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In 2015, the economic scene in the MENA reqion, where Bank Audi has extensive presence, was dominated by geopolitical and oil price developments. Regional uncertainties arising from the complex conflicts in a number of countries of the region have been weighing on overall confidence, while low oil prices have been taking a toll on economic activity. Overall, MENA growth last year was estimated to be modest, at 2.3% in 2015, according to IMF estimates, compared to a previous 5-year average of 4%. The MENA banking sectors remained at the image of economic developments at large.

Measured by the consolidated assets of MENA banks, banking activity reported a retreat in growth from 8% in 2014 to 4.5% in the 2015 corresponding period. Likewise, deposit growth retreated from 7.7% to 1.5% over the same periods, while loan growth was almost maintained at 7.5%. MENA banks’ net banking profitability was thus under the burden of relatively low activity growth and tough operating conditions underlined by narrowing net interest margins, growing provisioning requirements and slow fee income growth generation at large. Below is the year 2015 analysis of the economic environment and banking operating conditions in the main markets of presence in the broad region, namely Lebanon, Egypt and Turkey.


The Lebanese economic scene was at the image of domestic political uncertainties amid broad regional conflicts in 2015. The real economy reported one of its worst years in more than a decade, with most real sector indicators contracting or reporting mild growth. Domestic demand was sluggish, mainly in its private and public investment components, adding to a contracting foreign demand, as witnessed by forgone exports.

The evolution of real sector indicators in 2015 confirms the sluggishness in growth. Among indicators that reported net contractions, we mention exports that dropped by 10.9%, imports that declined by 11.8%, value of property sales that contracted by 10.6%, construction permits that decreased by 8.9%, cement deliveries that fell by 9.4%, and merchandise at the port that inched down by 0.8%. Among indicators that reported net increases, we mention passengers at the airport with an increase of 9.9%, the number of tourists with a surge by 12.1%, and new car sales with a rise of 4.1%.

As a reflection of weak aggregate spending in the economy, cleared checks declined by 6.6% in 2015. They moved from USD 74.5 billion to USD 69.5 billion. Accordingly, the velocity of money contracted by 11.5% over the period, suggesting that the 5% average yearly growth in deposits is not reflected in a similar expansion of the circulation of money within the context of a cautious politico-economic environment.

Mirroring the set of real sector indicators, the 2015 BDL average coincident indicator recorded 278.6, rising by 2.0% relative to the previous year. Comparatively, the average coincident indicator grew at a higher pace in 2013 and 2014, reporting a growth of 3.2% per annum for both years. It is worth recalling that the BDL coincident indicator represents a weighted average of a number of indices that should coincide with economic activity, but is not a measurement of the magnitude of real GDP growth in the economy. Its evolution is still a barometric indication of the behaviour of the domestic economy at large.

At the fiscal level, public finance statistics for the first nine months of 2015 show a 17.4% growth in public finance deficit year-on-year. The deficit expansion comes within the context of an 8.6% drop in public revenues, along with a 2.9% decline in public expenditures. As a percentage of GDP, the public finance deficit slightly rose from 5.9% over the first nine months of 2014 to 6.4% over last year’s corresponding period. Still, public debt to GDP did not deteriorate, reaching 130% at end-December 2015 against 133% at end-2014.

At the foreign sector level, foreign trade figures for 2015 reported a 12.0% contraction in the trade deficit relative to the previous year. As such, the trade deficit contracted to 27% of GDP (a historical low) from 34% of GDP in 2014. In dollar terms, the trade deficit was cut by USD 2.1 billion, moving from USD 17.2 billion in 2014 to USD 15.1 billion in 2015. It is yet important to mention that the decline in the trade deficit over the period did not lead to an improvement in the balance of payments. On the contrary, the balance of payments saw its deficit widening from USD 1.4 billion in 2014 to USD 3.4 billion in 2015, a record high for Lebanon. The increase in the balance of payments deficit is tied to contracting financial inflows that dropped by 25.4% over the period.

Within the context of a net contraction of financial inflows, a modest growth in bank deposits was reported, valued at USD 7.2 billion year-to-December, against USD 8.2 billion over the previous year, though still somehow sufficient to meet the borrowing needs of the economy in its private and public sector components. When looking at deposits by currency, we witness that the LBP deposits accounted for the equivalent of 52% of deposit growth, leading to a contraction in deposit dollarisation from 65.7% in December 2014 to 64.9% in December 2015, its lowest level in almost three years. Bank lending to the private sector slowed further down in 2015, amidst slowing down economic conditions in the country and the lack of lending opportunities domestically and regionally. Bank loans to the private sector, which had risen by USD 3.5 billion in 2014, grew by USD 3.3 billion in 2015.

Financial soundness indicators were maintained at satisfactory levels. NPLs to total loans ratio stuck to 3.6% as at end-December 2015, and provisioning hovered around the adequate 70% mark. Similarly, liquidity remains sufficient, with primary liquidity in FC at a high 48.2% of FC deposits at end-December 2015. Banks remain adequately capitalised, with the Basle II ratio at 14.4% at end-June 2015, thus providing them with adequate cushions should capital pressures arise. At the profitability level, an 11% rise in net profits was reported in 2015, yet bearing in mind that banks’ return ratios remain squeezed with the annualised ROA at 1% and the annualised ROE at 11%, below the cost of equity of Lebanese banks at large.


operating enviroment in lebanon
Sources: IMF, Central Bank of Lebanon and Bank Audi’s Group Research department.


Over the past year, the Egyptian economy has considerably recovered after four years of slow activity. The Ministry of Planning issued real GDP figures for 2014/15, showing that the economy grew by 4.2% at market prices, the best performance since 2009/10. There is a reasonable chance of a similarly strong growth performance in 2015/16 if the government can address the hard-currency shortage which has weakened business sentiment in recent months. The government will be assisted in this task by an influx of multilateral assistance from the IMF and the World Bank, which will help offset some of the recent setbacks to tourism, following the bombing of a Russian airliner in Sinai in October. Egypt’s economic outlook remains positive for the years to come, with this optimism reinforced by the Zohr gas discovery. The recent major gas recovery by the Italian firm ENI, together with improved terms, has encouraged development of previously discovered fields.

At the monetary level, headline inflation remains stubbornly high at 11.1% in December 2015 due largely to supply bottlenecks. Egypt did not seemingly benefit from lower international oil prices, as prices continue to trend upwards, especially within the context of the Egyptian Pound depreciation against the US Dollar. Increased downward pressure on the pound has prompted state-owned banks to increase interest rates on some of their local-currency savings products, in an indication of significant changes in monetary policy that are likely to be made under the newly appointed Central Bank governor. The increase in deposit rates offered by state-owned banks appears to be a signal that the Central Bank is likely to announce a noticeable rise in rates in the coming months.

The tightly managed currency is coming under increasing scrutiny. Ongoing security concerns and economic uncertainty continue to provide a challenging backdrop for the Central Bank. Under the leadership of the former CBE governor whose term ended on 26 November, the pound was allowed to depreciate against the US Dollar, crossing the EGP/USD 8 line for the first time, in mid-October, before strengthening slightly thereafter. This was the third time so far in 2015 that the CBE had effected a limited devaluation, and comes only weeks after the IMF urged the authorities to adopt a more flexible approach towards exchange-rate policy. The Egyptian Pound has accordingly depreciated by 9.6% in 2015, moving from EGP/USD 7.15 at end-December 2014 to EGP/USD 7.83 at end-December 2015, while the black market rate is quoted at EGP/USD 8.50. Foreign currency reserves have fallen from USD 36 billion before the 2011 uprising to USD 16.4 billion (3.4 months of imports) in December, leaving the Central Bank with little scope to defend the pound from mounting downward pressure.

At the public finance level, fiscal reforms pave the way for narrower deficits. The fiscal deficit narrowed to 11.5% of GDP, helped by lower fuel subsidies and tight limits on wages and employment. The sharp fall in oil prices is providing some further breathing space to the 2015/16 budget. The introduction of the smart card last year was successful in monitoring consumption and limiting smuggling. In addition, a draft VAT law is ready and officials are hopeful that this will be ratified by the new Parliament so that it can be launched by July 2016. With these measures, it is hoped that the deficit would narrow further to less than 10% of GDP in FY2015/16.

Egypt’s capital markets were at the image of regional tensions and the adverse effects of the drop in oil prices. Egypt’s 5-year CDS spread, a reflection of market perception of country risks, reported a 197 basis points expansion to reach 479 basis points. The Egyptian Stock Exchange saw a 27.5% drop in prices in 2015, driven by weaker investor sentiment across the region, some adverse local security developments, and lingering geopolitical concerns after the terrorist act that brought down the Russian passenger plane in Egypt on 31 October 2015. The latter, according to Moody’s, would have credit negative implications for the country’s balance of payments and pose downside risks to the country’s outlook. These unfavourable market spillovers were partly offset by Saudi Arabia’s pledge, towards the end of 2015, to raise its investments in Egypt and to contribute to providing Egypt with petroleum needs for the next five years.

At the banking sector level, the banking system has been relatively resilient to the regional turmoil amidst a tough operating environment. In details, over the first eleven months of 2015, bank assets grew by the equivalent of 27.6% in local currency terms (16.4% in USD terms), while deposits grew by 20.6% in local currency terms (10.1% in USD terms). In parallel, bank loans to the private sector grew by 24.7% in local currency terms (13.9% in USD terms), suggesting growing lending opportunities in a recovering economy. Net profits for 10 listed banks reported a yearly growth of 35% over the first nine months of 2015 (25% in USD terms). Financial soundness indicators remain satisfactory, with a non-performing loan ratio of 7.6% of total loans, along with a provisioning ratio of 99.2% of non-performing loans, a capital adequacy ratio of 13.2%, a return on average assets of 1.3% and a return on average equity of 18.9%. The anticipated sound economic growth in Egypt is likely to translate into a double-digit growth in monetary and banking aggregates over the years ahead, supporting the improvement of earnings growth of banks operating in Egypt.


operating enviroment in egypt

1 IMF full-year estimates. | Sources: IMF, Central Bank of Egypt and Bank Audi’s Group Research department.


Turkey’s macroeconomic performance in 2015 was satisfactory on the overall, exceeding preset expectations. A number of favourable developments in Turkey took place in the last quarter of 2015, as a new government was formed by the Justice and Development Party (AKP), starting to translate positively on the economy. Manufacturing PMI increased to above 50 in the last two months of the year, reporting 50.9 in November and 52.2 in December. Turkey’s consumer confidence index has improved in the last quarter of 2015, namely post-elections, reaching an average of 71 against an average of 64 in the first nine months of 2015. The recent rebound in confidence indicators (business survey data, consumer confidence, investment and employment prospects) eases the downside risks to economic activity.

It is worth mentioning that new national account figures were released for the third quarter that show that Turkey’s gross domestic product (GDP) increased by 4.0% on a year-on-year (YoY) basis, considerably higher than the market consensus of 2.7%. Accordingly, the 9-month real growth was realised at 3.4%. Consequently, 2015 yearly growth may come in at above the initially forecasted 3.0%, thanks to the strong domestic demand, bearing in mind that the last quarter was favourable post elections.

Such a performance is realised within the context of net economic benefits generated by the decrease in oil prices leading to lower external deficits and improved economic efficiency, on the backdrop of sustained volatility in the exchange rate and reference rates resulting from the impact of the US Federal Reserve policies on the emerging markets at large. In parallel, consumer price inflation has remained stubbornly high, well above the official 5% medium-term target, as a weaker Lira has, for the most part, offset the disinflationary effects of plunging global oil prices. The 12-month headline inflation remained high at 7.7% on average in full-year 2015, reaching 8.8% at end-December 2015.

At the foreign sector level, Turkey’s current account deficit, the soft spot of the Turkish economy, according to many, continued to decline towards sustainable levels thanks to the plunge in oil prices and underling a benign trend in trade balance. The IMF forecasts a current account deficit of 4.5% of GDP in 2015 against 5.7% in 2014.

At the public finance level, Turkey is still witnessing an ongoing fiscal discipline. The overall government balance sheet remains strong and the commitment to fiscal discipline appears to benefit from considerable consensus across the political spectrum. Turkey continues to have a strong fiscal framework, including a track record of primary fiscal surpluses and low government debt levels that allow for flexible policy responses. The IMF forecasts a primary government surplus of 1.43% of GDP in 2015, close to its previous year’s level. Government debt to GDP continues falling and is set to hit 32.41% at end-2015, its lowest level in more than two decades.

At the monetary level, although the Central Bank of Turkey reduced its key policy interest rate – the one-week repurchase lending rate – by a total of 175 bps in May-July 2014 to 8.25% and by 75 bps in January-February 2015, to 7.5%, liquidity has been kept relatively tight. The yield curve is flat, with short-term interest rates at a similar level to long-term rates. It is worth noting that the Turkish Lira lost 6.7% of its value in real terms in 2015.

While the country is facing tough challenges related to its domestic and external environments resulting in monetary drifts, its financial sector is continuing to grow steadily amidst favourable financial soundness indicators on the overall. The banking sector has proved resilient against the headwinds in 2015 due to heightened global and domestic risks. Bank assets grew by 18.2% in TRY terms in 2015, driven by an 18.3% growth in deposits, while loans grew by 19.7% over the year. Resilience in bank spreads was observed, partly owed to the sector’s ability to maintain a strong net interest margin (reaching circa 4.2% in by year end-2015) in spite of interest rate volatility, generating satisfactory profit metrics on the overall. Financial soundness indicators for the sector in aggregate are still reasonable in terms of asset quality, liquidity and capitalisation at large.


operating environment in turkey

Sources: IMF, BRSA and Bank Audi’s Group Research department.