The 2016 MENA economic scene, where Bank Audi has a wide 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. Low oil prices are also taking a toll on economic activity, mainly in the oil-exporting countries, with varying spillover effects on oil importing countries. Within this environment, MENA growth is estimated to be modest at 3.2% in 2016. The MENA banking sectors remained at the image of macroeconomic developments, with consolidated assets of MENA banks reporting a mild deposits growth of 3.2% in December 2016 relative to the same month of the previous year.

Within this environment, the year 2016 was mixed for the Egyptian and Turkish economies, the main markets of presence of Bank Audi within the region, which are facing opportunities and challenges. Both countries are going through domestic challenges, mainly at the level of monetary and exchange pressures that add to geopolitical and security threats, yet without jeopardising the countries sound macro fundamentals at large. In Lebanon, the Lebanese economy expanded at a slightly higher pace than in the previous year, with real GDP growing by 2%, along with prospects for faster growth in 2017 on the basis of Lebanon’s recent domestic political settlement that led to successful presidential elections and the formation of a Cabinet of National Unity.


In 2016, the Lebanese economy did not get out of the state of sluggishness that characterised its performance during the past half a decade. Despite a continuously growing private consumption, economic sluggishness was mainly tied to a weak private investment component within the context of a wait-and-see attitude among investors, delaying major investment decisions in the country. It is within this context that the capital formation rate, i.e. the investment to GDP ratio, registered a low of 23% in 2016, gradually down from 31% in 2010 prior to the regional turmoil. Mirroring the sound growth of private consumption offset by declining private investment, the analysis of Lebanon’s imports, that account for 36% of GDP, suggests a rise of 5.2% in imports of non-oil consumption products in 2016, coupled with a stagnation in imports of investment products over the same period.

With the Lebanese economy expanding at a slightly higher pace than in the past couple of years, the BDL coincident indicator issued by the Central Bank of Lebanon for the month of November 2016 reported 288 for the first eleven months of 2016, growing by 4.5% relative to the corresponding period of 2015. Comparatively, the average coincident indicator had grown by 3.2% in 2014 and by 2.0% in 2015. Within this context, the Central Bank of Lebanon forecast real GDP growth at 2% in 2016, similar to our own forecast and almost in line with the average reported over the past five years, but higher than the growth of 2015. While there was a slight improvement in aggregate demand for goods and services in Lebanon’s economy in 2016, the economy is still in a sluggish mood, with growth way below the economic boom years between 2007 and 2010, when the economy recorded a real GDP growth of 9% on average per annum.

The analysis of m ost real s ector indicators suggests that they remained somehow on the upside in 2016. Out of 11 real sector indicators, 8 are up and 3 are down in 2016. Among indicators that witnessed a positive growth in 2016, we mention the number of tourists with a rise of 11.2%, merchandise at the port with a surge of 6.3%, passengers at the airport with a rise of 5.5%, electricity production with an uplift of 5.2%, property sales with an expansion of 4.9%, cement deliveries with an increase of 4.1%, imports with a rise of 3.5%, and exports with an uplift of 0.8%. Among indicators that witnessed a negative growth, we mention new car sales with a drop of 7.7%, cleared checks with a decline of 2.2%, and construction permits with a decrease of 0.9% year-on-year.

The year 2016 witnessed a fiscal deterioration, along with a monetary improvement. Lebanon’s fiscal performance reported a net deterioration in the first eight months of 2016, with budget deficit expanding by 27% year-on-year driven by a faster growth in expenditures (9.5%) relative to that of public revenues (4.1%). At the monetary level, the Central Bank of Lebanon, in tight coordination with Lebanese banks, has undertaken successfully innovative financial engineering operations that targeted reinforcing Lebanon’s foreign assets and supporting the balance sheets of operating banks. Swap operations between the Central Bank and the Ministry of Finance and between banks and the Central Bank revolved around a total of USD 14 billion, raising BDL foreign assets to a record high of above USD 40 billion.

Consequently, the foreign sector reported a significant improvement in activity on the back of a noticeable 44% growth in financial inflows over the first eleven months of the year, generating a surplus in the balance of payments of USD 1.2 billion, following a large deficit the year before. While the year started with a large BOP deficit in the early months of the year, the financial engineering operations of the Central Bank were key to attract significant inflows in the second half, leading to a corollary rise in the net foreign assets of the financial system.

Within this environment, banking activity, benefiting from growing financial inflows towards Lebanon saw a USD 18.3 billion increase in assets in 2016, almost double the growth over the previous year, mostly driven by the rise in customer deposits of USD 10.9 billion and the significant reinforcement in shareholders’ equity. As to the currency breakdown, FX deposits grew by USD 8.6 billion, while LBP deposits increased by USD 2.3 billion, leading to a rise in deposit dollarization to 65.8% in December 2016. The year 2016 was a profitable year for Lebanese banks, reversing the trend of profit stagnation and contraction of return ratios over the previous few years.

At the capital markets level, a relative improvement in activity was witnessed, especially in the last quarter. Prices at the Beirut Stock Exchange rose by 2.1% in 2016, with equity trading activity increasing from USD 498 million in 2015 to USD 885 million in 2016, a year-on-year growth of 77.8% generating a rise in the annual turnover ratio to 8.1% of market capitalisation from 4.7% over the previous year. In parallel, Lebanon’s 5-year CDS spreads widened by 57 basis points over the year to reach 478 basis points at end-December 2016, despite the contraction of the fourth quarter.

Our macro forecasts for 2017 post-presidential elections and Cabinet formation, but with the persisting absence of a regional settlement, rest on a 4% real GDP growth for Lebanon, i.e more than double the average it reported over the past 6 years (1.8%). This could be driven by a 15% growth in private investment and a 7% growth in private consumption within the context of an 18% growth in financial inflows towards Lebanon, benefitting banking activity at large.



3.2. EGYPT

The year 2016 was mixed for the Egyptian economy which is facing both opportunities and challenges.

The country is going through large structural reforms which are set to secure sound growth in the economy on the medium term. However, such reforms carry intermediate costs, mainly at the level of monetary and exchange pressures that add to geopolitical and security threats, with considerable burden on the real sectors of the economy.

As a matter of fact, the Egyptian economy reported a real GDP growth of 3.8% in 2016, slightly lower than the 4.2% registered in the previous year, but still outpacing overall population growth. The real sector slowdown comes within the context of shrinking foreign demand amid lower touristic receipts and financial inflows, while domestic demand continues to grow satisfactorily. Reflecting the sluggish touristic performance, the number of tourists was down by 48% over the first nine months of 2016 relative to the previous year’s same period. The balance-of-payments figures for 2015/16 indicate a record current-account deficit of USD 18.7 billion, compared with USD 12.1 billion in the previous year.

Within this environment, Egypt adopted significant structural measures including a currency flotation, increases in fuel and power prices, a new value-added tax and increases in custom duties. The reforms had already contributed to a rise in Egypt’s core inflation, but inflationary pressures are expected to ease in the second half of 2017. Core inflation jumped to 24.3% in December, an eight-year high. The rise in inflation has adverse effects on real income which adversely impacts consumption.

Linked to that is the monetary drift. The Egyptian Pound exchange rate reached 18.11 pounds per dollar by year-end 2016, against 7.83 at year-end 2015, following the decision on 3 November to move from a fixed exchange rate system to a floating exchange rate regime. The large depreciation of the exchange rate comes despite reinforced central bank reserves that exceeded USD 24.3 billion at year-end 2016 (against USD 16.5 billion at year-end 2015), following the IMF deal and the stream of financing agreements with the World Bank, African Development Bank and others.

The decision to float the EGP and to reign in energy subsidies should help increase investment and improve the net export contribution to growth. But a slowdown in consumption could prevent a rapid growth rebound in the current fiscal year. Prolonged periods of FX shortages over the past few years, along with elevated socio-political and security related risks, have severely undermined investment growth. Investment has dipped from 21% of GDP in 2010 to around 14% currently. In parallel, the erosion of competitiveness as a result of real appreciation of the EGP contributed to a sharp fall in exports by 25% over the same period.

Beyond helping to bridge Egypt’s large external financing needs, the agreement with the IMF would send a strong signal to domestic and foreign investors that the authorities are committed to achieve macroeconomic stability and to improve the business environment. According to the IMF program, Egypt is set to decrease its debt ratio to reach 88% of GDP by 2018/19 from its current level of 98%, and to turn its 3.5% primary deficit to GDP ratio to a surplus of 2%, which represent ambitious targets for the Egyptian state authorities in general.

At the banking sector level, the banking system has been relatively resilient to the macro/monetary pressures amidst a tough operating environment. In details, over the first ten months of 2016, bank assets grew by 26.1% when expressed in Egyptian Pound, while deposits grew by 16.2% over the period. In parallel, bank loans to the private sector grew by 24.0%, suggesting growing lending opportunities in an economy operating below potential.

Net profits for 9 listed banks reported a yearly growth of 35.6% over the first nine months of 2016 relative to the corresponding period of 2015. Financial soundness indicators remain satisfactory, with a non-performing loan ratio of 5.9% of total loans, along with a provisioning ratio of 99.0% of non-performing loans, a capital adequacy ratio of 13.8%, a return on average assets of 1.5% and a return on average equity of 24.4%. Within this environment, banking activity in Egypt continues to be sound amid a strictly regulated environment, with opportunities outpacing challenges for operating banks at large.




Throughout the year 2016, the Turkish economy went under considerable pressures in its real sector, while its financial sector proved to be somehow resilient thanks to interest rate cuts by the Central Bank of Turkey (CBRT) throughout the year. Increased political uncertainty, a fall in tourism, weak business confidence, and adverse domestic and external shocks are taking their toll on Turkey’s economy, where growth is expected to fall to 2.7% in 2016 as per the IMF, against 6.1% in 2015.

Regarding tourism, the number of tourists fell by 30% in 2016. The country’s total revenue from tourism was USD 22 billion over the year, USD 9.4 billion less compared to the last year when it was USD 31.5 billion. Turkey suffered from a significant decline in hotel occupancy rates with a 17.8% decline in 2016 compared to 2015, and had the lowest hotel occupancy rate across Europe with 50.8%. In parallel, net FDI fell by 27.8% in 2016.

In brief, what is impacted in Turkey is foreign demand in its different components of FDI, portfolio inflows and tourism receipts, but domestic demand that accounts for 70% of total demand is almost unaffected by this year’s events. As a matter of fact, at the level of domestic demand, a hike in minimum wages, the positive term-of-trade from low oil prices, and demand from 3.5 million-plus refugees living in Turkey, have all contributed to sound consumption growth.

Within this environment, the government announced its 2017-2019 Medium-Term Program which prioritises political and economic stability. Real GDP growth is forecast at 3.2% for 2016, 4.4% for 2017 and 5% for 2018 and 2019. As per the program, the government expects inflation to decline from 8.5% at the end 2016 to 8.0% at the end of 2017, 6.0% in 2018 and 5.0% in 2019.

At the external sector level, the year 2016 is reporting a sustainable current account deficit ratio of 4.0% of GDP, mainly benefitting from the decline in oil prices. The ratio of exports to imports reported a 7-year high of 78.7% in 2016. In parallel, despite the expansion in fiscal deficit this year, the latter still represents a mere 1.3% of GDP, bringing down the public debt ratio to a low of 28.7% of GDP.

What remains is the monetary concern, with the exchange rate depreciating by 18% in 2016 to reach 3.53 relative to the US Dollar at the end of 2016. It is yet important to mention, in this respect, that the Central Bank’s international reserves kept a level below the USD 100 billion threshold, recording USD 92.1 billion, against USD 92.9 billion at end-2015. As to reserve coverage, international reserves currently represent 18.1% of money supply and 6.4 months of imports, slightly lagging behind international benchmarks.

At the capital markets level, this year’s developments did not entail significant pressures on stock and fixed income markets. The stock market price index rose by 8.9%, after a contraction of 16.3% in 2015, raising market capitalisation to USD 195 billion, the equivalent of 23% of GDP. The stock market turnover ratio, measured by the annualised trading value to market capitalisation, fell from 200.8% in 2015 to 193.5% in 2016. As a reflection of market perception of country risks, the CDS spread expanded by 32 basis points on average in 2016, following a widening of 36 basis points in 2015.

At the banking sector level, a noticeable resilience was reported this year. Total bank assets increased by 15.8% in local currency terms from January to December. Meanwhile, credits increased by 16.8 percent in local currency terms. Also, Turkish banks’ profits grew by 44.1% in TRY terms and 18.9% in USD terms in 2016. The Turkish banking sector is fundamentally sound, with high regulatory capital ratios (15.6%), low NPLs (3.2%) and sizeable liquidity buffers (USD 60.5 billion of FX liquid assets, the equivalent of 35% of FX deposits). As such, all financial soundness indicators for the sector in aggregate are still reasonable in terms of profitability, asset quality, liquidity and capitalisation at large.

Finally, while there are undoubtedly increased risks on the political and geopolitical fronts, we yet believe there is no major deterioration in economic fundamentals post-coup attempt for a number of intrinsic considerations. The Economic Research team at Odea Bank believes that increased risks are balanced by severely undervalued Turkish assets, including the Turkish Lira, and an increasingly hawkish Central Bank of the Republic of Turkey. The Turkish government’s timely supportive actions since the coup attempt on the macro-prudential, fiscal and structural reform fronts are expected to help the economy bounce back in the second half of 2017. Therefore, the upside potential in the Turkish economy still exists, assuming the political uncertainties will be dampened starting from the second quarter of 2017.