income countries  (all hydrocarbon exporters in the Arabian Gulf), but a combination of structural problems and potential weaknesses in the world oil market could limit their ability to register high growth rates going forward.

The MENA Economic Monitor has a special focus on the corrosive nature of the large energy subsidies in the region.  MENA is currently experiencing growth below potential, high unemployment, urban air pollution and congestion, and severe water scarcity that is undermining agriculture.  The report shows how energy subsidies have contributed to these development challenges and, therefore, reforms should be one of the highest priorities of policymakers.

“Energy subsidies and restricted competition encourage capital-intensive production, thus discouraging labor and employment, and contributing to the high unemployment in the region,” says Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa Region.  “With higher energy prices, resources would shift towards light manufacturing, construction and other labor-intensive sectors, as well as towards younger, more dynamic firms" 

Emerging evidence supports a positive relationship between fuel prices and per capita GDP growth, job creation and performance of the transport and water sectors.  The report exhorts MENA governments to reduce energy subsidies to create dynamic, employment-intensive economies supported by managed urbanization and a productive agricultural sector.  (WB 08.10)

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 11.2  ARAB STATES:  Half of Arab State Citizens Subscribe to Mobile Networks

More than half of the population across the Arab States of the Middle East and North Africa are now subscribed to a mobile service, presenting the region with a unique opportunity to use mobile technology to drive social and economic growth.  According to the GSMA’s new report, “Arab States: Mobile Economy 2014”, there were 195 million unique mobile subscribers in the region at the end of 2013, a penetration rate of 53% of the total population.  Total mobile connections in the region stood at 404 million at year-end.

“Mobile has scaled dramatically in the Arab States over the last five years, delivering significant socio-economic benefits in every country across this diverse region,” said Anne Bouverot, Director General, GSMA.  “As regional operators continue to invest in mobile broadband networks and services, we call on governments in the region to collaborate with the mobile industry to deliver on a range of goals, from rolling out networks to under-served areas in North Africa to ensuring that the right infrastructure is in place to support global business hubs such as Dubai.

“In the emerging economies, mobile commerce solutions are extending financial services to unbanked populations and helping bridge the digital divide.  In the Gulf States, mobile is driving innovation in areas such as machine-to-machine and smart city solutions.  We are also seeing mobile networks play an important role in disaster response and crisis management,” continued Bouverot.

A Diverse Mobile Landscape

The 19 markets that form the Arab States comprise both the advanced Gulf States and many populous emerging markets in North Africa.  These two sub-regions vary widely in terms of socioeconomics, mobile penetration, technology maturity and regulatory environments.

A number of Gulf States, including Bahrain, Kuwait and the United Arab Emirates (UAE), already have unique mobile subscriber penetration rates above 75%.  By contrast, just 16% of the population in South Sudan is subscribed to a mobile service (see table). Egypt is the largest market in the region with 44 million unique mobile subscribers at the end of 2013, accounting for 23% of the region’s total.  The five largest markets, in order of size, are Egypt, Saudi Arabia, Iraq, Algeria and Morocco, which together account for just under two-thirds of the region’s total unique mobile subscriber base.

 

Arab States, Unique Mobile Subscriber Penetration

2013 (% of Population)

Algeria             48%     

Bahrain            76%     

Egypt               53%     

Iraq                 60%     

Jordan             71%     

Kuwait             77%     

Lebanon           51%     

Libya               61%     

Morocco           51%     

Oman               72%     

Qatar                73%     

Saudi Arabia     74%     

South Sudan     16%     

Sudan               41%     

Syria                42% 

Tunisia             53%     

United Arab Emirates  83%       

Yemen             45%     

Arab States (total)         53%

 

A Fast-Growing Region

The mobile industry in the Arab States has grown faster than the global average over the last five years.  Unique mobile subscribers grew by 9.5% per year (CAGR) between 2008 and 2013, compared to a global average growth of 8.2%; mobile connections grew by 13.2% per year over the same period, compared to an 11% growth rate globally.

The general lack of fixed-line infrastructure in the region means that mobile is already the primary means of communication and increasingly also the primary means of accessing the internet.  Mobile has played an active role in addressing the digital divide and delivering financial inclusion to previously underserved populations, particularly in parts of North Africa.

Although in global terms the Arab States were relatively late to launch higher speed networks, a number of the Gulf States are considered global technology leaders.  Mobile broadband (3G/4G) accounts for well over a third of total connections in the Gulf States today and is as high as 60% of the total connections in Qatar, Saudi Arabia and the UAE.  Two of these markets – Qatar and the UAE – also have the highest smartphone adoption rates in the world (80% of connections).

There are also now signs of an accelerating technology migration underway in North Africa. Countries such as Morocco are seeing rapid growth in 3G connections.  The combination of accelerating mobile broadband network rollout and rising smartphone penetration is driving mobile data growth across the region.  For the vast majority of local operators, mobile data now accounts for a significant and fast-growing portion of total service revenue.

Contributing to the Economy

Mobile is an important contributor to social and economic development in the region. The mobile industry contributed $122 billion to the region’s gross domestic product (GDP) in 2013, accounting for 4.4% of the total.  In that year, the industry directly employed nearly one million people, while an additional 600,000 jobs were supported across the rest of the economy as a result of activity generated by the mobile sector.  The local mobile industry also makes a significant contribution to public sector funding in the form of taxation ($13 billion in 2013), in addition to regulatory and spectrum fees.

Mobile operators in the region grew mobile revenue by 7% per year (CAGR) over the last five years, significantly above the global average of 4.6%.  Operators have invested $75 billion over the last six years on improving network coverage, increasing network capacity and deploying mobile broadband networks.

“Mobile is powering a wave of innovative new services and applications across the region, though we are only just beginning to see the positive transformative potential of mobile broadband,” concluded Bouverot.  “Regional operators are well placed to deliver new solutions that can address the region’s social, economic and public services challenges, and the GSMA is pleased to be collaborating with local operators, governments and other stakeholders to help bring these services to market.”

The GSMA (http://www.gsma.com) represents the interests of mobile operators worldwide. Spanning more than 220 countries, the GSMA unites nearly 800 of the world’s mobile operators with 250 companies in the broader mobile ecosystem, including handset and device makers, software companies, equipment providers and Internet companies, as well as organizations in industry sectors such as financial services, healthcare, media, transport and utilities.  (GSMA 13.10)

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 11.3  LEBANON:  S&P Affirms Ratings at 'B-/B'

On 10 October, Standard & Poor's (http://www.standardandpoors.com) affirmed its 'B-/B' long- and short-term foreign and local currency sovereign credit ratings on Lebanon.  The outlook is stable.

Rationale

The government's debt servicing capacity is materially determined by the domestic financial sector's willingness and ability to continue buying government debt, directly or indirectly, and by the strength of deposit flows to the financial system.

In our view, confidence in the Lebanese financial system remains strong and is not likely to be significantly affected by domestic political developments, short of a major escalation of local unrest.

The external and internal political and macroeconomic shocks that Lebanon has faced since early 2011 - the ongoing crisis in Syria, the recent heightened security risks due to ISIS' territorial gains, lengthy periods without a government, and the current presidential vacuum - have not led to material deposit outflows.

The banking system's funding profile features a high proportion of retail deposits that have shown resilience through various crises.

Resident and nonresident private-sector deposit growth was 7.7% year-on-year as of end-July.  In our view, this should be sufficient to enable the domestic financial sector to finance the large government deficit and demand for private-sector credit. That said, banking sector profitability has deteriorated.

We estimate general government debt will reach 144% of GDP this year. As of end-June, 60% of gross debt was denominated in local currency.  Domestic banks support the government debt market directly and indirectly; firstly, they buy Lebanese government debt directly.

At first-half 2014, general government debt accounted for 22% of total banking system assets. Bank creditors held 53% of the government's outstanding local currency debt. Secondly, Lebanese banks buy certificates of deposit issued by the Banque du Liban (the central bank or BdL), which in turn buys government debt.

We view the concentration of government financing from these sources as a structural weakness that leaves Lebanon more vulnerable to adverse business, financial, and economic conditions.

The BdL itself held 30% of local-currency government debt as of end-June.  The bank keeps substantial foreign assets to maintain confidence in the system; gold ($11.9 billion) and foreign currencies ($35.1 billion) of $47 billion covered 33% of resident and nonresident private-sector deposits at the end of July.

The high reserves, together with large inflows of remittances, FDI and foreign deposits, provide an important buffer for Lebanon's very large trade deficit.  We consider that Lebanon's balance of payments, with its very large trade deficits, remains vulnerable in both the current and financial accounts.

We acknowledge, however, that stock-flow discrepancies between the balance of payments and IIP mean that Lebanon's external position is relatively opaque.  We estimate gross external financing needs at about 100% of current account receipts (CARs) and usable reserves.  Under our definition of narrow net external debt, we estimate that liquid external assets will exceed external debt by 70% of CARs.

There has been a presidential vacuum since president Sleiman's term ended in May, because the parliament has failed to agree on a candidate.  Under an unwritten agreement, the president must be from Lebanon's Maronite Christian community, the prime minister must be a Sunni Muslim, and the speaker of the parliament a Shia Muslim.

That said, there has been a "national interest" government in place since February this year, formed after 10 months of negotiations.  It includes members of centrist parties, as well as both the March 14 and March 8 political alliances.

The March 14 political alliance is led by former prime minister Hariri, who opposes the Assad regime in Syria.  The March 8 alliance is led by Hezbollah, whose military arm is actively fighting in support of the Assad regime and whose involvement has led to reprisal attacks from Sunni militias increasingly operating on Lebanese territory.

Despite some initial optimism regarding the government's policymaking capabilities under Prime Minister Tamam Salam, we expect policymaking to remain constrained by the divisive political environment. Institutional and governance effectiveness remains a key ratings weakness.  We expect that the parliament--the term of which has already been extended by 18 months--will extend its term again rather than hold the elections due in November.

Economic activity remains depressed.  Heightened security risks and rising concerns about the potential impact of ISIS operations in the region have likely offset most of the positive gains in consumer and business confidence in the first half of the year, which followed a relative stabilization of the security environment in the spring.

We estimate average growth over 2012-2014 of 1.5%, noting, however, that national accounts statistics have not been published since 2011.  Overall, we do not anticipate a significant rebound in tourism, financial and trade services, or FDI while the region remains unstable.  We therefore do not foresee a material improvement in Lebanon's macroeconomic fundamentals or creditworthiness.

This is despite the stability of deposits and stimulus package the BdL launched in 2013.  The stimulus package, channeled mostly toward housing loans, totaled $1.4 billion last year and was extended by a further $800 million in 2014.

Public finances also remain weak. We anticipate the general government deficit will widen to 10% of GDP, and that a rise in current expenditure will be partly offset by a larger-than-expected transfer from the Ministry of Telecommunications this year.  Fiscal space is severely limited; interest payments on debt are nearly 8.5% of GDP, or 40% of revenues, while transfers to the loss-making electricity company, Electricite du Liban (EdL), are 4% of GDP.

Our forecasts do not include a proposed salary-scale adjustment for the public sector, which would cost an estimated 2% of GDP.  This has been debated by parliament for two years following a cost-of-living adjustment that pushed up the deficit by 3% of GDP in 2012, along with higher transfers to EdL and municipalities.

We note that parliament has failed on several occasions to agree on offsetting revenue measures.  The revenue measures under discussion focus on increasing various taxes, including VAT and income tax, which could put further pressure on the economy and the banking system.

Parliament has yet to ratify a new borrowing law in foreign currency; if it does not, increases in government external debt will be constrained.  The limit was last lifted by $5 billion in 2012 to finance foreign currency treasury needs ($2 billion) and for debt refinancing ($3 billion), and has been fully utilized.

If the limit is not lifted, the government can only refinance maturing foreign currency debt; we expect BDL to continue providing the government with additional foreign currency needs in exchange for local currency, should the need arise.

The political environment precludes Lebanon from receiving significant financial support from the international donor community, as does government policy against setting up refugee camps that would allow the donor community more direct access to aid refugees.  The Syrian crisis has displaced millions of people, both internally and outside of the country.

The UN High Commissioner for Refugees reports that the number of registered refugees in Lebanon has reached 1.3 million, increasing the population of Lebanon by about one-third.  In the medium term, the Lebanese government will be increasingly occupied with addressing the effects of the growing refugee population on Lebanese politics and society, as well as on the economy, as pressures mount on public spending, services, infrastructure, and the labor market.

We note that the government has been discussing possible solutions for hosting refugees in the border areas.  The World Bank is managing a multi-donor trust fund aimed at supporting Lebanese communities hosting Syrian refugees, which has raised almost $30 million.  The World Bank estimates that $1.3 billion is needed to help stabilize the impact of the influx of refugees on Lebanese infrastructure, public resources, and foregone revenues.

Outlook

The stable outlook reflects our view that deposit inflows into the financial system will continue over the coming year despite the difficult internal and external political environments, and that consequently the domestic financial sector will continue to enable the government to meet its financing needs.  If the political and economic situation deteriorates to the point where it staunches deposit growth, or if public finances deteriorate significantly, we could consider lowering the ratings.

We could consider raising the ratings if public finances became more sustainable, which would be supported either by a political breakthrough in Syria, potentially improving economic growth prospects in Lebanon, or an improvement in domestic policymaking that could translate into fiscal reforms.  (S&P 10.10)

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 11.4  SAUDI ARABIA:  Falling Oil Prices and Saudi Decision Making

Simon Henderson wrote in PolicyWatch on 17 October that as prices drop to around $80 per barrel, more attention is being focused on the mindset of Saudi Arabia, the world's largest oil exporter.

The 20% decline in oil prices over the past three months has been attributed to a wide range of factors, including declining growth in China, poor growth in Europe, and the increase in U.S. production of "light tight" oil, often known as shale oil.  As always, though, Saudi Arabia's policies are a key factor shaping prices.  Apart from its huge oil wealth - nearly a quarter of proven global reserves - the kingdom is also the leader of OPEC, the cartel of mainly Middle Eastern oil producers who leverage their collective market influence to achieve the best price.  Riyadh's reaction to the latest price shifts will therefore have numerous implications at home and abroad.

Swing Producer

In addition to producing more than 10% of the world's oil and having very low production costs, Saudi Arabia is OPEC's "swing producer."  The latest figures show it producing more than 10 million bpd, but it could pump around 12.5 million.  At times of high demand, this excess capacity enables it to increase volume, thereby smoothing price increases.  During periods of declining demand, as now, its low costs and large financial reserves mean that it can weather lower export revenues, it has the option of either sustaining production to preserve its market share (exporting more oil, but at a lower price) or cutting production to maintain prices (exporting less oil, but at a higher price).

Neither mechanism works perfectly.  For now, the kingdom has evidently decided to maintain its production volumes and tolerate the fall in price.  In effect, it is contributing to price weaknesses by discounting its own prices for contracted sales to clients in Asia, believed to be companies with refineries in China, Japan and South Korea.  The widely accepted economic explanation for this tactic is that by pushing down the price, the Saudis can drive out some global competitors who use higher-cost production methods, such as Canadian tar sand companies and U.S. shale oil firms.  Maintaining markets is also important to Riyadh, especially in the competitive Asian region, which could quickly shift to non-Saudi sources such as Iraq if the kingdom cut back output in a bid to keep prices up.  Despite high shipping costs, Riyadh wants to remain a top exporter to the United States as well because of the relationship's perceived geopolitical importance.

The notion that Saudi Arabia carefully calculates its political advantage when influencing oil prices had its heyday four decades ago, when Arab countries declared an oil embargo on the United States because of Washington's support for Israel during the 1973 October War.  Yet that has rarely been Riyadh's practice and the current perception is that Saudi behavior is reactive rather than controlling.

Royal Family Tensions

One reason for this belief is the kingdom's geriatric leadership situation. King Abdullah, who turned ninety-one this year, is suffering from years of heavy smoking, is reliant on bottled oxygen and can no longer walk without assistance.  His notional successor and half-brother, Crown Prince Salman, is seventy-eight and has his own ailments.  He recently spent a month abroad on what was officially dubbed a "special vacation," interpreted to mean medical treatment.

In theory, Saudi oil decisions are taken by a Supreme Petroleum Council made up of the king, senior princes, and relevant cabinet ministers, but there has been no recent public announcement of any council meeting.  Instead, these decisions seem to have been left in the hands of long-serving oil minister Ali al-Naimi.  Although he is in his late seventies and said to be looking forward to retirement, Naimi retains a firm grip and, until recently, calmed markets with the gnomic utterances for which he has become famous.

But Naimi's magic is apparently no longer working and, worse still, has prompted a rare public display of division in the royal family.  On 13 October, Prince Alwaleed bin Talal, a prominent business tycoon and nephew to the king, published an open letter expressing his consternation with the minister's apparent equanimity about the price decline.  Alwaleed, who has no official position in the kingdom, cited several newspaper reports as evidence, including a 11 September story in the English-language Saudi Gazette headlined "No Cause for Alarm."  Although the headline was not an actual quote from Naimi and appeared at a time when prices had only fallen to around $95 per barrel, the article quoted the minister as stating, "Prices of oil always go up and down so I really don't know why the big fuss about it this time."  Many in Riyadh will likely dismiss Alwaleed's audacity because his father - Prince Talal, a half-brother to the king - has an established reputation for eccentricity.  Yet his gambit almost certainly grabbed the monarch's attention.  In addition to criticizing Naimi, Alwaleed's letter implicitly asked the king to fire the minister, even citing the Prophet Muhammad for good measure: "Truly a leader is not to deceive his people."

If oil prices remain weak as expected, Riyadh may feel compelled to find a scapegoat, and the aging Naimi could indeed become a political casualty.  Traditionally, Saudi oil ministers have been non-royal technocrats like Naimi.  His professional alma mater, the state-owned oil company Saudi Aramco, could provide several well-qualified replacement candidates, though King Abdullah may prefer someone from the Finance Ministry or Central Bank.  Another possibility is Prince Abdulaziz bin Salman, the assistant oil minister and son of the crown prince.  Although he is said to be ambitious for the top job, the king may hesitate to appoint him due to the wider politics of royal succession.  Abdullah apparently prefers that another half-brother, Prince Muqrin, succeed him as king.  Earlier this year, he gave Muqrin the title of deputy crown prince.  He may therefore be reluctant to bolster the power base of Crown Prince Salman, whom he is trying to sideline.

Challenges for the Kingdom

Although the current price decline will demonstrate anew Saudi Arabia's market influence, the situation will not be without some pain at home if it persists long term.  The kingdom is believed to need a minimum of around $80 per barrel to meet its budgetary spending requirements without running a deficit. Its huge cash reserves provide a major, though not limitless, cushion against such deficits.  For example, if oil income fell in half from its high 2013 levels, Riyadh would still have sufficient money to maintain its generous subsidies, salaries, and handouts for years.  This largesse is perceived as essential to the kingdom's implied social contract: namely, that its people tolerate their lack of democratic freedoms because of the House of Saud's paternalistic generosity.  But a significant price fall would be seen as a policy failure, invigorating opposition, perhaps including those radical Saudi youths (and potential jihadist recruits) who despise the House of Saud.

In the short term, Riyadh wants to maintain its leadership of the Islamic and Arab worlds and, more immediately, its control of OPEC.  The cartel's scheduled November 27 meeting in Vienna is already shaping up as a grudge match.  Saudi Arabia is opposing any cuts in the current oil production ceiling, a stance supported by Gulf Arab allies Kuwait and the United Arab Emirates.  Yet Venezuela, Iran and other members whose budgets require high oil prices will probably urge cuts.  Riyadh likely believes that it would have to shoulder the bulk of any such cuts, so it will resist them.  The kingdom also has no desire to ease economic pain on Iran.

Implications for the United States

The falling oil prices have raised concerns in the United States about the commercial viability of shale oil production, some of which ceases to cover its costs at around $75-80 per barrel.  While this may indeed be a valid concern if prices continue to fall, improvements in fracking techniques are boosting margins.  In the meantime, price drops should improve the impact of U.S. sanctions on Iran and Russia, while the broader decline in energy prices will eventually boost the American and global economy.  But the speed at which oil prices are weakening poses a challenge to decision makers across the world, and how the Saudi leadership behaves will be crucial to a smooth outcome.

Simon Henderson is the Baker Fellow and director of the Gulf and Energy Policy Program at The Washington Institute.  (TWI 17.10)

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 11.5  EGYPT:  Moody's Upgrades Egypt's Outlook to Stable

On 20 October, Moody's Investors Service (http://www.moodys.com) upgraded Egypt's outlook to stable from negative, thus making the country's struggling economy more hospitable to international investors.  Moody's decision was based on improved political stability, fiscal consolidation and signs of growth recovery, but limited by high fiscal deficits and government debt levels.

The ratings agency also affirmed Egypt's government bond rating at Caa1.

The decision could bode well for Egypt in the upcoming Economic Summit on 21 - 22 February which aims to attract international community to invest in the country.

Since the election of President Abdel-Fattah El-Sisi in July, the government has undertaken structural reform of the state budget.  This included a bold move to cut energy subsidies by up to 78% and implementing controversial taxes.  The Egyptian government set a target for growth at 6% by fiscal year (FY) 2018/19, to be achieved through partnerships with the private sector.

Egypt's growth stood at a low 2.2% at the end of the last fiscal year but on the back of relative strong growth levels in the last quarter, the rate reached 3.7%.

The state budget deficit hit 12.6% in the last FY but is targeted to reach 10.5% this FY and 8-9% in five years, while government debt is targeted to become 80-85% of GDP in five years after reaching 97% of GDP last year.

Moody's saw 'strong support from external donors' as a factor for upgrading the country's outlook.

Since the removal of president Mohamed Morsi in July 2013, Saudi Arabia, the United Arab Emirates and Kuwait have pledged $12 billion in aid to Egypt.  Saudi Arabia has further called on the international community to attend a donors’ conference – later renamed Egypt's Economic Summit – to support the Egyptian economy.

Moody's also affirmed the ratings for Egypt's backed global bonds at Aaa, foreign currency bond ceiling at B3, foreign currency deposit ceiling at Caa2 and local currency country risk ceiling at Ba3.  (Moody’s 19.10)

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 11.6  EGYPT:  Egypt Initiates Plan To Ensure Food Security

Despite Egypt’s limited water resources, the Egyptian government is confident and decisive about cultivating 4 million undeveloped acres for agricultural use outside the Nile Valley and the Delta line.  This new plan for farmland is not without difficulties, chief among which is the water shortage and the lack of adequate money for the reclamation of desert lands.

The project started with President Abdel Fattah al-Sisi's electoral program and consists of cultivating the land to achieve food security.  It also aims to strengthen competitiveness within domestic and international markets and developing the agricultural production of each unit of land and water.  The project was adopted by the government formed by Sisi following his victory, and the Ministry of Agriculture announced a set of measures to start land distribution and to develop implementation timelines.

On 19 September, Minister of Agriculture and Land Reclamation Adel El-Beltagy, the former supervisor of Sisi’s agricultural dossier, announced the start of the first phase of the project to plant the first million acres in 11 districts, mostly in the western desert and Toshka, in a huge celebration to mark the occasion of an Egyptian farming holiday.

The Egyptian government has adopted this plan at a time when the agricultural area in the ancient lands of the Nile valley and Delta are being eroded due to the continuous urbanization of agricultural land.  However, in light of the serious actions taken by the Ministry of Agriculture to implement the project, there are still many questions about the possibility of providing water for the reclamation of new land, at a time when Egypt suffers from a severe shortage of water resources.

“Groundwater will be the main source used in the cultivation of most of the spaces in the first 1 million acres,” Fathi Geweili, the head of the Irrigation Department at the Ministry of Egyptian Water Resources, told Al-Monitor.  “We will provide underground water to irrigate 90% of the area, while the remaining 10% will be irrigated from surface water and the Nile.”

The Ministry of Water Resources began water processing measures in a number of areas to be cultivated.  “We started locating and preparing the areas where wells are to be drilled south of the Siwa Oasis, south and east of the Qattara Depression, west of Minya, the vicinity of Toshka and Owaynat and southwest Egypt,” Geweili said.  “The land was selected based on thorough studies carried out via satellite imagery to validate the amount of groundwater available in the area, but there are no studies confirming the sustainability of groundwater that could guarantee the continuation of these crops.

“Measures will be taken to adjust the rates of water withdrawal from groundwater wells to ensure sustainability,” Geweili said.  “The experience of flood irrigation and water waste cannot be repeated and it ought to be completely erased from Egypt’s policies.”

Khaled Abu Zeid, head of the aquatic programs in the Arab Water Council, said in an interview with Al-Monitor, “The state’s reliance on aquifers is a temporary solution to face water scarcity, but most of the groundwater in Egypt is nonrenewable.”  Abu Zeid said, “The areas to be irrigated by groundwater within this project cannot be sustainable plantations.  There must be other nontraditional water resources, such as reusing wastewater and resorting to projects that could increase [Egypt’s] Nile share from the headwater states.”

A large part of the land guaranteed by the government in the first phase of the project, in Western Sahara, relies on groundwater in the Nubian Sandstone Aquifer, which extends from Egypt to Chad, passing through Libya and Sudan.  This could trigger a crisis in Egypt's depletion of the aquifer resources to cultivate tracts of land within Egypt.

But Abu Zeid said, “Water in the Nubian Sandstone Aquifer is nonrenewable as well, and there is a joint body among the four countries tasked with coordinating the use by each state.”  He stressed that, “The withdrawal of water from the reservoir in the Egyptian land far from the border with Libya or Sudan, will technically not affect the amount of water in the aquifer outside of Egypt.”

Abu Zeid believes “It is necessary that the plan for the planting of the first one million acres be consistent with the agricultural development strategy for Egypt until 2030, especially to achieve a food security ratio by settling for a specific amount of strategic crops to cover domestic consumption.”

The state has not yet tackled the possibility of setting conditions in contracts with investors. Such conditions would include opting for the cultivation of crops that do not require much water.

Water experts in Egypt agree on is the need to search for new solutions and carry out studies to provide nontraditional water resources without resorting to the Nile water or groundwater.  “The success of the project will depend on the state's ability to find nontraditional water resources,” groundwater expert Maghawri Shehata said in an interview with Al-Monitor.  “The reclamation of 4 million acres of land requires at least 20 billion cubic meters of water, which is an impossible dream in light of the water poverty currently plaguing Egypt.”

Shehata said, “Egypt has 12 billion cubic meters of reusable sewage and agricultural water, but it only uses 5 billion cubic meters of it.”  He stressed the need for the state to be serious about implementing the policies of water rationalization and maintenance of irrigation systems to avert water leakage and reduce the amount of water wasted.

Besides the crisis of water scarcity, there is the problem of the economic aspect and the need to provide the necessary money for drilling wells, the reclamation and preparation of land for cultivation and the connection of facilities and infrastructure, including electricity and roads in the spaces announced in the project.

The government is examining the land distribution mechanisms and ownership patterns. It plans on giving the larger part to Gulf and other foreign companies capable of providing financial resources and bearing part of the infrastructure cost to prepare the land for agriculture.  It has put forward ideas whereby it would distribute small areas of land — from three to five acres — to state project called Young Graduates and leave the large spaces — ranging between 20,000 and 25,000 acres — to Arab and foreign investment companies, according to a statement by the government on 17 September.

Amid the water and food crises plaguing Egypt, as well as the lack of acreage, hopes hang on the seriousness of the state in adopting an effective plan and strategy to achieve self-sufficiency as far as strategic crops - such as wheat, corn and barley - are concerned.  This is without depending on imports while it is implementing the unconventional policies to overcome the water crisis and adapt to this resource scarcity.  (Al-Monitor 16.10)

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 11.7 EGYPT:  Signs of Rebound in Egypt’s Tourism Sector

The government in Egypt is expecting a recovery of its tourism sector by next year after the latest data showed the tide may be turning for an industry that has been hit hard by domestic instability over the past three years.

With Egypt’s recent period of relative calm following the May election of President Abdel Fattah al Sisi, countries are starting to lift travel advisories and the government is trying to lure back tourists through a number of initiatives.

The number of tourists arriving in Egypt increased 15.8% in July compared with the same month a year ago, according to recent figures from the Ministry of Tourism.  Hotel occupancy reached 67.9% in August, an increase of 85.5%, with revenue per available room (RevPAR) rising 125% to LE382.87 ($53.5) according to the latest data from London-based consultancy and research firm STR Global.  The high percentage increases are indicative of the depths to which occupancy and revPAR had plunged.

“Egypt reported a strong performance for the second consecutive month, due in part to low performing comparables in 2013 when the country experienced an outbreak of violence,” said Elizabeth Winkle, managing director of STR Global, said in a statement at the release of the latest data.  “The question remains whether this uptick is the beginning of a turnaround.”

While the rebound is welcome news to the battered tourism sector, visitor numbers remain far behind pre-2011 revolution levels.  In July 2010 more than 1.3m tourists visited the country; significantly higher than the 885,765 visitors recorded in the same month of this year.  Moreover, in fiscal year 2013/14 tourist arrivals totaled 7.9m, down 42% from 2009/10 figures.

Green Shoots

It will be some time before the industry experiences the same levels as before the January 25 revolution in 2011, but the improvements come as a small boost to the beleaguered economy.  This is not surprising given that tourism is a mainstay of the Egyptian economy, contributing 11.3% of GDP and employing some 3.8m workers, according to government statistics.  The sector also brings 14.4% of Egypt's foreign currency revenues - the lifeblood of the economy, paying for much needed energy and wheat imports.

The minister of tourism, Hisham Zaazou, recently predicted a full recovery by the end of 2015 - assuming the current level of stability is maintained - with the aim of attracting more than 25m tourists by 2020, he told Reuters.  Zaazou’s upbeat outlook is partly due to a number of government programs that are expected to bolster the sector and a depreciating pound which makes it an affordable destination for European travelers in particular.

Egypt’s ambitious 2020 plan is being driven by a three-year marketing campaign hoping to attract tourists and investors.  The ministry is also heavily lobbying to ease any remaining foreign travel warnings as well as taking a multipronged approach to attract tourists from a variety of countries.

As well as pitching for tourists from Egypt's traditional markets in Europe and North America Zaazou is looking to target India, China and Latin American countries among others and the aim of a partnership with Gulf carriers Etihad Airways and Emirates Airlines, Zaazou told Reuters.  In addition, the minister has announced increased direct flights from New Delhi to Egypt and the planned launched of direct flights from four points in China to Aswan in November, targeting 142,000 Chinese tourists in the first year, Zaazou added in a separate interview with Chinese news agency, Xinhua.  The country is also calling on GCC developers and hotel managers to invest in the market.

Marriott International’s president of Middle East and Africa told Bloomberg in October that the group may build 40-50 hotels in Egypt before 2020 - adding 10,000 hotel rooms - to capitalize on a surge of travelers due to the economic potential and tourist attractions.  Occupancy rates at the chain's hotels in Egypt's capital, Cairo, and at Red Sea resorts have increased to between 60-75% from a range of 30 - 45% since the May election, he said. "We see tremendous growth opportunities in Egypt."

Analysts agree that the long-term fundamentals are strong.  “Even though perhaps it’s a little bit difficult right now, we still have fundamentally high hopes for Egypt. It is a great market.  It has great inventory, great product.  Its physical location as well as its price point is correct and nicely set,” Nicolas Mayer, industry leader, lodging and tourism at PwC on Egypt’s hotel market told Gulf Business in June.

Security Challenges Linger

There are still some challenges that the country will have to overcome if it is to see the same volumes of visitors as it did four years ago.  In February, an attack on a South Korean tour bus in the South Sinai, killing three, prompted additional security measures in the major destination for holidaymakers on the Red Sea.

In its wake, more than 15 European countries issued a travel warning to their citizens for the Sinai Peninsula, a major blow given that European tourists make up more than two-thirds of tourist numbers to Egypt, according to official data.

However Germany lifted its restriction in July, followed by Japan in August. Germany sent the second highest number of tourists to Egypt last year with 850,000 visiting the nation, resulting in $600m in profits, according to Chairman of the International Tourism Sector and the Tourism Activation Authority, Ahmed Shoukry.  (OBG 17.10)

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 11.8  EGYPT:  Aiming at 20% of Power from Renewables by 2020

In an attempt to escape the energy crisis triggered by frequent power cuts, lack of fuel and the deterioration of national networks and power stations, the Egyptian government has signaled its intent to expand the use of new and renewable energy, notably solar energy.  Despite the enormous potential, it’s still a daunting prospect because of the level of investment required to expand in solar energy, especially in light of the continuing deficit in the state budget.

In September, Prime Minister Ibrahim Mehleb held a number of intensive meetings with Minister of Electricity and Energy Mohamed Shaker and other parties involved in the energy sector in Egypt to discuss the implementation of a long-term renewable energy strategy.  The government confirmed in several press releases — copies of which were obtained by Al-Monitor — that there is no better way to get Egypt out of the energy crisis that doesn’t rely on natural gas or diesel fuel to run power plants.

On 20 September, Shaker announced a special tariff for the purchase of new solar and wind energy produced by private companies, following more than five years of delay, in an attempt to encourage the private sector to produce renewable energy and allocate it for domestic and commercial uses, provided government buildings are the first beneficiaries.  The state funds part of these projects through soft loans from the Ministry of Finance with a 4% interest rate.

In a statement to Al-Monitor, the spokesman for the minister of electricity and energy, Mohammed al-Yamani, said, “The government's plan aims at producing 20% of Egypt’s energy from renewable energy sources, 12% of which will be wind energy, by 2020.”  Egypt’s renewable energy output is currently 1% of its total energy supply, Yamani said.  “The current projects to generate solar energy are small projects to light government buildings and some university buildings,” Yamani added.

Investors in the energy fields complain of difficulty in pursuing any project in this field, but Shaker stressed, “We eased regulatory procedures to encourage investment and facilitate the process of obtaining construction permits for power plants using renewable energy.  “The government received bids from local and international private companies for the implementation of 20 projects for the production of solar energy at a cost of $30 billion, which will add 20,000 megawatts to the electricity grid in just two years,” he said.

The Renewable Energy Authority with the Ministry of Electricity finished feasibility studies for solar power plants operating on solar cells in the Kom Ombo region in the province of Aswan and in Hurghada city and hope to establish them by 2017.  These come in addition to the thermal stations set up by the Ministry of Electricity, such as the Kuraymat solar-thermal power plant as well as another power plant to be established in Aswan, still under review.

Despite the enthusiasm within the government to accelerate the implementation of such facilities, the state's legal authorities and legislative committees are still reviewing investment contracts and licenses so that the power plants are built and lands are appropriately leased for a determined period.

To benefit from recent government measures to promote the use of solar energy, owners of private companies are calling on the government to remove the contract and licensing obstacles that have delayed the expansion of solar energy projects in Egypt.

Samir Sobhi, the chairman of the board of directors of the Egyptian Solar Energy Systems Company, told Al-Monitor, “The recent government decisions to set a tariff for renewable solar and wind energy constituted the main drive and incentive for companies to work in this field. Prior to this decision, there were major delays in the solar energy market.”

Sobhi called the state to quickly address the remaining procedures that may impede the private sector from investing in the production of electricity from renewable sources, saying, “The state’s current action in this respect has become a national objective … and not a luxury.”

Sobhi, whose company produces 500 kilowatts per day of solar energy and adds them to the electricity grid in the Nasr City district, said, “Our experiments and studies confirm the great success of these projects, especially since Egypt is located in the 'sun belt' zone, which gives it more opportunities for expansion in solar energy production than European countries.”

In a statement to Al-Monitor, Khaled Abu Bakr, the chairman of the board of directors of Taqa Arabia, said, “Encouraging the private sector to support the state’s renewable energy plan requires the establishment of legislative frameworks and tax regulation, so as to reassure investors to invest intensively in a basic structure of projects that could generate profits in time.”  Abu Bakr believes the reform of the energy sector in Egypt may lead to further investments that support the economic situation of the state. “According to studies, we need at least 3,000 megawatts of solar energy, but the state is still in an awkward and difficult position due to significant challenges impeding the provision of these needs,” he said.

Cairo is trying to re-promote the Desertec solar energy project linking North Africa, the Arab Mediterranean region and the rest of the European continent to attract global investment for the production and exportation of renewable energy from Egypt.

The Desertec Foundation's report, "Clean Energy from the Desert," examines the energy crisis in Egypt following high rates of population growth, increasing energy demand and the lack of potential for the production of electricity from conventional sources based on petroleum products.  It also cites another problem: Cairo’s inability to expand the power output from the Aswan High Dam following clear threats to its water share from the Nile River.  The report states that there is no alternative but to expand in solar energy, abundantly available in the deserts of western and eastern Egypt.

The report affirms the possibility of full economic dependence on energy produced from renewable sources and finds that if exported, this energy may become a source of income for Egypt.

The government's attempts to promote the use of solar energy are hindered by the possibility of legislation that balances meeting the growing internal demand for energy and attracting investors by offering incentives.  The search for alternative sources of energy has become the only way to end the current impasse and avoid popular opposition that arose after the government allowed cement companies to burn coal for power.  (Al-Monitor 09.10)

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 11.9  MOROCCO:  Phosphate Companies Target Higher Output

While Morocco’s phosphate exports – a key revenue-earner – may have been impacted by declining commodity prices, the sector is anticipating general growth for the years ahead, with most analysts predicting a recovery in the global market by 2016.  In spite of the cyclical turbulence, state-owned Office Cherifien de Phosphates (OCP) has several projects under way to expand output. Increased sales of value-added fertilizers may help offset the decline in raw commodity prices in the near future.

OCP is pushing ahead with a Dh145b (€13.05b) investment program to increase its production capacity and reduce costs, positioning itself well for a market recovery.  The state-owned company, which owns four mining centers and two processing plants, is aiming to double its annual capacity of phosphates between 2007 and 2017 by expanding current mines and launching new ones, with a particular focus on improving downstream activity.

The OCP investments will be partly used for constructing a phosphate cleaning plant in Merah, a 235-km pipeline between Khouribga and its Jorf site, and the opening of three new mines at the Khouribga mining site, which will expand production from 18.5m tonnes to 38m tonnes by 2020.

Higher sales of end-product fertilizers may also give some short-term relief from the commodity market slump. OCP’s fertilizer exports are projected to rise to 2.5m tonnes in 2014, from 2.3m tonnes in 2013, according to the group.

The company signed an agreement with North American potash producer PotashCorp in May to provide OCP a platform to sell its dry finished phosphate products in the US and Canada.  A 10% stake in Brazilian fertilizer producer Fertilizantes Heringer that OCP bought in June for around $65m will give the company a commercial and supply foothold in South America. 

New markets

OCP is also expanding its production and commercial networks in Africa, where fertilizer usage rates are some of the lowest in the world. In the past five years, several African governments have launched initiatives to boost domestic agricultural production, which should multiply fertilizer demand in the future. OCP said exports of fertilizers to Africa in the first half nearly doubled to 315,000 tonnes from 164,000 tonnes in the same period last year.

In a recent tour of West and Central Africa, OCP unveiled several major commitments to the African market that should provide it with new export markets.  In February, Morocco’s King Mohammed said that OCP would launch a new fertilizer production line at its Jorf Lasfar plant at a cost of $600m that would be completely dedicated to sales on the African continent.

The unit is expected to become operational before the end of 2014 with a production capacity of 1m tonnes per year.  The group also concluded a partnership agreement with Gabon’s Societe Equatoriale des Mines (SEM) in March to build a joint chemical fertilizer operation, including two production units in each country, with a total investment value of $2b. 

Choppy waters

The expansion program comes amidst a tight time for global markets. OCP, one of the world’s largest three operators by exports, said first-half revenue fell 3.6% to Dh23.1b (€2.98b) y-o-y and net profit slid 17.8% to Dh3.02b (€270m).  The results confirm that the global downturn in phosphate prices that began two years ago continues to weigh heavily on the industry.  Phosphate rock prices have fallen to an average of $110 per tonne in September from $145 in 2013 and $185 in 2012.

The fall in export revenues will have an impact on the kingdom’s foreign currency earnings.  Morocco earned Dh17.55b (€1.58b) from phosphate exports in the first half of 2014, a drop of 12.1% according to the Foreign Exchange Office (FEO).

Several factors have triggered the price slump in phosphate, which is mainly used to produce fertilizers.  In particular, the phosphate market has been flooded by output from newer producers such as Peru and Saudi Arabia, with the latter benefitting from cheap energy inputs.  Slower growth in emerging markets such as China and India since 2013 has also lowered demand. However, analysts expect global population growth and a subsequent rise in the demand for agricultural products to boost phosphate prices in 2015 – something that OCP will be well-placed to capitalize on.  (OBG 08.10)

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 11.10  TURKEY:  Turkey Lowers Economic Targets

The Turkish government has revised its year-end economic targets amid regional turmoil, rising inflation, a weakening currency and shrinking industrial output.  The revisions were announced 8 October as part of Ankara’s new medium-term program, its economic road map for 2015-17.  The growth forecast was slashed to 3.3% from 4% for 2014, and to 4% from 5% for 2015.

Efforts to rein in inflation have proven a huge disappointment.  Accordingly, the year-end estimate was raised to 9.4% from the earlier 5.3% projection, a level Turkey could now hope to achieve only in 2016, if everything goes as planned.

While Ankara has failed on inflation and growth, it has achieved notable progress in reducing the current account deficit.  The economy management will now shift its priority to battling inflation and move the current account deficit problem to second place, with structural reforms third on the priority list.  Deputy Prime Minister Ali Babacan, who is in charge of the economy, pledged the required structural reforms, a key issue for foreign investors, will be sped up in a bid to prop up growth.

New Forecasts

Turkey’s main economic targets for the next three years, announced at a news conference attended by Babacan and five other ministers, were as follows:

Gross domestic product (GDP) per capita: $10,537 at the year-end; $10,936 in 2015; $11,541 in 2016; and $12,229 in 2017 (The original target for 2014 was $11,277, meaning it has been postponed by two years, to 2016).

GDP growth: 4% in 2015; 5% in 2016 and 2017.

Inflation: 6.3% in 2015; 5% in 2016 and 2017.

Unemployment: 9.6% in 2014; 9.5% in 2015; 9.2% in 2016; and 9.1% in 2017.

Investment: Public investment to reach $85 billion by the end of 2014.  A preliminary $88 billion will be allocated for public investment in the 2015 budget.

Budget deficit: 1.4% of GDP at the year-end; 1.1% of GDP in 2015; 0.7% of GDP in 2016; and 0.3% of GDP in 2017.

Foreign trade: Exports are expected to reach $160.5 billion and imports $244 billion in 2014.  Projections for the next three years: $173 billion in exports and $258 billion in imports in 2015; $187.4 billion in exports and $276.8 billion in imports in 2016; $203.4 billion in exports and $297.5 billion in imports in 2017.

Tourism: Revenues from tourism are expected to reach $29.5 billion by the year-end, and are projected at $31.5 billion in 2015; $33.5 billion in 2016; and $35.5 billion in 2017.

Privatization: Revenues from privatization are estimated at $8.7 billion in 2015 and $6.7 billion in 2016. Tax revenues and primary expenditures are expected to increase by 19.7% and 5.1%, respectively.

Is current account deficit reduction healthy?

Turkey’s most remarkable achievement this year has been the reduction of the current account deficit, which is expected to fall to 5.7% of GDP by the end of the year.  The deficit stood at 7.8% of GDP ($65 billion) in 2013, well above the deficits of other emerging economies such as India, Brazil, South Africa, Chile and Indonesia.

In the previous medium-term program, the current account deficit for 2014 was projected at $55.5 billion.  The revised projection has put the figure further down, at about $46 billion.  But despite the progress, the decrease is not quite healthy. The rise in exports has had a positive effect in reducing the deficit, but one should keep in mind that slowing growth is another factor that narrows the gap.  The economy would have gained more if the decrease in the current account deficit had been accompanied with strong growth, driven by structural reforms.

The current account deficit target was set at 5.4% of GDP for 2015 and 2016, and 5.2% of GDP for 2017.  The target rates in the previous program stood at 6.4% for 2014; 5.9% for 2015; and 5.5% for 2016.  According to Babacan, the targeted deficits translate to $46 billion in 2014 and 2015; $49.2 billion in 2016; and $50.7 billion in 2017.

Larger Domestic Savings

The low level of Turkey’s domestic savings is a major reason for its dependence on short-term capital inflows, or the so-called hot money.  According to Babacan, domestic savings are expected to reach 14.9% of GDP at the year-end, with the targets set at 15.2% in 2015; 16.2% in 2016; and 17.1% in 2017.

In sum, all of Turkey’s economic targets except for the current account deficit have been revised downward in the new, medium-term program. It remains to be seen whether the lower targets will be achieved.  (Al-Monitor 12.10)

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 11.11  TURKEY:  Turkey Uses Defense Industry As Political Instrument

Justice and Development Party (AKP) decision-makers, obsessed of late with the idea of the “New Turkey,” have decided that to be a powerful state Turkey has to rely on a “national government-strong army-strong national defense industry” formula.

In the AKP’s aspiration to become a powerful regional and global force, the defense industry has emerged as an important political instrument.

Fikri Turkel, a writer for the pro-government daily Yeni Safak, writes about Turkey’s place in the $1.5 trillion annual global defense market, which is expected to reach $2.5 trillion in the next 10 years.  Turkish decision-makers constantly say that by 2023, Turkey must get at least $25 billion from this lucrative market.

In 2008, Turkey’s defense industry exports were $600 million.  At the end of 2012, exports doubled to $1.2 billion. In 2013, the number of companies working in Turkey's defense sector was more than 500, while exports neared $1.5 billion.  The target for 2014 defense exports is estimated at $1.8 billion.  President Erdogan in his inaugural speech to the parliament spoke about the Turkish defense industry.  He said, "Turkey can now manufacture its own tanks, combat ships, attack helicopters, UAVs, communication satellites, its national infantry rifle, rocket launchers and much other defensive equipment."

Turkey’s military spending also reflects the increasing interest in the defense industry.  According to data provided by Stockholm International Peace Research Institute [SIPRI] in 2013, Turkey ranked 14th in military expenditures with $19.1 billion.

In fact, 39% of Turkey’s 2013 defense industry exports were to the United States; this included airplane and helicopter assembly parts and electronic warfare software and equipment.  The second-largest market, with 9.2%, was Saudi Arabia, followed by the United Arab Emirates, Bahrain, Iraq, Italy, Spain, France, Germany and Rwanda.

Latif Aral Alis, president of the Union of Defense and Aerospace Industry Exporters, said, “To some countries, we export not goods but services.  For example, Turkey is developing Malaysia’s unmanned naval vehicle project.  We want to open up to Central Asia, the Far East and Africa.  We want to be a preferred exporter of naval vehicles.”

The driving engine of the growth of Turkey’s defense industry is the Undersecretariat of the Defense Industry (SSM) attached to the Ministry of National Defense.  It is the decision-making center for all political, economic and strategic decisions related to the military industry.  In the last five years, the total contracts it issued increased by 85% to reach $20 billion. SSM is targeting revenue of $8 billion in the defense and aeronautics sectors while achieving $2 billion in exports.  The grandest SMM projects include the joint strike fighter with $16 billion, the ATAK helicopter with $3.3 billion and 2 billion euros ($2.56 billion) for the New Type submarine.

The AKP government is attaching importance to adding muscle to its “New Turkey” slogan also for domestic political gain.  Strengthening the defense industry is seen as an integral part of the country's aspiration to become a regional and global leader in addition to expanding the country’s economy.  The Turkish public loves to hear about defense industry success stories; these become an element of national pride.

In all countries of the world, the defense industry is a semi-transparent sector that usually has certain immunities and privileges.  In Turkey, where state corporations dominate the sector, political and military decision-makers are both employers and managers of the sector.  In such a configuration, it is easier for the sector to hide behind a wall of secrecy.

Lale Kemal, known for her articles in the defense field, said in an article titled “Will you build a warplane for prestige?” that the public has to be a bit more awake to boasts of “We will make a warplane, we are selling these weapons” — which sounds good to the ear but is misleading.  She said people should know that huge sums of tax revenues are spent on these projects, some of them needlessly.  She said a Turkey that says, “I will produce all my weapons and save myself from dependency abroad” continues to squander its limited resources in this field.

There are frequent complaints that small and medium-size companies known to be close to the government are encouraged to enter the defense industry, where they get preferential treatment.  According to academic Sait Yilmaz, the government continues to look after partisan supporters when it comes to defense-contract awards.  For example, Murad Bayar, who headed the Undersecretariat of the Defense Industry for 10 years, was removed from his post on 28 March; the companies the government favors stayed.  The government simply removed Bayar and appointed the Turkish Airlines general manager as the new undersecretary.  There has been frequent criticism that mega-projects such as the ATAK helicopter, the national warship project and Altay, the national tank project, were politically motivated decisions that will inevitable result in defense budget deficits.

The government wants to use the defense industry as a significant instrument of foreign policy to improve its foreign relations and to build new relationships.  Minister of Defense Ismet Yilmaz said Turkey, with its strong army, has become a country that many other counties want to cooperate with.  He said, "To date, we have signed military training, technical and scientific cooperation agreements with 67 countries.  We signed agreements for defense industry cooperation with 55 countries.  We have military training agreements with 52 countries.”

With such high-profile ventures, Turkey’s defense industry has become a major topic of political debate in Turkey.  Throughout history, countries have used the pretext of the threat of attack by external enemies, danger to national security and combating imperialism to expand their defense industries.  The aspirations and narratives of the AKP government for the revival of neo-Ottomanism, to be a leader of the Sunni Islam world and to be a political power with influence in the Middle East, the Balkans and the Caucasus have certainly oriented the country toward a major military-industry complex.

Nurhan Yenturk, who says military spending and the defense industry need to be more transparent and held accountable, says it is crucial for parliament to exercise more audit powers and supervision.  Unfortunately, in Turkey there is an aversion to concepts such as transparency, accountability, parliamentary oversight and open, constructive debate in this sector.

People instead watch with glee and pride TV programs that are nothing but populist political shows on new national weapons systems and equipment.  (Al-Monitor 16.10)

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 11.12  TURKEY:  As US Economy Recovers, Turkey's Falters

The signs of economic recovery in the United States are growing stronger, with better-than-expected growth and employment data.  The US recovery, however, is upsetting the balances of emerging economies, including Turkey.

Most recently, the US non-farm payrolls were announced on 3 October.  Employers added 248,000 jobs in September, beating the forecast of 215,000.  The jobless rate fell to a six-year low of 5.9%.  The signals of fast recovery in the United States have stoked concern in emerging-economy countries that the Federal Reserve could hike rates sooner than expected.  These fears have had an immediate impact on foreign exchange rates. In Turkey, the dollar jumped from about 2.26 to 2.31 Turkish lira, its highest value since Jan. 31.

The Federal Reserve has been expected to hike rates in June 2015.  But the strengthening US economy means that the hike could come earlier.  The prospect of an early Fed move, coupled with unrest within and along Turkey’s borders, has made the Turkish lira one of the fastest depreciating currencies among emerging economies.  The lira lost about 6% of its value in September alone.

In remarks to Al-Monitor, Fatih Ozatay, the former Turkish Central Bank deputy governor who now heads the Finance Institute at the Economic Policy Research Foundation of Turkey, offered the following analysis of the converse interaction between the US and emerging economies: “When the Fed starts to hike rates, this means that rates go up also in Turkey and similar countries such as Mexico, Brazil and South Africa.  This results also in upward pressure on foreign exchange because higher interest rates in the United States mean less capital coming in.  A major rate hike would lead to capital outflows from those countries.  The more the US unemployment rate improves, the more the timing of the Fed’s rate hike is brought forward.  The Fed doesn’t know when exactly it will raise the rates.  It says the decision will depend on the unemployment data.  If positive data continues to come in, the rate hike could be brought forward even to March.  This won’t be a disaster, but when the US hikes rates, things get worse here.”

When will the hike be announced?

The question is being debated both in Turkey and abroad. The Fed’s Open Market Committee said last month that rates would stay low for a “considerable time.”  Since late 2008, when the economic crisis erupted, interest rates in the United States have been close to zero.  The question now is when that “considerable time” will be up.

The minutes from the Fed’s 17 September meeting show that many executives expect a hike next year.  The most specific timetable came from Federal Reserve Vice Chairman Stanley Fischer.  He said that to him, “considerable time” meant between two months and a year, which suggests that a hike may be announced anytime between January and December 2015.

Turkey Expects Adverse Impact

Turkey’s economic management is preparing for the prospect of the Fed hiking rates. Deputy Prime Minister Ali Babacan, who is ultimately in charge of the economy, said last week while announcing Ankara’s three-year economic road map that Turkey would be adversely affected if the Fed tightens monetary policy.  However, the European Central Bank’s monetary expansion policy is expected to help increase exports and partially balance the negative US impact.

Babacan pointed out that US unemployment had dropped below 6%, but the quality of the recovery was questionable.

“The asset purchase program will be completed in October. And as of the middle of next year the rate process will kick off.  The Fed will start a process of rate hiking [that will continue] until the end of 2017,” Babacan said.  “In contrast, the European Central Bank maintains its expansion policy to avoid the risk of deflation and further strengthen growth.  We know the expansion process in the European Central Bank’s monetary policy will have positive consequences for Turkey.  We expect the Fed’s tightening policies to have adverse impacts on Turkey,” he added.

“How much those two will balance each other will become clear in 2015. It’s important that their impact on Turkey is regularly evaluated and that the related institutions take the right steps at the right time,” the minister concluded.

Foreign exchange jitters remain high in Turkey.  Events within and across the country’s borders play a role, but the main reason for this nervousness is the Fed’s looming rate hike.  Economic authorities are making preparations for multiple scenarios, while private companies are trying to balance their foreign exchange positions.  That’s why Turkey appears bound to remain on tenterhooks in the next several months.  (Al-Monitor 17.10)

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