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mashreq Fixed Income Trading Daily Market Update Wednesday, January 20, 2015 Quote of the Day "People may hear your words, but they feel your attitude." (John C. Maxwell) Market Update IMF trims global outlook, lowering growth estimates for the US, Brazil, Russia while raising prospects for euro-zone The International Monetary Fund has cut its world growth outlook, as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Mideast crude producers, and the rising dollar curbs US prospects. The global economy will expand 3.4% this year, down from a projected 3.6% in October, the IMF on said Tuesday in a quarterly update to its World Economic Outlook. The Washington-based fund also cut its forecast for growth in 2017 to 3.6%, down from 3.8% three months ago. The fund’s forecast offers little solace amid a gloomy start to 2016 for financial markets. “This coming year is going to be a year of great challenges and policy makers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” IMF chief economist Maurice Obstfeld said in a fund article accompanying the forecast. The IMF estimates the global economy grew 3.1% last year, the weakest pace since the 2009 recession. Growth in emerging markets and developing nations slowed for the fifth straight year. The fund said risks to the global outlook remain tilted to the downside, with the world facing three big adjustments: the emerging-market slowdown, China’s shift to growth driven less by exports and manufacturing, and the Federal Reserve’s gradual exit from ultra-low interest rates. Global growth could be derailed if these challenges aren’t managed, the IMF warned. IMF researchers left their estimate for China’s growth this year unchanged at 6.3%. However, they downgraded their forecast for Brazil by 250 bps to a contraction of 3.5% in 2016. They now expect Russia’s economy to shrink 1% this year, compared with an expected contraction of 0.6% in October. In advanced economies, the IMF expects a “modest and uneven” recovery to continue. The fund reduced its forecast for US growth this year to 2.6%, from 2.8% in October. While the economy remains “resilient” overall, the strong dollar is weighing on manufacturing, and low oil prices are curtailing capital investment, it said. The IMF raised its projection for euro- area growth in 2016 to 1.7%, up 0.1 percentage point from three months ago. The fund left its estimate of Japan’s growth this year unchanged from October at 1%. IMF officials predict 2.2% growth in the UK in 2016, also unchanged. The fund reiterated its call for monetary policy to remain loose in the advanced world, with countries ramping up public spending where possible and pushing ahead with structural reforms. The International Monetary Fund also cut its growth forecasts for Saudi Arabia for this year and next as the oil-price plunge weighs on the kingdom’s finances. Economic growth in the world’s largest oil exporter will slow to 1.2% this year and 1.9% in 2017. The price of Brent crude has fallen by more than 40% since October, when the IMF last released forecasts for the kingdom and said growth would be 2.2% this year and 2.9% in 2017. The biggest Arab economy expanded at an estimated pace of 3.4% last year. The fundamentals “seem to point to a low-for-long scenario for oil,” Maury Obtsfeld, director of the IMF’s research department, said in a video released with the new data. “With Iranian oil coming online, with the resilience in the shale extraction industry in the US, the possibility of shale extraction elsewhere, it’s hard to see oil going back to the USD100 a barrel level anytime soon,” he said. (Bloomberg) Saudi Arabia said to order halt of Riyal forward options Saudi Arabian banks are under orders to stop selling currency products that allow investors to make cheap bets on a devaluation of the riyal, according to five people with knowledge of the matter. The Saudi Arabian Monetary Agency told banks to halt the sale of options contracts on riyal forwards at a meeting in Riyadh on Jan. 18., the people said, asking not to be identified as the information is private. The directive applies to local banks and the Saudi branches of international banks, the people said. (Bloomberg) USA and Russia seek breakthrough on Syria The top US and Russian diplomats will seek to break an impasse on Wednesday over which belligerents in Syria’s five-year civil war should be labeled “terrorist,” something their bosses can’t agree on. John Kerry and Sergei Lavrov need to strike a deal in Zurich over who’s allowed a seat at the table or United Nations- sponsored peace talks may not start on schedule next week. More than three months of Russian airstrikes in support of President Bashar al-Assad have turned the tide of the conflict, which has killed 250,000 people and triggered Europe’s worst refugee crisis since World War II. Assad’s forces, once near defeat, seized a strategic town on the Turkish border last week and are closing in on an Islamic State stronghold, also near Turkey. The US, Russia and other nations have fixed a timetable to form a transitional government within six months and hold elections within a year and a half. Russia has made progress in weakening US opposition to Assad standing for re-election, according to Russian and Western diplomats. While the US still says Assad can’t lead Syria over the long-term, the Obama administration has backed away from insisting that he go at the start of a transition process. There’s a good chance Kerry and Lavrov will reach a deal, Russian state news service Sputnik said January 16. Russia may drop its opposition to including in the peace talks two radical Islamist militias backed by Gulf states and Turkey -- Ahrar as-Sham and Army of Islam - if the US agrees to include more Moscow- friendly groups, according to Sputnik. In Washington, State Department spokesman John Kirby was less sanguine that the negotiations will begin next week. While “it is still our desire to see this meeting occur on the 25th,” Kirby told reporters on Tuesday, “there is still quite a bit of work that needs to be done.” Tensions between Saudi Arabia and Iran, which intensified with the Saudi execution of a dissident cleric this month, are hampering the peace effort in Syria, Putin said last week. Iran, which supports Assad, is locked in intense regional rivalry with Saudi Arabia. Putin met Qatar’s Sheikh Tamim Bin Hamad Bin Al Thani in Moscow on Monday and they agreed that Syrians should decide their own fate, Lavrov said. (Bloomberg) Creditworthiness of Middle East sovereigns on the decline The overall creditworthiness of Middle East and North Africa (MENA) sovereigns, including the GCC sovereigns has deteriorated over past six months with Saudi Arabia, Oman and Bahrain facing negative rating outlook in the context of rising fiscal pressures, according to rating agency Standard & Poor’s. Assuming average crude prices of USD45 for the current year, S&P expects current ratings and outlooks to hold for GCC countries as many of them continue to retain substantial government reserves and have initiated fiscal reforms to balance budgets and contain reserve erosion. If the oil price remains low over an extended period, GCC countries such as Saudi Arabia, Oman and Bahrain are likely to face further deterioration in their creditworthiness. Recent fiscal consolidation efforts such as spending cuts, subsidy reforms and planned introduction of direct and indirect taxes are expected to improve the fiscal position of GCC sovereigns and will have positive impact on their ratings, according to S&P. (Reuters) Iran gives order to boost crude oil output amid IEA’s warning of deeper oil rout on oversupply Iran’s oil ministry has issued an order to increase production by 500,000 barrels a day as the country moved ahead with plans to add supply to a glutted market even at the risk of contributing to a price collapse. The increase is possible now that Iran is unfettered by sanctions on its crude exports, the ministry’s news agency Shana reported Monday, citing comments by Roknoddin Javadi, managing director of state-run National Iranian Oil Co. If Iran doesn’t boost production, neighboring countries will pump more oil within six to 12 months and take away its market share, Javadi said. “Does Iran have the right to do so? Yes, of course,” United Arab Emirates Energy Minister Suhail Al Mazrouei said on Monday in Abu Dhabi. “Is this going to help the situation? No.” Buyers of Iranian crude are free to import as much of its oil as they want after the International Atomic Energy Agency determined that the country had curbed its ability to develop a nuclear weapon. The country is targeting an immediate increase in shipments of 500,000 barrels a day, Amir Hossein Zamaninia, deputy oil minister for commerce and international affairs, said Sunday in an interview in Tehran. Iran plans to add another half million barrels within months. “Anyone who is introducing more supply into the market in the current situation is going to make it worse,” the U.A.E.’s Al Mazrouei Page 1 mashreq Fixed Income Trading Daily Market Update Wednesday, January 20, 2015 told reporters. “Any significant production increase will increase the glut and delay the market balancing.” Iran may hold back on an oil output boost if other producing countries do the same, in proportion to their production, Shana reported, citing Javadi.

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