GCC Economic Outlook 011209

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The economic downturn in Inflation in the GCC is Liquidity is returning to the GCC
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GCC is likely to bottom out expected to decline to 3% in response to robust government
in part by any person for any purpose. If you are not the intended recipient you must not use, disclose or distribute the information in this publication in any this year and GCC growth is this year before rising measures and recovering oil prices
way. expected to recover to 4.5% slightly to 4% in 2010. The and access to capital markets
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in 2010 driven by stronger oil absence of price pressures has also started to pick up with
loss of profits) arising from any use of this publication and/or further communication, disclosure, or other use of this publication. prices supported by a modest will enable policy-makers to new bond issuance by GCC
global recovery. Despite maintain an expansionary governments, banks and state-
the increase in counter- monetary and fiscal policy owned companies which in turn has
© 2009 KFH Research Ltd. cyclical spending by GCC environment, critical for the fuelled a renewed equity market
All rights reserved.
governments fiscal surpluses economic revival. rally, however our outlook towards
are projected to decline in real estate sector still remains grim
2009, and then recover in and state spending will continue to
2010. support the non-oil sector.
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Contents Research Team
“Road to Recovery” Baljeet Grewal

Managing Director
Tel: 603-20557877
2009-10 Outlook & Perspective 4 baljeet.kaur@kfh.com.my
Country-Specific Outlook Nurazlin Azman Tabassum Khwaja

Nurazlin.azman@kfh.com.my tabassum.khwaja@kfh.com.my
Kuwait: “Building Blocks” 20

Tursina Yaacob Meeta Anand
Saudi Arabia: “Catching Up” 34
tursina.yaacob@kfh.com.my meeta.anand@kfh.com.my
United Arab Emirates: “Rebuilding Confidence” 50
Qatar: “Gas Fuelled Economy” 62

Waina Leong Mashkurah Abdul Latif
Bahrain: “Surviving the Undercurrents” 74 waina.leong@kfh.com.my mashkurah.latif@kfh.com.my
Oman:”Slow and Steady” 81

Noor Ashikin Ismail Yong Chin Siong
noorashikin.ismail@kfh.com.my yong.chin.siong@kfh.com.my
Kuhan Balasegaram Sharon Thiang

kuhan.balasegaram@kfh.com.my sharon.thiang@kfh.com.my
Darshini M. Nathan Isman Ariffin

darshini.mahendra@kfh.com.my isman.ariffin@kfh.com.my
Imran Nurginias Ibrahim Nur Aina Abdul Ghani

imran.ibrahim@kfh.com.my aina.ghani@kfh.com.my
GCC Economic Outlook
2008 Economic Indicators Forecast

Kuwait Saudi UAE Qatar Bahrain Oman
Arabia
GDP growth % y-o-y 6.3 4.6 7.4 9.8 6.3 8.5
CPI % y-o-y 11.3 9.9 12.0 15.1 3.5 12.4
Current account balance, % of GDP 40.8 37.2 8.0 14.1 10.3 9.13
Fiscal balance, % of GDP 29.3 32.7 23.0 10.6 6.0 1.2
Source: IMF, IIF, Central Banks, KFHR

Arabia
GDP growth % y-o-y 1.0 1.5 1.5 9.0 2.5 3.5
CPI % y-o-y 6.0 5.0 2.0 1.5 2.2 3.3
Current account balance, % of GDP 20.9 5.0 1.0 7.8 3.0 -2.0
Fiscal balance, % of GDP 4.8 1.2 2.0 8.0 -1.0 4.0

Arabia
GDP growth % y-o-y 2.0 3.0 3.0 10.5 4.0 6.5
CPI % y-o-y 6.5 7.0 3.5 3.5 3.0 3
Current account balance, % of GDP 22.9 10 6.0 12.0 5.7 1.5
Fiscal balance, % of GDP 29.3 32.7 12.3 10.0 3.0 12.0
© KFH Research Ltd 3

GCC Economic Overview

“Road to recovery”
The nominal GDP of the GCC region tripled to USD1.3tln during the 2002 - 2008 period largely due to the strong global oil
demand, increased public spending, sustained economic reforms and the growing strength of the GCC corporate sector.
In real terms, the GCC economy grew by 7% in 2008 as compared with 6.3% in 2007. The region was able to post record
high fiscal and current account surpluses during the boom period. The regional aggregate fiscal balance in 2008 was 18.7%
of GDP while the current account recorded the highest-ever surplus of 22.1% of GDP in 2008 due to high oil prices and
increased oil production levels. However, the global financial crisis brought an abrupt end to the boom. While the steep drop
in oil prices has severely affected the export earnings of the GCC governments, growing risk aversion by global investors
has reduced market liquidity and resulted in massive capital outflows from the region.
GCC Banks Asset size in 2008

UAE
Oman 30%
3%
Qatar
9%
Kuwait Saudi Arabia

11% 27%
Bahrain
20%
Source: Central Banks, KFHR
Growth Deceleration
Hydrocarbons real GDP has contracted by approximately 10% in Saudi Arabia, the UAE, and Kuwait in the first eight
months of 2009, mainly due to OPEC-induced cuts in oil production. But in Qatar, it rose by double digits (where the output
of gas production is being ramped up as a series of multiyear investment programs come on stream). Growth in the non
hydrocarbon sector is estimated to have decelerated to about 2% in 2009, as compared with 6.5% in 2008. Weaker private
consumption and investment are the main sources of the slowdown in the region. The continued sizable government
infrastructure projects, roads and port expansion, have partly offset the private sector construction. The pace of slowdown
in the non hydrocarbon sector is expected to ease as the global economy is beginning to pull out of recession and as oil
prices rose from an average of USD51 p.b in the first half of this year to USD68 p.b. in the third quarter.
GCC Oil vs. Non-oil Real GDP
10
4
%
-2 2007 2008 2009F

Oil GDP Non-Oil GDP Real GDP
Source: IIF.IMF, KFHR
The decline in oil prices, combined with an expansionary fiscal stance, is leading to a substantial drop in current account
surpluses for the GCC region, from more than USD250bln in 2008 to just over USD46bln projected for 2009.Combined with
the sharp outflows of capital and given the authorities’ commitment to maintaining fixed exchange rate regimes, this also
led to a significant drawdown of the large stocks of international reserves built during the oil boom years.

GCC Current Account Surplus
150
140
130
120
110
100
90
USD bln
80
70
60
50
40
30
20
10
0
-10 2007 2008 2009F 2010F
UAE Qatar Bahrain Kuwait Saudi Oman
Source: IMF, IIF, KFHR
Private sector credit stagnated, reflecting both a reduction in the supply and the demand for credit given the uncertain
macroeconomic environment. Private credit growth could decelerate to less than 4% in 2009 from 30%in 2008.The factors
that have likely contributed to the marked deterioration in the bank credit were the sudden drying-up of foreign funds, sharp
decline in the growth of deposits and the decline in domestic asset prices have also put severe strains on the balance
sheets of banks that had both borrowed externally and were heavily exposed to real estate and equity markets. Particularly
notable were the decelerations in deposits in Bahrain, Qatar, and the United Arab Emirates, as well as reduced foreign
financing in Kuwait. Inflationary pressures have fallen largely due to weaker domestic demand, reduced housing rents, and
lower global commodity prices.
Private Sector Credit Growth as % of GDP
60
50
40
%
30
20
10
0
2007 2008E 2009F 2010F
UAE Qatar Bahrain Saudi Kuwait Oman
Source: IMF, IIF, KFHR
Drivers of Change in Credit Growth to Private Sector in GCC

Sources of Funds Alternative uses of Funds
Deposit
& other Credit from Net Foreign Capital and Net Claims on
liabilities Central bank Financing others the govt. Bank reserves
Negligible
Bahrain - impact + + + -
Negligible Negligible Negligible
Kuwait + impact - impact impact -
Negligible
Qatar - impact + - - -
Saudi Arabia - + - - - +
U.A.E. - + - - - -
Source: IIF, IMF, KFHR
Note: + sign indicates the given factor has accelerated,-sign indicates the given factor has decelerated

The impact was manifested by steep falls in stock and real estate markets in addition to the sharp fall in oil prices. The
reversal of speculative wholesale funds linked to exchange rate speculation in mid-2008, combined with global deleveraging
later in the year, resulted in significant liquidity pressures and higher funding cost. External funding of private sector projects
dried up since late 2008 (except for the gas sector in Qatar). Of an estimated USD2 tln of projects (both public and private)
in different stages of implementation as of end-2008, around 23% have now been placed on hold or cancelled. Weaker
demand for goods and services combined with the credit crunch has also adversely affected corporate sector profitability.
Projects on Hold/Cancelled in GCC
Bahrain
15%
UAE
39%
Oman
14%
Qatar
7%
Kuwait
Saudi Arabia
15%
10%
Source: Meed, KFHR
Government Measures Mitigated Crisis Impact

The impact of the crisis on the regional economies has been greatly mitigated by countercyclical government spending.
Drawing on substantial reserves built up prior to the crisis, governments responded with strong countercyclical policies,
which have helped contain the impact on the non-oil sectors of their economies: non-oil GDP has slowed, but still is
projected to grow at 3.5% in 2009. Looking ahead, higher oil prices, a revival of global demand and continued government
spending will provide the basis for stronger growth in 2010.
The GCC authorities have adopted extraordinary measures to ensure the normal functioning of financial markets. These
have included deposit guarantees (Kuwait, Saudi Arabia, UAE), liquidity support to ensure orderly money markets, capital
injections (Kuwait, Qatar, UAE), equity purchases (Kuwait, Oman, Qatar),monetary easing, and fiscal stimulus to shore up
demand. Despite much lower revenues from oil, GCC countries maintained their expansionary fiscal policies. Saudi Arabia
passed a USD400bln fiscal stimulus package to be implemented over five years. The increased spending on social sectors
and infrastructure is cushioning the downturn.
Policy Response to Global Financial Crisis

Financial Sector Macro Economics
Deposit Liquidity Capital Equity Monetary Fiscal
Guarantees Support Injections Purchases Easing Stimulus
Bahrain Yes Yes
Kuwait Yes Yes Yes Yes Yes
Qatar Yes Yes Yes
Saudi Arabia Yes Yes Yes
U.A.E. Yes Yes Yes
Oman Yes Yes Yes
Source: IIF.IMF, KFHR
While policymakers in the region have taken a number of steps to boost government spending and liquidity in the economy,
these initiatives have helped only in limiting the impact of the downturn so far and not in driving economic growth. There
is a limit to the support that monetary and fiscal measures can provide to the GCC economies given the sharp
decline in both hydrocarbon and non-hydrocarbon output. Therefore the need of the hour is to push ahead with
liberalisation and reforms to kick start a sustainable growth process. In our view, to help realize these economies’

potential, public spending on infrastructure and social development will remain a key feature of economic policy.
Looking ahead, governments will need to begin designing strategies to unwind the exceptional liquidity support
provided to mitigate the impact of the crisis.
Key Policy Challenges

Near-term challenges
• The ability to sustain the expansionary fiscal policy through 2010 and balancing the expected growth slowdown and
addressing financial stress, while attending to the GCC’s development needs
• On the monetary side, the authorities need to remain alert to the possible need to support credit to the private sector
through unconventional measures, given that policy rates are now close to zero.
• A thorough assessment of banks’ exposures to family-affiliated conglomerates, together with establishing norms for
greater transparency, is needed.
• To ensure level playing field for all investors and creditors.
Policy challenges of a medium-term nature requiring priority attention include:

• Further improvement in the regulatory and supervisory frameworks of banks, nonbank financial institutions and
wholesale banks.
• Enhancement of transparency and governance of the nonfinancial corporate sector.
• Raise the productivity of the non-hydrocarbons sector by implementing additional structural reforms to improve
competitiveness and boost the region’s resilience to shocks. This is particularly important given the vulnerability to
fluctuating oil prices.
Gcc Economic Recovery Taking Hold

The world economy now appears to be entering into a new phase, moving from a period of containing the crisis to one of
economic recovery. Over the course of this year, financial markets have stabilized and the outlook for the world economy
has greatly improved. As a result of the improving economic conditions IMF has recently revised its global economic
outlook and expects the recovery of the global economy in 2010 to remain sluggish, particularly in advanced economies,
as financial systems remain impaired and households will rebuild savings. Tight lending standards are likely to last through
mid-2010. Despite recent signs of the onset of recovery in many parts of the world, the IMF expects the global economy to
contract by -1.1% in 2009. By later this year, the combination of easing monetary and expansionary fiscal policies should
begin to yield some results, and the forecast remains for a return to modest global growth of 3.1%in 2010.
GCC vs. World GDP Growth Rates (2007-2010F)

10
4
%
-2 2007 2008E 2009F 2010F
GCC World
Source: IMF, KFHR

Oil Price Recovery

The economic and business outlook in the GCC has improved considerably since the second quarter. Despite the troubles
of 4Q08 and 1Q09, fortunes seem to be reviving for GCC economies as the renewed sentiment that the global economy is
stabilizing, rather than returning to strong growth has helped reinforce the oil market in recent months. The oil prices have
rebounded from their USD35-40p.b first quarter lows to hold at around USD65-70p.b in Oct’09 driven mainly by improved
market perceptions of the state of the global economy and sustained OPEC compliance with production cuts. Market
sentiment improved significantly in early October following an upward revision by the IMF to world economic growth for
2010 and projected increase in demand for the latter part of 2009 and 2010. A sharp depreciation of the US dollar against
other major currencies and crude stock draws also underpinned persisting market sentiment and lifted crude prices.
Stronger oil prices and an easing of the global financial crisis, have improved economic prospects in the GCC for the second
half of the year. Although production levels remain constrained by OPEC quotas, higher oil prices will provide a welcome
boost to GCC finances. This will help fund government fiscal stimulus efforts, financial support to banks and state owned-
corporate sectors, while bolstering fiscal and external balances. Increasing oil revenues have also boosted confidence, and
helped buoy external market perceptions of the GCC which has facilitated improved - albeit still restricted - access to capital
markets. In addition, decisive and broadly effective government support to businesses boosted confidence and removed
some of the gloom in debt markets. However, 2009 will still be a year of retrenchment and contraction.
Real GDP growth will be stagnant, as credit growth slows sharply, private investment slumps, and oil production declines.
We, thus maintain our cautious stance to medium-term growth prospects in the GCC region. Despite the announced
fiscal stimulus packages in some GCC countries, in our view growth in the Gulf economies are expected to slow
in 2009 to 3% (IMF Est: 0.7% in 2009), shrinking by approximately 15% in nominal terms. However, our baseline
projection for 2010 for the GCC assumes modest global recovery or a growth of 4.5%, backed by an average oil
price of USD75p.b, and that the impact of the troubled family-affiliated conglomerates on banks is contained.
Although, active central bank intervention has bolstered money market liquidity which in turn has fuelled a renewed equity
market rally, however our outlook towards real estate sector still remains grim and state spending will continue to support
the non-oil sector, but economic activity will be held back by the weakness in the world economy and trade. The economic
recovery in the GCC region also depends a great deal on the revival of economic activity in the industrialized and emerging
nations, not least because of the impact their prospects will have on the all-important oil price.
GCC Real GDP Growth Rate
15
10
%
0
2007 2008 2009F 2010F
Source: Central Banks, IIF, IMF, KFHR
There are downside risks to the baseline scenario. The sustainability of a global economic recovery remains the key risk to
the oil price outlook despite a pronounced recovery from the lows in 4Q08. In September 2009 sharp movements in energy
prices have taken place in response to revised assumptions about market fundamentals as well as fluctuations in the value
of US Dollar. Improving global economic conditions in 2Q09 have not been sufficient to assuage concerns regarding the
durability of this revival. Indeed, deteriorating government balance sheets in the US, UK and Japan call into question the
sustainability of government stimulus against the background of still fragile fundamentals. Moreover, consumption, the
mainstay of Western economies, is also likely to experience a period of cyclical and structural weakness with uncertainties
persisting regarding rising unemployment and recovery in house prices has resulted in sharp movements in energy prices.

The use of crude oil as a hedge against fluctuations in the US Dollar has been another factor behind the volatility in oil this
year. This marks a return to the pattern last observed in 2008 when the depreciating greenback was one of the chief drivers
of record high oil prices. In our view, oil prices are expected to average around USD60p.b in 2009 and would continue to
rise at a moderate pace over the medium term, rising to USD75p.b in 2010 with the weak pace of global GDP growth and
ample spare capacity precluding a rapid rise in oil prices.
A prolonged global slowdown or a double-dip recession could slow non-hydrocarbons growth further by reducing the scope
for government fiscal stimulus through much lower oil revenues. Also, consumer and investor confidence could weaken
further. Continued weak demand and tighter financial conditions could lead to an increase in corporate distress that could
feed back into banks in the region. Beyond the short-term, the fear is that many expatriates who left the UAE, Qatar, and
Kuwait will not return before the end of this year. The sharp slowdown in credit growth may expose problem loans that
have been masked by the generally favourable economic conditions in the region. Any further worsening of asset prices
could lead to a deterioration of banks’ balance sheets, leading to a further reduction in credit, impacting on overall growth.
However, we believe governments in the region have the capacity and have shown willingness to act to mitigate the impact
of any emerging financial sector stress.
Considering the faster-than-expected turnaround in oil prices, which are likely to average USD60 p.b in 2009 and USD
75 p.b in 2010, the prospects for a sustained recovery are indeed becoming brighter, even if they remain vulnerable to
swings in sentiment elsewhere. The current account and fiscal surpluses will remain sizable. The current account surplus is
expected to shrink from USD245bln in 2008 to USD47bln in 2009, and then recover to USD80.2bln in 2010. Foreign assets
of the GCC will increase to USD1.55 tln by end-2010 (excluding asset valuation changes). The fiscal situation for 2009
already looks much stronger than estimates suggested during the beginning of the year. The countercyclical fiscal policy
pursued in several GCC countries in response to the crisis is expected to be maintained (especially in Saudi Arabia and the
United Arab Emirates), with a focus on large public investment projects. For GCC, fiscal surpluses are projected to decline
in 2009, and then recover in 2010. Given the uncertainty regarding the pace of global recovery and in light of the anticipated
increase in oil prices, continued spending in 2010 is both warranted and feasible in countries with ample fiscal space.
Current Account Surplus as % of GDP
50
40
30
20
%
10
0
2007 2008 2009F 2010F
-10
Source: IMF, KFHR
Despite the increase in counter-cyclical spending by Saudi Arabia, the Kingdom might end the year with a marginal budget
surplus of around 1.5% of GDP, in stark contrast to the IMF forecast of 4.7% deficit. Qatar, Kuwait and the UAE, which
have budget break-even oil prices of lower than USD 50 p.b are also set to post surpluses. The least hydrocarbon-sensitive
economies in the GCC, Bahrain and Oman, will likely post the highest deficits, which will be met with accumulated reserves
and new debt issuances.

GCC Fiscal Surplus % of GDP

40
30
20
%
10
0
2007 2008 2009F 2010F
-10
Source: IMF, KFHR
Inflation in the GCC is expected to decline to 3% this year before rising slightly to 4% in 2010. Cost-push pressures from
a more-than-expected weakening of the dollar against major currencies over the next few months, and a modest recovery
in nonfuel commodity prices would add limited inflationary pressures next year. Weak domestic demand, the correction in
housing-related prices, and the fall in global commodity prices have brought down the 12-month inflation rate from over
13% in July 2008 to 3% in July 2009. Continued slack in the GCC economies will dampen domestically driven inflation
pressures in 2010.
Consumer prices in the GCC are on a downtrend, primarily because of the deep correction in housing markets, weaker
global food prices and the strengthening in the US Dollar. This will likely support private consumption demand and also
bodes well for the external competitiveness of the region. Besides, the absence of price pressures will enable policy-
makers to maintain an expansionary monetary and fiscal policy environment, critical for the economic revival.
GCC Inflation Trend

16
14
12
10
%
8
6
4
2
0
2007 2008 2009F 2010F
Source: IMF, KFHR
Inflation in them UAE stood at 3.4%y-o-y (0.03%y-o-y in June’09) in 1H-09, after averaging 12.3%y-o-y during 2008.The
decline has been even sharper in Qatar, where consumer prices dipped to -2.9% y-o-y in 2Q-09, down from 13.2%y-o-y
in 4Q-08. In Saudi Arabia, inflation fell from a peak of 11.1% y-o-y in July 2008 to about 4.1% y-o-y in August 2009.Saudi
Arabia and Kuwait are likely to experience further disinflation, but end the year with positive inflation figures. Rental price
in the two economies are still rising on a year-on-year basis, but at a subdued rate.
The UAE and Qatar are likely to experience a period of deflation in the coming months due to a fall in housing prices.
However, we do not forecast to see a sustained deflationary environment developing or a deflation spiral. While we are
expecting to see deflation in both Qatar and the UAE, the economic realities on the ground are diametrically opposite. Qatar
will continue to see solid non-oil economic activity, while the UAE is seeing a structural correction. In Qatar, the fall in the
rental prices are mostly due to a marked increase in housing supply entering the market in 2009. In the UAE, it will be a
result of both the correction in the property sector along with the increased supply in housing. Both Saudi Arabia and Kuwait
are likely to see positive inflation rates, although slowing sharply, with rental price growth decelerating and not contracting.

Again, Saudi Arabia and Kuwait have different economic outlooks with Kuwait forecast to see a contraction in non-oil GDP
growth, while Saudi Arabia continues to have a solid outlook supported by government spending.
Credit Default Swap (CDS) suggest that signs of recovery and stability started shadowing over the GCC region. This
optimism was backed by rising commodity prices such as Gold & Oil in addition to recent activities in fixed income markets
(large number of sovereign bonds issued globally). Credit default swap (CDS) spreads on sovereign debt which widened in
the region in the first half of the year, largely on account of local factors. Higher risk premium were recorded for Dubai and
Bahrain. Dubai’s CDS spreads widened to around 900 basis points (bps) in March 2009, but have since declined to 305 bps
and 96bps in Abu Dhabi in Oct’09 on the strength of the federation’s support. Further, while Bahrain CDS stood at 175 bsp,
Qatar recorded 85 bsp, a level lower than emerging markets CDS which ranges from 100 bsp to 137 bsp. In general, the
GCC’s CDS spreads are lower than the average for emerging economies. International market perceptions of the GCC’s
CDS spreads narrowed in recent months, indicating signs of recovery from the impact of the global financial crisis and in
line with modest recovery in oil prices.
GCC Capital Markets -Improved Investor Sentiment
GCC Equities Performance 3Q 2009

GCC Indices Performance
Closing Value Performance
Q209 Q309 Q-o-Q% YTD%
Kuwait SE (Kuwait) 8080.3 7817.3 -3.3 0.4
Tadawul (Saudi) 5596.46 6322.04 13.0 31.63
DFM GI (UAE) 1784.45 2191.03 22.8 33.90
ADX GI (UAE) 2631.32 3124.22 18.7 30.72
DSM 20(Qatar) 6491.65 7414.25 14.2 7.67
BHSE All Share (Bahrain) 1581.67 1554.51 -1.7 -13.83
MSM 30 Index 5612.21 6572.25 17.1 20.79
Source: Various Stock Exchange,KFHR
Gulf markets ended the 3Q 2009 sustaining a rally that began in March. A surge in risk appetite, coupled with a rebound
in oil prices and the rally in international markets restored investor’s confidence. Moreover, news of an expected global
economic recovery also boosted confidence in the international and regional equities. Dubai’s benchmark index emerged
as the best performing market during the first 9 months of 2009 posting YTD gains of 33.9% despite the slump in the real
estate market. Despite the troubles in family owned groups such as the Saad and Al Gosaibi, Saudi Arabia’s TASI came
in second with gains of 31.63% during the same period. The Saudi benchmark index has suffered the lowest losses of
15.2% in the region since the financial crisis hit the GCC between 4Q 2008 and 3Q 2009. This may be attributed to the
government’s efforts to promote the manufacturing sector in order to diversify its economy. However, the kingdom still
remains heavily reliant on oil revenues but to a lesser extent than most of the other GCC countries. ADX bagged the third
position with gains of 30.72% followed by Oman’s MSM and Qatar with gains of 15.14% and 7.67% respectively. Qatar’s
strong economic background and the government’s support to the banking sector kept the sentiment positive. Kuwait’s
benchmark index almost ended flat with marginal gains of 0.45%. The troubled investment companies remain an issue
in Kuwait, however, the banking rescue bill, which was approved in April, has improved the market sentiment. Bahrain’s
BHSE was the only regional index to end the first nine months of 2009 with losses of 13.83% as the bourse is heavily
weighted towards the financial sector.

GCC Equity Market Indices Performance YTD (3Q 2009)
40
30
20
10
%
Saudi UAE UAE Kuwait Qatar Bahrain Oman

-10
Arabia (DFM) (ADX) (DSM) (MSM)
(KWSE) (BHSE)
(TASI)
-20
Source: Various Stock Exchanges, KFHR
On a quarter on quarter basis, DFM was the best performer among GCC markets with gains of 22.78% on the back of
renewed foreign institutional buying. ADX followed suit and bagged the second place with gains of 18.73% closely followed
by Oman’s MSM with gains of 17.11%. Qatar and Saudi index posted gains of 14.21% and 12.96% respectively. Meanwhile,
Bahrain and Kuwait benchmark indices were the only GCC markets to incur losses of 1.72% and 3.25% respectively on a
quarter on quarter basis. On the liquidity front, the average daily traded value in 3Q 2009 was slightly lower as the trading
activity remained subdued due to the holy month of Ramadan and subsequent holidays.
GCC: Equities Returns and Liquidity Analysis (3Q 2009 vs. 2Q 2009)
25
DFM
20
ADX
MSM
15
Returns % Q-o-Q
QE
10
TASI Series1
5
0
BHSE
-5 0 0.2 0.4 0.6 KSE 0.8 1 1.2 1.4
Liquidity Ratio
Source: Zawya, KFHR

Chart Analysis: The above chart depicts the 3Q 2009 performance (on a Q-o-Q basis) of GCC equities on y-axis and the Period’s Liquidity Ratio
(PLR) on the x-axis. The PLR is the average daily traded value in 3Q 2009 divided by the average daily traded value in 2Q 2009. The figure exhibits
that all GCC markets (except Bahrain’s BHSE and Kuwait’s KSE) posted positive returns in 3Q 2009 but their liquidity was slightly lower than the
average of 2Q 2009.
Volatility indices of the GCC equity markets have returned to their pre-September 2008 levels, with markets showing
evidence of stabilisation and investors re-entering the market. GCC equities are expected to take their positive performance
into the final quarter of 2009, although at a slow pace. All GCC stock are currently undervalued while the DJIA, Eurostoxx
50 and FTSE are all viewed as overvalued.

GCC: Equities Volatility (2Q 2008-3Q 2009)
80
60
40
%
20
0
Saudi UAE (DFM)UAE (ADX) Kuwait Qatar Bahrain Oman
Arabia (KSE) (QE/DSM) (BHSE) (MSM)
(TASI)
1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009
Source: Zawya, KFHR
Nevertheless, the regional markets still remain reliant on movements in international markets and economic indicators
both regional and international. The stability of the international financial markets and the global economic recovery will
translate into higher energy demand which will have a positive impact on GCC stocks. Going forward into the fourth quarter,
the financial markets in the GCC region should be able to continue its positive performance, but at a lesser degree. The
stability of the international financial markets and the recovery of world economy will result directly in improving energy
demand, and this will be reflected on GCC stock markets. However, any discouraging economic news or fall in oil prices
will adversely impact the GCC equities, going forward. The exposure of regional banks to troubled Saad and Al Goasaibi
groups also remains a concern.
Consumer Sentiment Improving

Despite the weakness in asset classes such as real estate and equities, consumer sentiment in the GCC has been
improving. There is increasing perception among individuals in the region that the worst of the current crisis has passed.
The slowing in the pace of the fall in real estate prices, for example, and reviving energy markets will contribute positively
to consumer sentiment. The most poignant example of this revival is in the UAE where a sizeable number of consumers
expect the economy to emerge from current market corrections by the middle of 2010. The UAE ranks as the seventh most
optimistic country in the world in the second quarter of 2009, according to a Nielsen Global Consumer Confidence Survey
conducted in June’09. In the UAE, 34% of consumers rate job security as a top concern (36% in March’09), followed by the
state of the economy at 17% (previously 23%).The survey indicates a 13% increase in consumer confidence in June 2009,
compared with a previous survey in March’09 when it reached record lows.
Consumer Confidence Reviving in GCC

120
100
80
60
40
20
0
July'07 Oct'07 Jan'08 May'08 Jul'08 Nov'08 Feb'09 May'09 Aug'09
Kuwait Qatar Saudi Arabia UAE
Source: Bayt, KFHR
Despite this new evidence of optimism in the GCC, the global and regional economic malaise is likely to continue to
overshadow spending habits of individuals, thereby ruling out a sharp revival. Retail sales, for example, remain weak. This
is evident from point-of-sale transactions data, a close proxy to retail sales. In Saudi Arabia, transactions fell 0.9% y-o-y
in July this year, though this was a sharp improvement on the 11.7% fall recorded in June. This was the third consecutive

month of decline in sales. However, August growth could have turned positive as economic and business outlook improved
in the Kingdom and the high base effect of June and July toned down. Other countries in the region also seem to be
suffering from a slump in retail sales. Kuwait saw a mere 4.8% y-o-y rise in sales in 2Q-09 versus 15.7% in 2008.
Although, consumption suffered as a result of dwindling expatriate population and incomes, it is expected to resume once
the recovery begins — a positive externality of labour market flexibility. With the deleveraging process in the Gulf likely to
be over sooner than in advanced economies, and with oil prices stabilizing around the USD75 p.b level, global funds in the
form of syndicated loans and institutional and direct investments may return to the region, albeit more cautiously than in
the past.
Risks To The Recovery

Doubts persist over the sustainability of the global economic recovery, which remains fragile and subject to at least
temporary reversals. Oil price are rising on the recent positive momentum and are not entirely supported by fundamentals
either in the economy or in the oil market itself. Moreover, what is expected in the GCC, is not a rebound but a lesser
normal contraction than previously expected. Real GDP in the region is primarily determined by oil output, which is limited
by OPEC quotas. No positive surprises in real GDP are expected as all GCC countries are expected to comply with the
quotas in the coming year.
Another risk, at least in the short term, to the region’s prospects is linked to the troubles of the Saad and Al Gosaibi
family groups. Concerns inspired by it have clearly held back bank lending to the private sector and delayed any recovery
that otherwise might have materialized. Together the conglomerates are tentatively estimated to owe a host of Saudi
and international banks as much as USD20bln. The companies’ debt restructuring talks have been complicated by the
allegations of foul play. Legal proceedings, which look set to increase in complexity, could now take many years to work
through and resolve. Fears that the incident is merely representative of broader problems may return to dent investor
confidence in the GCC region.
The continued woes in the real estate sector in Dubai and issues with financial sector in Kuwait will likely hamper their
economic recoveries. Similarly, the Bahraini government requires oil prices to average USD75 p.b to balance its budget.
Given its limited reserves and high dependence on the oil sector for government revenues, no GCC country is more
vulnerable to oil price sensitivity than Bahrain. In such a scenario, economic activity is unlikely to bounce back rapidly on
the basis of fiscal and monetary push provided by the government.
Nonetheless, inherent fundamental strengths such as a young growing population that provides huge customer base to
increase domestic consumption, low debt-to-GDP ratios, and years of accumulated surplus, will ensure that the region is
among the first to come out of the recessionary spell. In addition, the recent revival in oil prices to around USD70-75 p.b has
improved local sentiment which will play a key role in improving the region’s economic dynamics in the coming quarters.
The introduction of a single currency for the region, planned for 2010, is expected to be delayed. Progress has been made
in regional economic integration. The GCC economies have largely unrestricted intraregional mobility of goods, labour, and
capital. Key convergence criteria for establishing the monetary union have been largely achieved. However, little progress
has been made in putting the institutional arrangements in place for a functioning single currency (including harmonization
of statistics, and the development of an efficient payments system). While four of the six GCC countries except Oman and
the UAE have signed the Monetary Union agreement, the option is open for these two countries to join at a later stage.
Financial Sector Concerns Looms

Central banks in the region have also been proactive during the crisis. When money markets dried up in 4Q-08, leading to
sharp rises in interbank offered rates, the central banks stepped in by cutting policy rates and offering discount windows
to banks. Some countries also ploughed back reserves from their SWFs into the local economy. In Qatar, for example,
the Qatar Investment Authority (QIA) bought stakes (10-20%) in local banks. Deposit guarantees were also offered in a
number of countries (KSA, Kuwait, UAE and Bahrain). As a result of a host of such measures, short term money market
liquidity eased, reflected by reduction in interbank offered rates from their highs of 4Q-08.These policy actions are aimed
at restoring confidence, stabilizing the banking system, and supporting demand to avoid an adverse downward spiral. A
key issue is the interaction of policies, with the effectiveness of monetary and fiscal policies dependent on a restoration of

normal functioning to financial markets. Financial crisis measures have not yet restored normal functioning of the financial
system. Tightening of lending standards persists. Credit to the private sector has stopped expanding since November 2008.
Monetary policy easing has helped financial institutions through lowering of funding costs.
Impact of Crisis on Islamic Banks vs Conventional Banks
Islamic banking industry has witnessed significant growth in recent years with their assets currently estimated at
approximately USD850mln. Both Islamic banks and conventional banks faced similar risks during the recent financial
crisis in that (a) the risk profile of Shariah-compliant and conventional contracts are comparable; and (b) credit risk is the
main risk for both types of banks.
Unlike conventional banks, Islamic banks are not permitted to have any direct exposure to financial derivatives or
conventional financial institution’s securities which are hit hardest during the global crisis. However, the main difference
in risk exposure appears to be related to concentration risk of Islamic banks in certain countries.While Islamic Banks
exposure to the risk real estate and construction sectors is lower in Saudi Arabua,Kuwait and Bahrain,it is significantly
higher than the system average in UAE and Qatar.
Market Share and Average Annual Asset Growth of Islamic and Conventional Banks
Total Islamic Growth Rate of Growth Rate of
Bank Islamic Bank Assets Banking
Assets-2008 Assets System Period
Saudi Arabia* 35.0 33.4 19.0 2003-08
Bahrain** 29.9 37.6 9.6 2000-08
Kuwait 29.0 23.2 14.3 2002-08
UAE 13.5 59.8 38.1 2001-08
Qatar 11.5 65.8 31.9 2002-08
Source: IMF, Central Banks, KFHR
Note:
*: Including Islamic window;
**: Growth rate is calculated for the total of wholesale and retail while market share is for retail only
GCC bank’s profitability fell substantially in 2008 and the first half of 2009.Islamic banks were less affected by the initial
impact of the global crisis potentially reflecting a stronger first-round effect on conventional banks through market-to-
market valuations on securities in 2008.For the first half of 2009, data indicate slightly larger declines in profitability for
Islamic banks compared to conventional banks which could be linked to the second-round effect of the crisis on the real
economy, especially real estate. There are, however, differences in the relative impact on Islamic banks within GCC
countries, reflecting variations in relative exposures to risky assets. In particular, the weaker performance of Islamic
banks in 2009 was largely driven by the UAE and Qatar where they had a considerably higher exposure to the real estate
and construction sectors. Banks are expected to post additional provisions in 2009.
With large capital and liquidity buffers, Islamic banks are better positioned to withstand adverse market or credit shocks.
On average, Islamic banks’ capital adequacy ratio(CAR) in the GCC is higher than that for conventional banks(except in
the UAE).The risk sharing aspect of Shariah compliant contracts adds to this buffer as banks are able to pass on losses
to investors.

Selected Indicators for GCC Islamic Banks and the Banking System
Saudi Arabia Kuwait UAE Bahrain Qatar
Islamic All Islamic All Islamic All Islamic All Islamic All
Capital Adequacy 22.1 16.0 21.7 16.0 12.8 13.3 24.5 18.1 17.9 15.6
Ratio
Change in 2.9 -11.9 -71.9 -65.3 -34.2 -19.5 -46.5 -33.7 0.0 5.1
Profitability(1H09-
1H08)
Return on Assets 3.7 2.1 1.6 3.2 1.7 2.2 2.6 1.3 6.6 2.6
Exposure to Real 5.6 7.3 22.1 31.4 25.7 12.9 11.3 26.2 38.3 18.4
Estate as % of total
loans*
Source: National Authorities, Zawya, IMF, KFHR
Note: The analysis for Saudi Islamic banks does not include Islamic windows in conventional banks
*: It is not clear from the published data whether exposures to real estate and construction include household mortgages. Exception is Islamic
bank data for Qatar, where it is clear that household mortgages are included, and banking sector data for Kuwait, which do not include
household mortgages. This renders the comparability of exposures difficult.
Credit to the private sector broadly stagnated from end-November 2008 to end-August 2009. Until the real
estate sector and investment companies show improved operating environments, credit risk concerns are likely to
weigh negatively on many banks’ financial profiles over the months ahead. A number of factors contributed to the
sluggish private sector lending in the first eight months of 2009. First, banks were cautious about corporate growth prospects
in an environment of weak domestic demand. Second, the global financial crisis has generally encouraged most banks
around the world to refocus on risk management. Third, new private sector projects coming to the market dwindled this
year, as a number of projects were put on hold or cancelled.
Private Sector Credit Growth as % of GDP
60
50
40
%
30
20
10
0
2007 2008E 2009F 2010F
UAE Qatar Bahrain Saudi Kuwait Oman
Source: IIF, KFHR
In the second half of this year we expect several major banks in the region to show further profit declines or even some
losses following the recent increase in provisions against growing level of NPLs. Several banks in the region with loan-to-
deposit ratios exceeding 100 have had to deleverage to protect their capital base and meet central banks’ guidelines. This
has already curtailed banks’ capacity to expand credit.
Loan-to-Deposit Ratio
2006 2007 2008 June'09
Bahrain 0.82 0.81 0.97 0.95
Kuwait 1 1.1 1.13 1
Oman 1.13 1.06 1.22 1.25
Qatar 0.76 0.81 0.97 1.1
UAE 1.11 1.09 1.37 1.2
Saudi 0.81 0.81 0.87 0.79
Source: IIF, KFHR

Financial soundness indicators constructed from aggregate country data suggest that GCC banks remain solvent and
profitable with system-wide capital and liquidity cushions that are helping them weather financial turmoil . This is largely
due to solid economic performance over recent years, that helped strengthen balance sheets, stronger regulation (Saudi
Arabia and Oman), and high government participation in banks (UAE). While banks remained profitable in the first half of
2009, consolidated net profits have fallen notably in stark contrast to the strong growth in profits over recent years. The ratio
of nonperforming loans (NPLs) to total loans remains below 4 percent.
Selected Banking Soundness Indicators-2008
160
140
120
100
%
80
60
40
20
0
NPLs Capital Provisioning Return on
Adequacy Ratio Equity
Saudi Arabia UAE Kuwait Qatar Oman Bahrain
Source: IIF, IMF, KFHR
There has been a pronounced rise in provisioning and bad assets in the regional banking sector. In 2Q-09, the provisions of
the five leading UAE banks (Emirates NBD, NBAD, Abu Dhabi Commercial Bank, First Gulf Bank and Union National Bank)
which account for 65-70% of the aggregate loan book, increased by 86% over 1Q-09. Saudi banks were no exception and
their provisions for bad loans increased 70% q-o-q to SAR1.5bln in 2Q-09. Further, one-off factors such as the defaults by
Al Gosaibi and Saad Groups of companies pushed up bank losses and delayed the recovery process by casting a cloud on
all banking activity in the country. Concerns have been further fuelled by the reluctance of banks to disclose their exposures
to the two groups, something that for instance no Saudi bank has yet done. This has once again increased risk aversion
and loans to the private sector have all but dried up. Additional anxiety has been caused by worries that other family groups
might run into similar difficulties.
Although reassuring, financial soundness indicators have limitations, including that they often are backward looking. In
addition, system data can mask the deterioration in financial conditions of individual banks. Overexposure to real estate and
highly leveraged companies has eroded asset quality. Uncertainty over the true state of balance sheets, especially in light
of revealed exposures of two large Saudi conglomerates compounded by inadequate transparency, will likely persist over
coming months, restraining bank funding and credit growth, although we judge the risks to be manageable.
The crisis has revealed some vulnerability in the region’s financial sector: weak risk management systems and overleveraged
institutions. Measures to strengthen financial regulation and supervision — already being instituted in some countries
— will remain crucial for safeguarding the financial system against future shocks. In the medium term, financial market
development — including diversification beyond a bank-based system — will remain a priority, as will efforts to improve the
business climate to support economic diversification and generate employment.
Significant progress in prudential regulation and banking supervision has been made in the region, but there is still scope
for further improvement. More robust management systems, close monitoring of high-frequency data and early warning
systems are needed to detect and correct problems that could become systemic. The importance of this issue stems
from the lack of transparency against the backdrop of the prevalence of large family-affiliated conglomerates, offshore
and regional banking. This requires enlarging the information set available to supervisors, including off-balance-sheet
operations of banks, household indebtedness, real estate prices, and gathering information on the health of corporates.
Besides regular on-site inspections, stress tests can provide early warning signals.

Financial Regulations in GCC

UAE Saudi Arabia Qatar Kuwait Bahrain
Lending to the Monthly instalments Loans <= weighted Loan / deposit ratio Loans to a single
public sector<=25% of consumer loans 90% of deposits <=85% entity <=15% of the
of equity; Loans to should not exceed bank’s capital and
single private sector one third of the reserves
firm<=7% of equity salary, or 25% of
pension payment
for a retiree
Loans to bank Maximum tenor for Loans to a single Monthly instalment Loans to banks
directors should not consumer loans is entity <=20% of of loans issued to directors should
exceed 5% for a 5yrs capital and reserves locals <=40% of not exceed 15%
sum of <=25% the salary or 30% individually and
of the net income 30% collectively of
of a retiree capital and reserves
Loans to consumers Loans with a Loan / deposits
should be capped maturity of less ratio <=65%
at AED250,000 or than a year can Loan / deposits
40% of salary have a spread of ratio <=65%
250bp, while loans
with a maturity of
more than year can
carry a spread of
300 bp above the
discount rate
Loans to consumers Loans with a
should be capped maturity of less
at AED250,000 or than a year can
40% of salary have a spread of
Credit facilities by 250bp, while loans
Lending the banking system with a maturity of
as a whole to credit more than year can
groups of a single carry a spread of
customer <=QAR 300 bp above the
2bln discount rate
Loans for stock Loans for stock Consumer loans
purchases<=70% purchases <=40% can have maximum
of the book value of the market value tenor of 5yrs
of shares for new of these shares (extendable up to
companies(<5 yrs) and 50% of the 6 yrs)
and 80% for older securities are
companies(>5yrs) purchased on the
foreign market
Construction loans Mortgages given by Mortgages can
<=20% of deposits conventional banks have a maximum
Maintain a <=150% of capital tenor of 15yrs
ratio<=1:1 between and reserves or (extendable up to
loans + interbank 15% of deposits. 18 yrs)
placements Mortgages given
(life>=3M by Islamic banks
and stable <= weighted
resources; free average of 150%
own funds, other of capital and 15%
funds(life>=6M) of deposits. The
and 85% of other mortgage in both
deposits types of banks is
limited to 65% of
the value of the
property.

UAE Saudi Arabia Qatar Kuwait Bahrain

Total capital/ total Minimum capital Minimum capital Minimum capital Minimum capital
risk asset ratio >10% adequacy ratio adequacy ratio adequacy ratio adequacy ratio
Capital
Tier 1 ratio >6%; required is 10% required is 10% required is 12% required is 12%
Adequacy
Tier 2 ratio < 67%
of tier 1
The reserve The reserve The reserve The reserve
requirement is 14% requirement is 2% requirement is requirement is 5%
Reserve on current, savings in savings and time 3.75% of deposits of deposits
−
Req. and call accounts, deposits and 7%
and 1% on time on current account
deposits deposits
Individual
shareholder may
not hold >20% of
Ownership − − − − the banks shares
(amt exceeding
that requires prior
approval
Securities (govt.
Securities securities exempt) − − − −
<=25% of equity
Source: CB’s, Moody’s, S&P, KFHR

Saudi Arabia
“Catching Up”
Although the Saudi economy was well positioned to whether the extreme economic and financial conditions due to its
petrodollar wealth accumulated over the years and limited exposure to global financial markets, the plummeting of oil
prices from record highs of USD147pb and the volatility in the stock markets were bound to have serious implication on the
Kingdom’s economic growth. After registering a stellar average growth rate of 5% between 2003 and 2007, Saudi Arabia
could not remain insulated from the global financial turmoil contagion woes.
Real GDP growth is estimated to fall to 1.5% in 2009 from 4.5% in 2008 which was largely driven by strong private and
public investment expenditure on the back of record oil prices and abundant liquidity. However, despite being less affected
by the financial crisis, the indirect impact on the kingdom’s real economy has been significant. Substantially lower oil price
from the 2008 peak is shrinking the main source of government revenue. Weaker global demand for oil has motivated
drastic OPEC production cuts and tighter credit and investor risk aversion in international markets have led to a shortage
of foreign capital, a massive decline in local asset prices and lower investment in the kingdom.
Nevertheless, as we approach 2010 with an expected recovery in global demand conditions and a higher oil production
level, Saudi Arabia’s real GDP growth rate is forecast to increase to 3% in 2010. The Saudi stock market has recovered
considerably recording YTD gains of 31.63% (as at the end of 3Q09) and may suggest that the conditions for planned IPOs
and sukuk issues are improving and oil prices are steadying in the range of USD65-70pb. Saudi Arabia accounted for 48%
of the proceeds and 8 out of the 13 issues till the end of the 3Q09.
Saudi Arabia: Real GDP Growth Rate (2004-2010F)
3
%
0
2004 2005 2006 2007 2008E 2009F 2010F
Source: SAMA, KFHR
We believe Saudi government spending and investment will keep growth positive in both 2009 and 2010 with the average
oil price forecast of USD60pb for 2009 and USD75pb for 2010. As far as private-sector growth is concerned, much will
depend on bank lending which has been affected due to risk aversion in the wake of the Saad and Al Gosaibi crisis. The
struggle of the private sector to get financing and stay afloat might have adverse effects on the labour market which is
already suffering from asymmetries created by the wealthy public sector.
A positive fall out from the global crisis has been easing of inflation in the kingdom. After climbing to one of its highest levels
of 9.9% in 2008 the average annual inflation in the kingdom is expected to recede to 5% in 2009 due to the easing of the
rate of increase for rent and food prices.
Sitting atop 25% of the world’s oil, Saudi Arabia is the world’s leading oil producer and exporter. Oil accounts for approximately
85% of its revenues and more than 90% of the country’s exports. The kingdom’s oil sector ended a five-year booming era,
with oil prices slashed by half and output as a result of OPEC’s lower quotas for the last quarter of 2008 and early 2009.
Saudi Arabia pumped an average 9.2mln bpd in 2008 but supplies are projected to dive to only 8mln bpd year in line with
OPEC’s reductions.

Saudi Arabia: Contribution to GDP

Oil Revenues
85%
Non Oil
Revenues
15%
Oil Revenues Non Oil Revenues
Source: SAMA, KFHR
The external sector in 2008 witnessed its most favourable historical performances, benefitting from the oil bonanza during
the first three quarters of the year. However, in the final quarter of 2008 the sector was hit hard by the financial turmoil and
slump in oil demand and prices. In terms of foreign trade, 2008 recorded a current account surplus of USD139bln and trade
surplus of USD212.3bln respectively. Imports amounted to USD100.6bln in 2008, rising by 23.5% y-o-y. The growth was
due to increase in industrial imports that make up more than half of total imports, with the Kingdom firmly heading towards
a non oil economic expansion led by construction, infrastructure development and manufacturing activity. Meanwhile, total
exports amounted to USD313.3bln in 2008, up 34.4% from 2007. The increase in exports was mainly due to a 36.9% yearly
surge in oil exports. However, in 2009 we estimate current account balance to drop drastically to approximately USD16bln
due to a sharp decline in oil prices from the highs of 2008 while the trade balance will reduce to USD100bln.
Saudi Arabia: Current Account Balance (2004-2010F)

150 40
30
100
USD bln
20
%
50
10
0 0
2004 2005 2006 2007 2008E 2009F 2010F
Current Account Balance % of GDP
Source: SAMA, KFHR
Saudi Arabia: Trade Balance (2004-2010F)

350 250
300
200
250
USD bln
USD bln
200 150
150 100
100
50
50
0 0
2005 2006 2007 2008E 2009F 2010F
Export Import Surplus
Source: SAMA, KFHR
The Saudi government remains committed to increasing spending and providing the much needed boost to domestic
demand despite the projected decline in oil revenues. Equipped with its massive overseas assets built up during the oil
boom of 2002-2008, Saudi Arabia approved a record high budget for 2009 to mitigate the impact of lower crude output

and prices on its economy. The government budgeted USD126.67bln for total expenditure in 2009, out of which USD60bln
was allocated to capital expenditure. The budget prioritises capital spending in key areas, such as education, healthcare
and infrastructure, which is consistent with the government’s objectives to create job opportunities and support economic
growth and development in the medium-term.
Saudi Arabia: Fiscal Balance (2004-2010F)

400 200
300 150
100
USD bln
USD bln
200
50
100
0
0 -50
2004 2005 2006 2007 2008 2009P
Revenue Expenditure Surplus/Deficit
Source: SAMA, KFHR
2008 proved an unprecedented bumper year for Saudi fiscal policy, highlighting the Kingdom’s position as a key beneficiary
of the global imbalances of recent years. Revenue for the year stood at USD293.33bln while expenditure was estimated to
be USD136bln. This left a surplus of USD157.33bln (32.5% of GDP). However, in 2009 the Saudi budget is set to plunge
into deficit, in the finance ministry’s own estimation. The government estimates a deficit of USD17bln which is likely to push
up debt (which is all domestic) unless the government opts to utilise its sovereign wealth fund assets, which is an open
possibility and in that case the balance may not even show up as a deficit. It is also worth mentioning that Saudi Arabia like
other Arab oil-producing countries has traditionally presented conservative government budget estimates based on lower
oil prices.
Although the Kingdom forecasts 2009 budgeted deficit of USD17bln, the expenditure for the year shows a marginal decline
of 7% as against 2008. Under normal circumstances such a drastic drop in revenues would necessitate a similar reduction
in spending. However, despite the decline in oil price since record highs of 2008, the Saudi Arabia’s 2009 budget indicates
the Kingdom’s continued commitment to focus on optimising the use of available resources and giving priority to projects
that ensure sustainable and balanced development as well as more employment opportunities and job creation.
Large fiscal surpluses over the past six years have enabled the Saudi government to build up official reserves and to reduce
its outstanding debt levels. Domestic government debt, having peaked at 119% of GDP in 1999, continued its downward
course from 18.7% in 2007 to 15.8% of GDP in 2008. However, we believe, in 2009 government debt will amount to 30%
to GDP before subsiding slightly to 20% in 2010.
Saudi Arabia: Fiscal Balance vs. Domestic Debt (2002-2010F)
150
100
% of GDP
50
2002 2003 2004 2005 2006 2007 2008 2009F 2010F

-50
Fiscal Balance as a % of GDP Government Debt as % of GDP
Source: SAMA, KFHR

Moreover, the conservative management of government’s petrodollar wealth has shielded the Saudi government from the
adverse developments in global equity markets till 2008. Nonetheless, the investment income earned on these assets is
expected to fall in 2009 compared to 2008 due to lower interest rates on foreign deposits and securities.
The Kingdom of Saudi Arabia needs to create about 160,000 jobs to eliminate unemployment and cater to new entrants.
Saudi economy particularly needs foreign investments in industries capable of generating employment for the locals. Strong
FDI inflows over the years have helped in overcoming unemployment among nationals and strengthening the kingdom’s
competitiveness. The rate of unemployment in the Kingdom fell from 11.5% in 2005 to 9.8% in 2008.
Saudi Arabia: Unemployment Rates (2001-2010F)
14
12
10
8
%
6
4
2
0
2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F
Source: SAMA, KFHR
The World Bank has ranked the Kingdom of Saudi Arabia as the 13th most competitive country in the world in its annual
Doing Business report, thus ensuring the Kingdom is well poised to achieve its goal of becoming one of the top 10 most
competitive countries by 2010. Saudi Arabia has shown significant improvements in the Doing Business rankings over the
last 5 years, leaping from 67th position in 2004, to 38th in 2006, 16th in 2007 and to this year’s ranking of 13th.
For the fifth consecutive year, the report ranks Saudi Arabia as the best place to do business in the entire Middle East
and Arab World, ahead of Bahrain (20th), the UAE (33rd) and Qatar (39th). The report also ranks Saudi Arabia ahead of
advanced economies such as Japan, Germany, France, and Switzerland. Whilst Saudi Arabia holds the lead position,
improvements in the region generally indicate it is a global hot-spot for major investors.
The World Bank recognised several of Saudi Arabia’s recent reforms which drove the country’s increased ranking this
past year. These reforms made it easier to do business in Saudi Arabia by reducing the required complexity, time, and
cost to start a business and obtain construction permits in the Kingdom. Moreover, the Kingdom has encouraged domestic
and foreign investment by enacting a new foreign investment law, establishing SAGIA, privatizing public companies, and
achieving membership in the WTO.
Saudi Arabia’s consistent improvement in the Doing Business rankings has been matched by FDI inflows to the Kingdom.
The kingdom’s inward FDI flows of USD24.3bln in 2007 recorded an annual increase of 33%, and FDI to GDP ratio of 6.4%.
However, in 2008, FDI to Saudi Arabia amounted to USD22.5bln, a 6.5% decline from a year earlier. Foreign investments
in the Kingdom mainly targeted the real estate sector (21% of FDI), petrochemicals (16%), and the mining industry (10%).
Outlook for foreign investment inflows in the country will moderate further in 2009 (forecast: USD18bln) due to the ongoing
global financial crisis before a slight recovery by the end of 2010 (forecast: USD20bln).

Saudi Arabia: Foreign Direct Investment Inflows (2004-2010F)
30
25
20
USD bln
15
10
0
2004 2005 2006 2007 2008E 2009F 2010F
Source: WIR, KFHR
Economic reforms in the kingdom are behind the growing inflow of foreign direct investment in Saudi Arabia. FDI allows
long-term commitments, as opposed to investments in stock markets. The extraordinary progress is a result of on-going
economic reforms, kick-started with the drive to join the World Trade Organisation in December 2005 following decade-long
negotiations. Credit must be extended to Foreign Investment Law enacted in April 2000.
The law allows foreign firms to own a majority stake in companies in the kingdom. The maximum income tax rate for
foreign firms came down from 45% in 2000 to 20%. Saudi Arabian General Investment Authority (Sagia), which looks after
foreign investments, has put in place a one-stop-shop process besides a 30-day deadline for decisions on investment
applications.
Conversely, the law barred foreign investments in 22 areas including exploration, drilling and production of oil, and thereby
dubbed as “negative list”. However, officials have since eased the restrictions, granting foreign investors the opportunity to
invest in such sectors including insurance services, wholesale and retail trade, air and train transport, and communications.
The Supreme Economic Council has eased the restrictions and currently the list includes only 13 activities. SEC forms and
oversees the kingdom’s economic policies.
As part of WTO accession, Saudi authorities agreed to grant 60% foreign equity shareholding for joint projects. Also, foreign
banks were permitted in the form of locally incorporated joint stock companies or as branches of international financial
institutions.
Box: Saudi Arabia’s 10x10 Vision
SAGIA and the Kingdom of Saudi Arabia as a whole are fully committed towards the Kingdom’s ambitious project of 10
x 10, which aims at positioning Saudi Arabia amongst the top ten most competitive nations by 2010.
The realisation of 10x10 vision will require substantial steps and effective initiatives, which are facilitated through a series
of development plans that have reached Eighth Developmental Plan (2005-09).
The Eighth Plan marks a new phase in a development process that has spanned more than three decades. Although the
oil sector remains a dominant contributor to the Kingdom’s GDP, its contribution may come down in coming years as the
government takes on various plans to enhance its economic diversification.
In the five years (2005–09), the Eighth Development Plan aims at increasing real GDP from around USD192.59bln in
2004 to around USD238.7bln in 2009. The Plan also envisages that by the end of 2009, the share of the non-oil sector
in GDP would also increase.
Source: KFHR

However, due to the difficult borrowing environment at home and abroad, projects are facing delays in the Kingdom. With
the government playing a more extensive role in investment expenditure, focus will remain on strategic or vital infrastructure
projects to meet consumer and industrial demand and sustain economic growth. The global economic slowdown and the
accompanying slide in project costs is prompting Saudi Arabia to make further revisions to its multi-billion dollar downstream
and upstream expansion programs. Three flagship projects – the Saudi Aramco/Dow Chemical joint venture integrated
refinery and petrochemicals project at Ras Tanura, and Saudi Aramco’s 400,000 b/d joint venture export refineries with
Total and ConocoPhillips – are all delayed, as the partners reassess costs.
Saudi Arabia: Delayed or Cancelled Projects

Project Value Completion
Project Name Sector USD Status Date Owner
ADC - Al Ahsa Cement Plant Industry 320,000,000 Delayed NA Al Ahsa Development
Company
ADC - Jubail Aluminum Chip Industry 220,000,000 Delayed NA Al Ahsa Development
Manufacturing Facility Company
Arabian Cement Company/ Industry 600,000,000 Delayed 2011 JV of Arabian Cement
Italcementi - Cement Plant in Company and Italcementi
Labuna
Aramco - Dammam Oil Field Oil and Gas 250,000,000 Delayed NA Saudi Arabian Oil
Development Company
Aramco - Ras Tanura Oil and Gas 8,000,000,000 Delayed Q1 2012 Saudi Arabian Oil
Refinery Company
Grand Real Estate Projects - Real Estate 3,000,000,000 Delayed Q3 2012
Marriland Leisure Park
Kinan - Al Basateen Real Estate 93,000,000 Delayed Q4 2010 Kinan International for
Real Estate Development
Company
SWCC - Shuaibah Water Power and 265,000,000 Delayed Feb-09 Saline Water Conversion
Transmission System Water Corporation
(Package 2)
Safco 5 - Urea and Ammonia Petrochemicals 500,000,000 Delayed 2011 Saudi Arabian Fertilizer
Plant Company
Saudi - Egypt Causeway Infrastructure 3,000,000,000 Delayed NA Ministry of Transport -
Egypt and Ministry of
Transport - Saudi Arabia
Saudi Maaden - Aluminum Industry 2,000,000,000 Delayed 2015 Saudi Arabian Mining
Complex - Alumina Refinery Company
Sipchem - Jubail Ammonia Petrochemicals Delayed 2011 Saudi International
Plant Petrochemical Company
Al Ittefaq Steel Products Industry 400,000,000 Cancelled NA Al Ittefaq Steel Products
Company - Dammam Steel Company
Plant
Al Watan Cement Company - Industry 300,000,000 Cancelled NA Al Watan Cement
Jalajil Cement Plant Company
Aramco - Yanbu Refinery Oil and Gas 500,000,000 Cancelled 2014 Saudi Arabian Oil
Expansion Company
Delta Oil - Ethane/Propane Petrochemicals 2,000,000,000 Cancelled NA Delta Oil Company
Cracker
Mabani - Yanbu Steel Plant Industry 40,000,000 Cancelled NA Mabani Steel Company
Petrokemya - Petrochemicals Cancelled NA Arabian Petrochemical
Debottlenecking/Expansion Company
of Cracker Units 1 and 3
Petrokemya - VCM Plant Petrochemicals Cancelled 2010 Arabian Petrochemical
Expansion Project Company
Source: Zawya, KFHR

Liquidity has been an important issue in Saudi Arabia since September 2008, and the regulation of the market by the
government was done to keep the economy from succumbing to complete illiquidity. In a way, the regulation of the national
economy has made the Saudi Arabia much safer from recession; by keeping credit and other cash circuits active, they are
one rung safer from domestic collapse.
Saudi Arabia: Policy Actions to Boost Investor Confidence (October 2008- To Date)
16th Jun 2009 Saudi Arabian Monetary Agency (SAMA) halved the interest rate it pays to commercial banks for
deposits, but kept its benchmark repurchase rate unchanged.
14th Apr 2009 SAMA cut its reverse repurchase rate by 25 basis points to 0.5%. It had reduced the rate in January
and December by a total of 125 basis points.
19th Jan 2009 SAMA cut benchmark repurchase rate by 50 basis points to 2%, having lowered it by 50 basis points
in December. In five moves since October, the repo has been lowered by a total of 350 basis points.
23rd Nov 2008 SAMA lowered bank reserve requirements to 7% from 10%. Since October, it has reduced the reserve
ratio from 13%.
21st Oct 2008 SAMA poured USD3bln in long-term bank deposits, its first direct injection of U.S. dollars in a
decade.
17th Oct 2008 Saudi Arabia's top economic body, the Supreme Economic Council, promised to guarantee bank
deposits.
Source: Various, KFHR
Saudi Arabia’s Dollar peg came under considerable pressure during 2008 as the monetary policy stance of the US Federal
Reserve proved entirely inappropriate for the Saudi business cycle. With the domestic economy running into a multitude
of bottlenecks due to its rapid expansion, SAMA was nonetheless repeatedly forced to follow the Fed’s interest rate cuts.
Repo rates declined 300 bps during the year to 2.5% in December 2008. The reverse repo rates were slashed from 4.25%
in December 2007 to 1.5% at the end of 2008. In the latest move, on 16th June 2009 the Saudi Arabian Monetary Agency
reduced its benchmark reverse repurchase rate for the fourth time since December 2008 to 0.25% from 0.5%, while
keeping its repo rate constant at 2%.
Saudi Arabia: Key Rate Cuts (Dec 2007-Jun 2009)
6
5
4
3
%
2
1
0
07
08
9
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
20
b-
an
ar
ay
ct
ct
ov
ec
an
pr
un
Fe
-O
-O
-M
-A
of
-N
-D
-J
-J
-J
1-
3-
12
30
14
23
19
16
19
23
16
d
En
Repo Rate Reverse Repo Rate
Source: SAMA, KFHR
In early 2008, strong macro environment, cheap credit and increased food and rental prices fueled inflation in the Kingdom.
Saudi Arabia’s General Wholesale Price Index (WPI) registered annual growth (i.e. WPI inflation) of 11.8% at the end of
3Q08. In a bid to control the situation, SAMA was left desperately casting about for alternative policy instruments. As a key
step, it hiked the reserve requirement for banks from 9% in January 2008 to 13% in May 2008.
These steps have now given the Saudi monetary authorities additional ammunition to confront the economic softness,
especially at a time when inflationary pressures are once again abating (2009F: 5%). Inflation pressures in Saudi Arabia,
which were perceived as a major concern until the first half of 2008, have eased considerably with the onset of the global
economic crisis. Recent data show that inflation in Saudi Arabia fell to 5.2% in June 2009, down from a peak of 11.1% in
July last year.

Saudi Arabia: Inflation Trend (2004-2010F)

12
10
0
2004 2005 2006 2007 2008E 2009F 2010F
Source: SAMA, KFHR
Latest figures released by the Saudi Arabian Monetary Agency showed money supply has also started to stabilise as
inflation is moderating. The figures show M1, which includes currency outside banks and depend deposits, edged up to
USD130511.8mln in August 2009 from USD113458.8mln in December 2008. M2, involving M1 plus time and savings
deposits, also increased to USD 220004.2mln from USD 211486.5mln during the same period. Meanwhile M3, which
covers M2 and other quasi money, also edged up to USD 265245.4mln from USD 247753mln.
Saudi Arabia: Money Supply Trend (Sep 2008-Aug 2009)

6
5
4
3
%
2
1
0
End of 23 1 19 3 12 30 23 16 19 14 16
2007 -Jan -Feb -Mar -May -Oct -Oct -Nov -Dec -Jan -Apr -Jun
-08 -08 -08 -08 -08 -08 -08 -08 -09 -09 -09
Repo Rate Reverse Repo Rate
Source: SAMA, KFHR
Oil and Gas

According to the Oil and Gas Journal, Saudi Arabia contains approximately 267bln barrels of proven oil reserves (including
2.5bln barrels in the Saudi-Kuwaiti shared “Neutral” Zone), amounting to around one-fifth of proven, conventional world oil
reserves. Around two-thirds of Saudi reserves are considered “light,” “extra light” or “super light” grades of oil, with the rest
either “medium” or “heavy.”
Although, Saudi Arabia has around 100 major oil and gas fields (and more than 1,500 wells), over half of its oil reserves
are contained in only eight fields, including the giant 1260-square mile Ghawar (the world’s largest oil field, with estimated
remaining reserves of 70bln barrels) and Safaniya, including Khafji and Hout (the world’s largest offshore oilfield, with
estimated reserves of 20bln barrels).
Saudi Arabia maintains the world’s largest crude oil production capacity, estimated to be approximately 10.85mln bpd, in
2008 which is a 4.2% increase from 2007. However, in 2009 the output is likely to contract to 10.65mln bpd only to slightly
recover to 10.8mln bpd in 2010.

Oil GDP vs. Total GDP (% Change)
10
5
% Change y-o-y
2004 2005 2006 2007 2008E 2009F

-5
-10
Oil GDP Total GDP
Source: SAMA, KFHR
Despite this slowdown the kingdom is pressing ahead with investments to expand upstream oil capacity. Saudi Arabia is
considering the second phase of capacity expansion to achieve a total capacity of 15mln bpd after the first phase target of
12.5mln bpd is achieved by 2009 end. The target capacity expansion aims to prepare for a foreseen rebound in demand
in the next few years.
Oil and Gas Fields in Saudi Arabia
Source: Saudi Aramco
Downstream projects (refineries and petrochemicals) are also underway but at a slower pace as these require more foreign
borrowings and investments whereas crude capacity expansion is to be financed by the state oil company. Refining capacity
of the existing seven plants was estimated to be 2.1mln bpd at the end of 2008. The Kingdom aims to invest USD20bln to
increase the refining capacity to 3mln bpd to meet the requirement of the fast growing Asian region.
The collapse in oil prices is one of the clearest and most immediate impacts of the financial crisis on Saudi economy. Saudi
Arabia’s oil export revenues are forecast to fall 41% to USD172bln in 2009 due to lower production and prices. Exceptionally
high oil prices in early 2008 had already slowed demand growth and the onset of financial crisis and recession in much of
the world will further dent demand.

Saudi Oil Revenues and Oil Export Price
400 100
300 80
60
USD bln
USD pb
200
40
100
20
0 0
2002 2003 2004 2005 2006 2007 2008E 2009F
Oil Export Revenues Saudi Oil Export Price
Source: SAMA, KFHR
The world’s largest oil exporter’s average daily production is expected to shrink 8.7% to 8.4mln bpd in 2009 down from
an average 9.2mln bpd in 2008. Saudi production peaked at 9.7mln bpd in July 2008. However, official figures reveal
that Saudi Arabia raised its oil production by nearly 300,000 bpd in March 2009 in spite of a collective agreement by the
Organisation of Petroleum Exporting Countries to cut crude supplies to support prices. The country produced 8.358mln bpd
in March 2009, compared with around 8.056mln bpd in February 2009.
The March 2009 production is also in excess of 300,000 bpd above its output target set by the oil exporter group under a
series of production cuts totaling 4.2mln bpd by January 2009. Under the cartel’s latest accord, Saudi Arabia was allocated
a quota of 8.051mln bpd.
The oil sector holds primary significance in Saudi Arabia, despite an oil price slump last year and OPEC’s decision to cut
output. The upward price correction witnessed since the 2Q09 should return liquidity to enable the government to support
Saudi Arabia’s investment programs in the oil sector.
Banking
The banking sector in Saudi Arabia consists of eleven publicly listed banks and National Commercial Bank (NCB). Five of
the eleven listed banks (namely Riyad Bank, SAMBA, Al Rajhi Bank, Al Bilad Bank and Alinma Bank) and NCB are local
whereas the rest have foreign participation with SABB, Saudi Hollandi Bank, Banque Saudi Fransi and Arab National
Bank having substantial foreign ownership. In the last one decade, SAMA has offered licenses to a number of regional
and international players to operate in The Kingdom. Gulf International Bank of Bahrain was the first to acquire the license
in 2000. The regional and foreign banks having operations in The Kingdom currently include Gulf International Bank of
Bahrain, National Bank of Kuwait, Emirates Bank and Bank Muscat.
The increase in economic activity is funded by the growth in credit from banking institutions. The total assets of commercial
banks’ in the Kingdom increased at a CAGR of 18.5% which is in line with the GDP growth of 17.1% during 2003 to 2008.
However, Saudi banking sector could not remain insulated from the implications of the global financial distress even though
the well provisioned balance sheet of the Saudi banking sector (with the NPL coverage of above 100%) signals the overall
good health quality of the Kingdom’s banking assets. In the second quarter of 2009, Saudi Arabia faced the defaults by
two high profile families. SAMA froze the bank accounts of Mr. Maan Al Sanea, the founder of Saad group, and his family.
Apart from those mentioned above, there have not been any further threats of significant defaults. In a recent interview, Mr.
Al-Jasser, governor of SAMA expressed his views on the two families and mentioned that there are no systemic risks on
the Saudi banking system from their debt; however, he said the profitability of banks might get affected. He also mentioned
about the setting up of a special committee which will investigate the two firms and take appropriate actions. He also ruled
out the moves to buy the debts of the two troubled families.
The total assets of commercial banks in The Kingdom grew at a CAGR of 19% from 2003 to 2008 and by only 2.7% in 1H
2009. The growth was mainly fuelled by the inflow of petrodollars in the last five years but is expected to be sluggish for
2009; however, from 2010 onwards we expect healthy growth.

Saudi Arabia: Commercial Banks’ Total Assets Composition (2006-1H 2009)

400000
300000
USD mln
200000
100000
0
2006 2007 2008 1 H 2009
Cash in Vault Deposits with SAMA
Foreign Assets Total Claims
Fixed Assets Other Assets
Source: SAMA, KFHR
The foreign assets and liabilities grew at a CAGR of 14% and 23% respectively from 2003 to 2008 causing the net foreign
assets to increase slightly at a CAGR of 0.2%. However, in first half 2009, the foreign assets increased by 16% and foreign
liabilities declined by 31% causing the net foreign assets to boost by 143%.
The loans and advances to the private sector increased at a CAGR of 27% from 2003 to 2008, however, in 1H 2009 the
loans have declined by around 1% due to bank’s preference towards holding cash which is evident from the increase in
cash and deposits with SAMA. We expect the lending to start growing by the end of 2009 as the global markets recover
and the economic activity in The Kingdom picks up.
The deposits grew at CAGR of 18.5% from 2003 to 2008, however, in H1 2009 the deposits increased at a slower pace of
8%. Though demand deposits and quasi monetary deposits (mainly foreign currency reserves) recorded increase in value,
time & savings deposits decreased in H1 2009.
Saudi Arabia: Commercial Banks’ Total Liabilities Composition (2006-1H 2009)

400000
300000
USD mln
200000
100000
0
2006 2007 2008 1H 2009
Total Deposits Foreign Liabilities Capital Accounts

Interbank Liabilities Repos Other Liabilities
Source: SAMA, KFHR
The investments by banks in the private sector and government sector increased at a CAGR of 24% and 7% respectively
from 2003 to 2008. However, in 1H 2009, the investments in private sector and government sector declined by 2% and
13% respectively. The decline in govt. sector securities might be because of buyback of securities by SAMA in the open
market to inject liquidity.
SAMA undertook a number of measures to pump in liquidity into the local market and spur lending by the commercial banks;
the regulator cut the official repo and reverse repo rates to 2% and 0.25% respectively since October 2008, decreased
the reserve requirement on demand deposits from 13% to 7%, injected liquidity into the banking sector through demand
deposits and provided guarantees for deposits at commercial banks. The average interbank lending rate in The Kingdom
has declined significantly from September 2008 levels suggesting increasing liquidity and rising confidence in the banking
sector.

All these positive efforts by SAMA have helped the banking sector in The Kingdom to weather the global crisis relatively
well. However, lately the banks in The Kingdom are feeling some pain related to credit problems. Decline in international
trade the private sector lending related to imports and exports in The Kingdom are expected to grow at a slower pace than
historical Levels due to depressed global demand. However, our outlook remains positive for 2010 as the global economy
starts to recover.
KSA’s strong macro-economic outlook offers future optimism for the financial institutions that can capitalise on the growing
financing appetite and deposit base in the Kingdom. Dependant on the stability of global stock markets in 2009, the
Kingdom holds significant potential to attract investments. The Kingdom’s continued commitment towards the projects to
ensure sustainable and balanced economic development along with banks’ restructuring plans and to lower dependence
on revenues from equity markets, provide a window for stable banking sector performance. Going forward, to tap the
potential mortgage market, mortgage laws need to be designed to protect the interest of both lenders and borrowers.
Real Estate
Real estate plays an important role in the Kingdom’s relatively small non-oil economy, which remains focused on the
government’s effort for economic diversification. Despite a global recession and declining property markets across the
world the real estate activity in KSA is estimated to increase at an average annual rate of 5.8%, with its contribution to GDP
increasing from 6.8% in 2004 to a forecast 7% in 2009.
Real Estate Sector Contribution to GDP

7.3
7.2
7.1
7
%
6.9
6.8
6.7
6.6
1999 2004 2009F
Real Estate to GDP
Source: SAMA, KFHR
In recent years, Saudi Arabia has undertaken many economic reform measures that added further clarity to laws and
regulations and are aimed at attracting foreign investments and providing direct impetus to the real estate sector. Kingdom
of Saudi Arabia, the largest amongst the GCC economies, has managed to maintain its grip on economic factors even in
the current scenario. The reason behind this is the larger domestic investor base in comparison to foreign investors.
The projects in pipeline to date are worth more than USD500bln. With no more projects likely to be announced in 2009, the
outlook is not expected to change much in 2010. The current real estate investments, which are of the order of USD300bln,
making KSA one of the biggest construction markets, are conjectured to reach USD400-450bln levels by 2010. The demand
for real estate is expected to continue optimistically, owing to reasons such as highest population growth rates in the region
and an ever increasing foreign workforce influx. Furthermore, the lowered prices of cement (lower by 1/4); steel (lower by
1/2) and other construction materials suggest better profitability for construction businesses.

Saudi Arabia: Population Growth Trend (2004-2010F)
2010F
2009F
2008E
2007
2006
2005
2004
0 5 10 15 20 25 30 35
mln
Source: EIU, KFHR
KSA is projected to have one of the more resilient, safest and robust real estate markets in the GCC. Residential prices
which increased at a rate of 10% p.a. during 2002-2005, will continue an upward momentum once the current economic
slowdown is over. The growth of real estate sector is forecast to moderate to 5% during 2009 (owning to the overall global
slowdown), but the moderation is believed to be transient.
With only one half of the total residential facilities in KSA (approximately 4.3mln), estimated to be occupied by owners
and the rest rented out; and an unmet demand of 250,000 houses – residential rental alone is expected to show a 10%
acceleration in 2009.
Having approximately 60% population between the working age group of 15-64 years indicates a strong demand in all
categories of daily households in years to come.
Saudi Arabia: Population Distribution
Under 30 Years
61%
Between 30 to
64 Years
36%
Above 64 Years
3%
Above 64 Years Under 30 Years Between 30 to 64 Years
Source: EIU, KFHR
With less than 50% of the population having home ownership, while 60% of the population being under 30 years of age and
a significant inflow of labour force migration into the Kingdom indicates substantial housing demand in the country.
Saudi Arabia is witnessing an escalating demand from young middle income Saudis. Thus, if Saudi is to meet such demand
it will need to build 1.5mln new homes by 2015. Saudi Arabia being one of the largest construction markets in the Middle
East is estimated to have the total real estate investments of around USD300bln, which are expected to cross USD400bln
mark in near future.

Saudi Arabia: Housing Demand by Region (2005-2009F)

30
25
20
%
15
10
5
0
dh
a
sim
on
il
rs
an
ha
sir
ru
Ha
bu
ka
in
jra
e
Jo
As
ta
gi
Jiz
Ba
ad
rd
as
ak
Ta
Na
Re
Ri
Bo
m
Q
M
st
Al
rth
Ea
No
Source: Ministry of Economy & Planning, KFHR
A moderation in property and rentals in the 1H 2009 was witnessed as the global economic sentiment and a correction in
oil prices took a toll on investor sentiment. Property prices have showed excessive increment of as much as 80% in early
2008 (given oil windfalls and demand) in the capital city of Riyadh.
Despite this, it is our conservative estimate that only half of the Saudi residents own their properties, and with approximately
60% of the population under 30 years of age. This translates as a significant demand of about 200,000 homes per year,
across various echelons of society. The current infrastructural developments show promise to provide for this demand.
KSA is expected to witness a moderate but sustained growth of 5% in the real estate prices in 2009; rental prices are also
forecast to grow by 10-15%. This is primarily due to the increasing per-capita income and the resulting rise in standards of
living, coupled with the rising population. Further, KSA provides an environment conducive for and attractive to business
and investment as government reforms remain committed. This has enhanced the demand for both residential as well as
commercial space much beyond supply.
KSA’s real estate sector is still one of the most promising and resilient in the GCC. We remain optimistic on investment
prospects with sustained demand and incremental increase in rental and overall prices despite the gloomy global economic
backdrop. Moreover, oil prices stabilising in the range of USD6507-pb will protect the real estate market of the kingdom
from faltering by keeping a check on the liquidity issues.

Kuwait
“Building blocks”
Kuwait’s real GDP came in at 6.3% in 2008 as against 3.8% in 2007, underpinned by record high oil prices in the third
quarter of 2008 and a resultant increase in government expenditure. Although oil prices corrected by the end of December
by more than 50% since reaching USD147pb in July, the windfall surplus was enough to sustain growth at a stellar pace
in 2008. However, the global economic downturn has impacted Kuwait across all sectors. The Kuwaiti bourse fell and the
collapse of investment firms have in turn fed a decline in the real estate market and a drop in commodity prices.
The decline in oil prices from their 2008 peak has changed the outlook for oil revenues and for economic growth in Kuwait
in 2009. The growth for 2009 is expected to moderate to 1% on account of our oil price forecast of USD55pb but is forecast
to recover to 2% in 2010.
Kuwait: Real GDP Growth Rate Trend (2004-2010F)

12
10
8
% Change y-o-y
0
2004 2005 2006 2007 2008E 2009F 2010F
Source: CBK, KFHR
To contain the crisis, Kuwait’s government has launched a series of initiatives aimed at shoring up investor confidence,
bolstering the bourse and rescuing failing firms. From sending a bourse regulator bill to parliament and setting up a USD7.3bln
bailout fund to suggesting that troubled financial firms consider mergers, the government is putting its considerable weight
and financial heft into managing the economic crisis. Kuwait approved a USD5.15bln economic stimulus bill to underwrite
fresh bank loans and assist troubled investment firms impacted by the regional credit crisis. In the GCC, Kuwait is the only
country that has approved a comprehensive economic stimulus package to guarantee and assist banks and investment
companies. However, the manner in which these plans are perceived and implemented will greatly affect their chances for
success.
In a survey initiated in March 2009, Moody’s recognised that Kuwait’s fiscal and economic strengths remain superior
compared to most peers despite some adverse fallout from the global crisis. Moody’s has also taken into consideration
improvement in policy environment with the recent election of a new parliament and the formation of a new government
in Kuwait. Kuwait’s country ceiling for foreign currency bonds remains at Aa2 with a stable outlook while its local currency
ceilings also remain at Aa2. Kuwait’s local and foreign currency government bond ratings and its country ceiling for foreign
currency bank deposits, which were also confirmed at Aa2.

Contribution to GDP in 2008
Non Oil
Revenues
10%
Oil
Revenues
90%
Oil Revenues Non Oil Revenues
Source: CBK, KFHR
Kuwait boasts the world’s fourth-largest oil reserves and its oil GDP constitutes 90% of its overall GDP. In 2008, Kuwait’s
trade balance reached USD62.24bln as against USD41.9bln in 2007, primarily fuelled by trade surpluses on account of
increasing oil prices earlier in the year. Despite a decline in oil output in 2009, export earnings should remain reasonably
strong as the prices have stabilised in the range of USD65-70pb. As a result, the current account is expected to maintain
a surplus (although not as high as in 2008) of USD10.14bln in 2009-10 while the trade surplus is forecast to be USD17bln.
We expect the current account balance to improve to USD22.1bln in 2010-11 and trade balance to climb to USD20bln in
2010-11 on account of an increase in oil exports as the global economy recovers.
Kuwait: Trade Balance Trend (2004-2010F)
100 80
80
60
60
USD bln
USD bln
40
40
20
20
0 0
2004 2005 2006 2007 2008E 2009F 2010F
Exports Imports Trade Surplus
Source: CBK, KFHR
Kuwait: Current Account Trend (2004-2010F)
80 60
60
40
USD bln
40
%
20
20
0 0
2004 2005 2006 2007 2008E 2009F 2010F
Source: CBK, KFHR

On the fiscal front, Kuwait’s fiscal surplus came in at USD2.1bln in 2008-09 as against USD31.62bln in 2007-08. The
steep fall may be attributed to a fall in oil prices from their July 2008 peak. Although Kuwait’s budgetary projections have
historically been very conservative we caution that Kuwait’s surplus in 2009-10 may also be hampered by the lagged
impact of a drop in oil prices and lower earnings this year. This will in turn cause the government to revisit some of the
planned mega projects. We forecast that the fiscal surplus will narrow sharply to USD6.1bln in 2009-10, due to the crude
oil production cuts by OPEC in order to stabilise the prices.
Nonetheless, we expect Kuwait to be able to invest in the economy in times of economic weakness, given the government’s
continuous effort to build up its foreign assets, both intra- and extra-regionally, in order to protect the outlook for long-term
government revenues.
Kuwait: Fiscal Balance (2004-2010F)
35 35
30 30
25 25
20 20
USD bln
%
15 15
10 10
5 5
0 0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10F
Budget Surplus % of GDP
Source: CBK, KFHR
Box: Kuwait 2009-10 Budget Projections
The Kuwaiti state budget for 2009-10 projects a sharp drop in revenues and a USD13.8bln deficit. Revenues are projected
at USD27.9bln, down 61.7% from USD72.9bln of budgeted income in the current fiscal year. Projected spending is
slashed by a massive 34.2% to USD41.7bln from USD63.4bln in this fiscal year’s budget. Kuwait’s fiscal year runs from
April 1 to March 31.
The main expenditure cutback is the cancellation of a USD19.08bln one-off payment to the social security agency,
while 24% is slashed from capital spending. The wages bill for civil servants, more than 70% of whom are Kuwaitis, has
however been boosted by 8.3%.
According to the Ministry of Finance, the main expected downturn is in oil income which contributes more than 90% to
total revenues, due to the sharp decline in oil prices. Predicted oil revenues have been calculated on the basis of an oil
price of USD35pb (KFH Forecast 2009: USD55pb) down from 2008-09 USD50p.b. However, Kuwait’s estimated deficits
always turn into actual surpluses because the breakeven oil price – the level needed to balance the budget – for Kuwait
is USD17p.b.which is even further below the lowball figure.
To diversify its economy away from its near total dependence on oil revenues and maintain long-term economic growth
momentum, Kuwait had planned to invest approximately USD207bln over the next five years in various economic sectors
such as real estate, oil and gas as well as energy and infrastructure. Kuwait also has plans to spend USD131.5bln on an
array of mega projects over the next five years, including a new business hub dubbed Silk City, as well as a harbour, railway
and metro system in a bid to diversify its economy and become a regional trade and financial centre. However, some of the
projects have been affected due to the current credit crisis and the completion dates have been extended.

Major Delayed or Cancelled Projects

Project Name Sector Project Value (USD) Status Completion Date
KNPC - Al Zour Refinery - Package 1 Oil and Gas 4,000,000,000 Cancelled 2012
(Process Plant)
(Process Plant)
KNPC - Tank Upgrade Program (TUP) Oil and Gas 400,000,000 Cancelled NA
Kuwait MEW - Emergency Power Power and 2,861,000,000 Cancelled NA
Generation (Subiya) Water
Kuwait MEW - Emergency Power Power and 330,000,000 Cancelled NA
Generation 2007 (Shuaibah) Water
KNPC - Al Zour Refinery Oil and Gas 15,000,000,000 Delayed 2012
KNPC - Al Zour Refinery - Package 3 Oil and Gas 2,000,000,000 Delayed 2012
(Offsites & Utilities)
(Tankage)
(Marine Works)
KOC - Al Zour Refinery - Pipeline Oil and Gas 500,000,000 Delayed 2012
KPC - Project Kuwait Oil and Gas 9,000,000,000 Delayed 2030
Kuwait MOC/Transport Union - Kuwait Infrastructure 11,000,000,000 Delayed 2016
Metropolitan RTS
Kuwait MPW - Failaka Island Development Real Estate 3,300,000,000 Delayed 2013
Tamdeen Real Estate Company - Silk City Real Estate 130,000,000,000 Delayed 2023
Tamdeen Real Estate Company - Silk City Real Estate 100,000,000 Delayed 2014
- Mubarak Tower
Al Aqeelah - Crystal Villas Real Estate On Hold 2009
Al Asima Real Estate - Al Asima Real Estate 821,000,000 On Hold 2010
Hydra Al Aqeelah Development Company Real Estate On Hold NA
- Aqeeq Al Marina
Kuwait MPA - Failaka Power and Power and 500,000,000 On Hold 2010
Desalination Plant Water
(Process Plant)
Source: Zawya, KFHR
Although the global credit crisis has had its impact on some of the planned projects in Kuwait, we believe the Kuwaiti
government will be able to safeguard its system amidst the global financial crisis, as it has been building up its foreign
reserves (the third-largest in the GCC, after Saudi Arabia and the UAE) and sovereign wealth fund (managed by the
Kuwait Investment Authority). Moreover, Kuwait has relatively minimal government debt (the International Monetary Fund
estimated this at only 5% of the country’s GDP in 2008) and moderate external debt (26% of its GDP).
Currently, Kuwait channels approximately 10% of its oil revenues into the Reserve Fund for Future Generations (RFFG)
annually, given the finite nature of Kuwait’s oil reserves and limited economic diversification. The bulk of this reserve
is invested in US, Germany, UK, France, Japan and Southeast Asia. Given that the government is utilising the high oil
revenue to fund long-term economic reforms, strengthen investment infrastructure as well as turn Kuwait into a regional
financial hub, key risk to Kuwait lies in the volatility of oil price.
Kuwait’s strong commitment to large infrastructure projects will benefit the economy at both micro and macro levels.
However, in spite of its oil wealth and its strategic position in the Gulf, Kuwait in 2008 attracted only USD56mln in foreign
direct investment down from USD123mln in 2007, the lowest of all Middle East and North African countries except for
the Palestinian territories. This is partially because Kuwait’s own oil wealth makes foreign capital less necessary for
development. In addition, the parliament’s refusal to approve any law that would allow the sharing of Kuwait’s wealth also
discourages foreign investors. The petroleum industry is barred to foreigners, who also cannot own land. Companies must
generally be majority-owned by locals and, unlike the free zones thriving elsewhere in the region.

Kuwait: Foreign Direct Investment Inflows (2004-2010F)
250
200
150
USD mln
100
50
0
2003 2004 2005 2006 2007 2008 2009F 2010F
Source: World Investment Report, KFHR
However, Kuwait has initiated reforms, such as cutting the corporate tax rate from 55% to 15%, and has tried to increase
access to land for development. But the changes have been too few to keep up with the rest of the Gulf. The study
titled ‘Doing Business 2010: Reforming through difficult times’ by the International Finance Organization and the World
Bank ranked Kuwait at the 61st position among 183 countries covered by the study. Kuwait has slid down from the 52nd
position when compared to the study conducted the previous year. The decline in the rank by nine points could affect the
competitiveness of Kuwaiti market to attract foreign investors, which might delay achieving the government strategy to turn
Kuwait into an international financial and trading centre.
Therefore, further structural reforms remain pivotal for the country to continue to attract FDI and hence boost economic
growth.
We believe the net inflow of foreign direct investment into Kuwait would remain subdued during 2009 to a forecast USD58mln
(on account of the global financial crisis and resultant sentiment of risk aversion towards investments) before recovering
slightly in 2010 to USD75mln. Nevertheless, apart from Equate II (a petrochemicals venture) and some smaller-scale
projects, most developments will be financed almost exclusively from domestic sources. The upstream oil and gas sectors
will remain largely closed to foreign investors, limiting technology transfer.
With the economic outlook rapidly dimming, inflationary pressures – a key factor leading to the decision to drop the Dollar
peg – have rapidly receded as a policy concern. Nonetheless, inflation was slow to decline in 2008. It fell to 10% in October
2008 from record highs of over 11% during the middle of the year. The average inflation for 2008 is estimated at 11.3%
which is forecast to fall to 6% in 2009. The falling real estate prices are likely to keep a check on inflationary pressures in
2009 and early 2010 and provide the government with an opportunity and an imperative to engage in more aggressive
policy interventions in order to revive the sagging economy.
Kuwait: Inflation Trend (2005-2010F)
12
10
6
%
0
2005 2006 2007 2008E 2009F 2010F
Source: CBK, KFHR

Kuwait Stimulus Plan

A long-awaited USD5.17bln stimulus package was put into effect in Kuwait in April 2009 in an attempt to shore
up the economy amid the global financial crisis. Kuwait’s distressed investment firms will be able to use new credit
to repay part of their debt to foreign banks and financial institutions. The draft bill was unveiled by the CBK in February,
with an aim to reduce the risk of an economic slowdown by helping struggling investment companies and offering bank
loan guarantees. This is the first comprehensive effort in the GCC, initiated by the government of Kuwait, in an effort to
solve the economic and financial crisis in the region.
The basic idea of the plan is to help banks and investment companies come out of their asset quality tribulations and
resume normal operations. Existing bad assets/loans will be ring-fenced and support injected to them in order to clear the
balance sheets of banks and investment companies of the burden of these toxic assets. According to official estimates, the
country’s 99 investment companies have lost nearly USD32bln between August 2008 and January 2009, a third of what
those companies once owned.
Company Statistics
ST LT ST LT ST LT
# of Companies Assets Assets Debt Debt Debt Debt
USD USD
Total Distressed Solid (%) (%) (%) (%) Mln Mln
Investment Companies 41 23 5 26 74 80 20 15487 3978
Real Estate Companies 37 22 13 28 72 68 32 4518.6 2091
Industrial Companies 28 10 11 47 53 70 30 4773.6 2050.2
Service Companies 52 22 22 18 82 32 68 4267 9112
The investment sector in Kuwait includes around 100 firms with 46 companies listed in the Kuwait Stock Exchange (KSE).
The investment sector was in need for such emergency plan comparable to other sectors as investment companies showed
to be affected the most by the global financial crisis. Until the end of August 2008, the market capitalisation for the sector
was approximately 18% of the total capitalisation of the KSE. However, this ratio decreased to 11% between Jan 2009 to
Apr 2009, as the sector suffered major losses in assets’ values when stocks’ for investment companies dropped sharply
compared to other companies in the KSE.
The government of Kuwait has been taking measures to deal with the fallout of the global downturn since September 2008.
The government has cut interest rates, guaranteed all bank deposits and pumped liquidity into the stock exchange.
Kuwait: Policy Actions to Boost Investor Confidence (October 2008- Till Date)
21st Jul 2009 Kuwait's central bank reduced its three repurchase rates by 25 basis points each to spur the economy
and lending. The central bank lowered its overnight repo rate to 0.75% from 1%, its one-week repo
to 1.75% from 2% and its one-month repo to 2.25% from 2.5%.
13th May 2009 Kuwait central bank decides to cut benchmark discount rate by 50 bps to 3% from May 14. This is the
fifth cut since October, taking total reduction to 275 basis points.
13th Apr 2009 A long-awaited USD5.17bln stimulus package was finally put into effect in Kuwait in an attempt
to shore up the economy amid the global financial crisis.
19th Nov 2009 The central bank introduced new short-term repurchase agreements to give banks more access to
funding.
4th Dec 2009 Sovereign wealth fund said it would invest 1.5bln dinars into local equities, adding later the funds
aimed to stabilise the bourse and would invest for the long term.
29th Oct 2009 Kuwait passed law guaranteeing all bank deposits after the central bank was forced to save Gulf
Bank, which suffered steep derivatives trading losses.
9th Oct 2009 The Kuwait Investment Authority pumped cash into the bourse to help stabilise markets.
Source: CBK, KFHR

The State, through CBK, intends to assist the banks and investment companies primarily through providing guarantees
on both existing toxic assets as well as new lending. The plan will help banks deal with loan losses and increase their
capital but under certain conditions, including expense cutting and possible mergers. Also, the state would guarantee 50%
of an estimated USD13.8bln of new credit facilities to be granted by banks to local companies this year and in 2010. The
guarantee by the Central Bank will enable banks to reduce their provisioning and increase liquidity.
Overall such a plan of action with associated policies and procedures is expected to ensure the following:
• Confidence Building: An indication to the market that the government is taking measures to deal with the economic
slowdown. This will lead to improved confidence as this may be considered more proactive than reactive.
• Ensuring Accountability: Ensuring accountability on the part of recipients of benefits out of this package through various
conditions.
• Optimal Use of Funds: Judicious and optimal use of public funds for a larger cause.
In response to the structural challenges thrown up by the financial turmoil, the CBK also plans to enhance risk management
mechanisms in the banking system by making it mandatory for banks to undergo a half-yearly assessment through stress-
tests to evaluate their fundamental strength and risk management procedures. The initiative was launched as some of the
Kuwaiti banks were exposed to troubled western financial institutions. According to the credit rating agency Standard &
Poor’s, the Kuwaiti banking sector’s total exposure to domestic investment companies stood at about USD9.1bln or 6.6%
of the total banking sector assets at the end of May 2009.
Although Kuwait, having abandoned its Dollar peg in May 2007, enjoys greater autonomy in its monetary policy than its
GCC neighbours, the actions of the Central Bank of Kuwait have largely matched those undertaken by other monetary
authorities in the region. On 21st July 2009, the Central Bank of Kuwait decided to reduce its three repurchase rates by 25
basis points each to spur the economy and lending. The central bank also lowered its overnight repo rate to 0.75% from
1%, its one-week repo to 1.75% from 2% and its one-month repo to 2.25% from 2.5%.
Meanwhile, the CBK has also kept a check on the discount rate which has been slashed twice this year from 3.75% at the
end of 2008 to the current rate of 3%.The reductions by the CBK were meant to be an additional injection into the local
economy to help it shore up the position of local market including financial institutions and firms.
Kuwait Discount Rate Cuts (End of 2007- Present)
7
6
5
4
%
3
2
1
0
End of 23-Jan-08 8-Oct-08 30-Oct-08 17-Dec-08 13-Apr-09 13-May-09
2007
Source: CBK, KFHR
The issue of how much surplus Kuwait can afford to pump into the local economy still remains. If oil prices fall again,
producers are even more unlikely to adhere to production cuts - even if they agree on them - as lower exports equal lower
receipts. In the short term, Kuwait can afford to transfer money from abroad to invest at home. In the longer term, it will need
effective economic legislation to drive the economy.
Pumping money into the system is only a short term manoeuvre to raise share prices. In the meantime, the government is
taking more indirect measures to fix the problem. For example, the government is encouraging troubled funds to consider
mergers. At the top of the list will be investment firms listed on the bourse. Standing at nearly USD4.15bln in net profits
by Sept 30, 2007, the 45 investment firms listed on the KSE recorded a net profit of USD2bln by Sept. 30, 2008. The

investment sector saw a halving of net profits within the last year. The loss is significant for a variety of reasons, not least
of which is the fact that the investment sector represents a considerable 22.8% of the capitalisation of the Kuwait bourse
as a whole, with the banking sector accounting for 26.1% and services comprise 20.9%.
However, mergers between Kuwaiti financial institutions, suffering from the global economic crisis, remain a difficult option
that is being avoided due to the ownership structures of these firms and the nature of their managerial board. This year saw
one major merger operation only, between Al-Deera Holding Co. and the International Investment Projects Co. The recent
announcement of a merger between Kuwait Invest Holding, Jeezan Holding Co., and International Finance Co. came to
break the still waters, despite being limited to a single investment group.
The weak link in the global financial crisis lies in the investment sector which warrants scrutiny not only by profit level
of each sector but also by its sources. A detailed check of the performance of each company in the sector and of the
profit sources is the need of the hour. A shake out of financial and investment firms could have a positive impact on the
bourse but it will hit employment figures - both among citizens and expatriates. It could also trigger internal feuds if hostile
takeovers enter the picture.
Kuwait, like other GCC states, is highly dependent on foreign workers, who comprise nearly two-thirds of the total population
of 2.4mln(2008E) and 80% of its workforce. Only 11% of the workforce is employed by the private sector. The government
has time and again expressed its resolve to push forward the “Kuwaitisation”; the process of persuading more Kuwaiti
citizens to enter the private sector and encouraging private firms to hire them. Kuwait’s labour force stood at 1.14mln in
2008, while unemployment was just 2% but with up to 25,000 young Kuwaitis joining the labour market each year, this
looks set to rise.
Unemployment Rates
8
7
6
5
4
%
3
2
1
0
2003 2004 2005 2006 2007 2008E
Source: IMF, KFH
Moreover, the recent restructuring of the economy due to the financial crisis may witness an increase in unemployment
rates in 2009. The expected job cuts will result in considerable outflow of expatriate population from the country as majority
of the job cuts are likely to occur in the private sector. Expatriates constitute 91% of the private sector workforce.
Labour Force Distribution

Kuwaitis Expatriates
Private Public
Sector
Sector
9%
16%
Public
Private
Sector
Sector
84%
91%

Box: Financial Sector Layoffs in Kuwait
Employees in Kuwait’s financial sector are facing an uncertain future, with more layoffs and lower salaries expected as
banks and investment firms try to weather the global financial meltdown.
The banking sector alone employs approximately 12,000 employees, a majority of which are Kuwaiti citizens. Thousands
of expats and citizens work in the investment sector. Expatriates may bear the brunt of layoffs in the banking sector.
But both citizens and expats in the investment sector face downsizing as the crisis deepens. More than half of Kuwait’s
46 listed investment firms have seen their share prices halved since the crisis hit Kuwait in October. The bourse has
nosedived, dropping 38% in 2008.
In the current scenario, approximately 27,000 nationals employed in the private sector may face termination. Although,
citizens made redundant can rely on government support but expatriates will likely leave the country if they cannot find
another job within the 30 days grace period after their work visas are cancelled.
Real Estate
The real estate market in Kuwait, one of the worst-affected in the region, and is yet to show convincing signs of stabilisation.
Property prices have dropped 40% during the past nine months, in comparison to the rates during the past three years.
During the 1Q09 a drop in overall real estate activity was witnessed in Kuwait. A decline of 57% was witnessed in the sector
in terms of number of transactions and sales volume as against 1Q08. Both property prices and the number of transactions
continued to fall during 2Q09.
Property sales in the country declined by a sharp 47% to USD984.4mln in 2Q09, down from USD1854.86mln a year earlier.
Residential property sales, which represent the biggest proportion of total real estate transactions in Kuwait, declined
28.1% YoY to USD500.61mln in 2Q while the investment property sales and commercial property sales declined 55.6%
and 64.1%, respectively. The total number of deals too fell significantly over the previous year with the country witnessing
a total of 1,185 transactions totaling USD1509.90mln in 2Q09, down 42.5% from the 1,514 deals totaling USD 2626.12mln
in 2Q08. The average value of transaction too dropped significantly to USD1274320.40 from USD1734618.25 in 2Q08 and
USD1466081.96 in 1Q09.
In 3Q09, a total of 415 transactions took place in July, up 2.0% on June and 42% from the start of the year while in August
total transactions figure fell to 374. Although the real estate activity weakened in August, but the broader picture remains
one of gradual recovery from the very low levels of sales seen for much of last year. The combined number of sales
transactions in the residential, investment (i.e. apartment) and commercial sectors was 374 in August, down 9.9% from
July. In year-on-year terms, however, sales rose by 12.7% - their first rise in 18 months – attributed largely to very weak
sales in August 2008.
Real Estate Sales Volume (Oct 2008-Aug 2009)
500
400
USD mln
300
200
100
0
Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-
08 08 08 09 09 09 09 09 09 09 09
Residential Apartments Commercial

Real Estate Number of Transactions (Oct 2008-Aug 2009)

400
300
200
100
0
Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-
08 08 08 09 09 09 09 09 09 09 09
Residential Apartments Commercial
Real estate markets in Kuwait had been recording an upsurge up till the latter half of 2007, with a growth rate of 8.7% on
a CAGR basis, over a period of 5 years, beginning 2002. The contribution made by Real Estate and Construction sectors
to the country’s GDP was 6.1% during this time. This was mainly attributed to the overall economic growth in the country,
marked by rising oil prices, free availability of funds, and abundant liquidity.
After this boom, a period marked by lot of impediments for the real estate sector began in 2008. One such impediment
came by way of issuance of laws 8 & 9 prohibiting shareholding companies from dealing in private residences, in order to
contain real estate prices. Aimed at limiting the amount of speculation in prices, which had in turn caused inflation rates
to soar up to as high as 10%, these laws also went a long way in curtailing the boom in real estate business, affecting
financing, acquiring, selling as well as mortgage operations of as many as 60% businesses. The contribution of the real
estate sector to GDP is estimated at only 5% in 2008.
Kuwait: Real Estate sector contribution to GDP (2000-2008E)

12
10
6
%
0
2000 2001 2002 2003 2004 2005 2006 2007 2008E
Source: CBK, KFHR
The value of sales fell 3.2% between July and August, but surged from -37.9% to 8.7% on year-on-year basis. But the
combination of a steadily improving economic backdrop, easier financing conditions and the impact of the recent legal
ruling which will allow Islamic financial institutions to trade residential property should continue to push real estate sales off
their lows. However, we believe that the overall real estate activity is expected to remain depressed, during 4Q09 as well.
Declining oil prices, the lower intensity of business activity, and the ensuing layoffs of non-natives has brought demand
dynamics to an all time low. Vacancy rates are slated to increase with more new apartment complexes being churned out
by builders. Demand is expected to recover in tandem with an uptick in economic activity. A lowering of up to 15-20% of
rents has been conjectured during 2009-10.
The commercial segment exhibited a growth in the early part of 2008, parallel to that in the investment segment, while the
4Q08 witnessed a slowdown too, in similar manner. Vacancy rates shot as the effects of the financial crisis were felt; while
some tenants renegotiated their contracts with approximately 20% lower rents. Moreover with increased supply of new
buildings, lower purchasing power for nationals as well as immigrants, and the overall worldwide slowdown, rentals may
further slip by 15% during 2009-10.

In addition, despite several measures, liquidity issues will continue to exacerbate the situation for office space rentals. With
expected fresh supply, vacancy rates may rise to as much as 40%. This is expected to bring down rentals as well as office
prices, by 15-20% in 2009-10.
Oil and Gas

Kuwait’s territorial boundaries contain an estimated 101.5bln barrels (bbl) of proven oil reserves, roughly 8.8% of the
world total. The Saudi-Kuwaiti Neutral Zone holds an additional 5 bb of reserves, half of which belongs to Kuwait, bringing
Kuwait’s total oil reserves to 104 bb.
Major Oil Fields in Kuwait
Source: Kuwait’s Ministry of Oil
In 2008, Kuwait produced approximately 2.7mln bpd of oil (as against 2.68mln bpd in 2007), which includes about 300,000
bpd of production from the Neutral Zone. Of 2008 production, 2.57mln bpd was crude and 170,000 bpd was non-crude
liquids. Overall, approximately two-thirds of Kuwaiti oil production comes from the southeast of the country. Oil production
in 2009 has been hampered on account of OPEC production cut in the wake of fall in oil price from 2008 peak of USD147pb.
During 1Q 09 Kuwait oil production was estimated at 2.276mln bpd while it fell to 2.241mln bpd in 2Q09.
Kuwait Crude Oil Production 3Q08-3Q09E

2,700.0
2,600.0
2,500.0
2,400.0
'000 bpd
2,300.0
2,200.0
2,100.0
2,000.0
3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 E
Source: EIA International Energy Statistics

Total Oil Production vs. Crude Oil Production

6
4 2.67 2.68 2.7

Mln bpd 2.52 2.68
3 2.27
2.03
2
1 2.14 2.38 2.53 2.54 2.47 2.57

1.89
0
2002 2003 2004 2005 2006 2007 2008
Crude Oil Production Total Oil Production
Approximately 90% of the country’s crude oil is sold via term contracts, with prices linked to Saudi Arabian medium crude
for western buyers and a monthly average of Dubai and Oman for Asian buyers. Kuwait is a major exporter to Asia-Pacific
countries such as Japan, India, South Korea, Singapore, Taiwan and Thailand. In 2007, of the 2.6mln bpd of crude oil
Kuwait produced, roughly 1.6mln bpd was exported.
Crude Oil Export by Region

Unspecified Asia and
0%
Pacific
Western
82%
Europe
8%
North America
7%
Africa
3%
Source: OPEC, KFH
Mina al-Ahmadi is the country’s main port for the export of crude oil. Kuwait also has operational oil export terminals at
Mina Abdullah, Shuaiba, and at Mina Saud. To handle increased production generated by Project Kuwait, a new terminal
is planned for construction on Bubiyan Island.
Output of Refined Products

Gasoline
7% Distillates
Kerosine
34%
19%
Others Residuals
20% 20%
Source: OPEC, KFH
Increasing demand for refined products combined with higher profit margins has kept Kuwait’s refining sector operating
close to its full capacity. Kuwait’s three domestic refineries have a combined capacity of approximately 936,000 bpd. The
country’s largest refinery is Mina al-Ahmadi, with capacity of 466,000 bpd, followed by Mina Abdullah (270,000 bpd) and
Shuaiba (200,000 bpd). High demand over the last two years has kept Kuwait’s refining sector running at close to full
capacity.

Kuwait’s Total Liquids Production and Consumption (1980-2008)

3.0
Production
2.5
2.0
Mln bpd
1.5
Exports
1.0
First Gulf
0.5 War
0.0
1980 1985 1990 1995 2000 2005
Kuwait Petroleum International (KPI) manages KPC’s refining and marketing operations internationally, with approximately
4,000 retail stations across Western Europe (Belgium, Spain, Sweden, Luxembourg, and Italy). KPI owns an 80,000 bpd
refinery in Rotterdam, Netherlands and has a 50-50 joint venture with AGIP in the 240,000 bbl/d capacity refinery in
Milazzo, Italy.
With the growth of downstream markets in Asia, Kuwait has been keenly interested in acquiring downstream assets in large
emerging markets such as China and India. In March 2008, KPI, Royal Dutch Shell, and China’s Sinochem announced a
deal to build a 240,000 bbl/d refinery in Fujian Province in China. The refinery is expected on-stream in 2010 and will be
designed to process Kuwaiti heavy crude. Also, in China’s Guangdong Province, KPC is negotiating a partnership with
China’s Sinopec and Dow Chemical Company. At a projected cost of USD5bln, the plant will feature a 300,000 bpd capacity
refinery and a 1mln tons per year ethylene steam cracker.
Most of Kuwait’s major producing fields are over sixty years old, and therefore field maturity is becoming a concern. In
2005, KOC, citing field exhaustion, lowered its production plateau estimates for the Greater Burgan area from 2mln bpd
to 1.7mln bbl/d over a 20-30 year period. This issue places added significance on development of other Kuwaiti reserves
going forward.
Selected Future Upstream and Downstream Expansion Projects

Kuwait Upstream Petroleum Projects
Increase Due Estimated Cost
Project (‘000 bpd) Date (USD bln)
Project Kuwait 300 2012 8.5
Early Production Facilities Phase I 50 2010 0.24
Early Production Facilities Phase II 120 NA 0.4
Lower Fars Pilot Project 0.2-0.5 2010 1
Kuwait Downstream Projects
Al Zour Refinery 615 2010 14
Source: Zawya, KFH
The Kuwait Foreign Petroleum Exploitation Company (KUFPEC), an upstream arm of Kuwait Petroleum Company (KPC)
is seeking opportunities in offshore oil exploration in Vietnam. PetroVietnam, which is state owned, has launched the
proposal for allotting offshore exploration license for oil and gas fields to competent bidders. KUFPEC is confident of
bagging the license, given the country’s history of cooperation in the energy sector in Vietnam. Already, KUFPEC along
with Malaysia-based Mitra Energy Ltd. and Singapore Petroleum Company has signed two production-sharing contracts
with PetroVietnam for two offshore blocks each covering an approximate area of 4500 square km. KUFPEC holds 40%
interest in both the blocks. Kuwait is also involved in Nghi Son Petrochemical Refinery Complex, a USD6bln worth trilateral
project involving Vietnam and Japan. The project is scheduled to go on stream in 2013.
Kuwait plans to increase oil production capacity from its current 2.7mln bpd to 4mln bpd by 2020, largely via Project
Kuwait. Kuwait’s constitution - and long-time policy - bars foreign investment in the country’s natural resources, except as
provided for by law. In order to allow international oil companies (IOC) involvement, “incentivised buy-back contract” (IBBC)

arrangements, which do not involve production sharing, concessions, or the “booking” of reserves by foreign companies,
have been created. The structure of the IBBC agreements allows the Kuwaiti government to retain full ownership of oil
reserves, control over oil production levels, and strategic management of the ventures. Foreign firms are to be paid a “per
barrel” fee, along with allowances for capital recovery and incentive fees for increasing reserves, in their role as service
provider/contractor. In May 2007, the Kuwaiti ruling family conceded the responsibility to approve each related IBBC for
Project Kuwait to Parliament.
In 2008, PK was projected to cost USD8.5bln. PK aims to increase the country’s oil production capacity from four northern
oil fields – Raudhatain, Sabriya, Ratqa, and Abdali - to 3.5mln bpd by 2015, and then 4mln bpd by 2020 with the help of
IOC.
Heavy oil is a major component of Kuwait’s increased production capacity plans. Estimated heavy oil reserves of
approximately 1bln barrel are located primarily in the north of Kuwait. KOC also plans to drill for oil in South East Kuwait
and West Kuwait. In South East Kuwait, which holds the vast Burgan field, production is to increase by 200,000 bpd to a
total of 1.7mln bpd; KOC hopes to maintain capacity in West Kuwait at 500,000 bpd.
Banking
Having spent the first half of 2008 grappling with high inflation and awash with liquidity, the entire scenario changed for
Middle East banks in the fourth quarter of 2008. In Kuwait, too, the banking sector witnessed a changed scenario in 2008
after the global turmoil started impacting the Gulf Arab state towards the end of 2008.
Kuwait: Financial Sector as a Percentage of GDP
16
14
12
10
%
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, KFH
Two of its biggest investment companies, Global Investment House and Islamic firm Investment Dar, were forced to seek
USD1bln each to help meet debt obligations and Gulf Bank, had to be rescued by the central bank after suffering steep
derivative losses.
In 2007, the Kuwaiti banking system was the GCC’s third largest, with consolidated assets of USD122bln (2000: USD51.1bln),
buoyed by higher credit facilities to residents on the back of higher real estate and property developments. The Kuwaiti bank
assets increased 10.6% (y-o-y) in 2008 amounting to USD135bln, as against an increase of 31.7% experienced in 2007.
The assets in 2008 were dominated by claims on the private sector specifically the credit disbursement to residents which
increase by 60.8% y-o-y. The assets in 2008 included claims on the government which amounted to USD6.95bln, as well as
foreign assets (USD 34.07bln), local interbank deposits (USD2569.10mln), and other assets. As of August 2009, local bank
assets in Kuwait amounted to approximately USD134bln out of which foreign assets were worth approximately USD24mln.
Foreign assets growth was driven by a substantial increase in deposits with foreign banks and in foreign investments, which
grew 13% y-o-y and 25% y-o-y respectively in 2008. However, the increase in foreign assets was completely offset by the
cumulative decline of over USD3.45bln in deposits placed with the Central Bank and by the decline in the outstanding CBK
bonds. Local interbank deposits also fell by USD2453mln over 2007 with most of the decline during the end of 2008.

Kuwait: Local Bank Assets (2004-Aug 2009)
150000
100000
USD mln
50000
0
2004 2005 2006 2007 2008 2009
Foreign Assets Total Assets
Source: CBK, KFH
Kuwait: Y-o-Y Growth in Assets

2007 2008
Claims on Government
CBK Bonds -5.9% 2.7%
Public Debt Instruments 2% -0.9%
Claims on Private Sector
Other Local Investments 3.2% 5.5%
Credit Facilities to Residents 95.4% 60.8%
Foreign Assets 31.6% 27.9%
Local Interbank Deposits -19.2% 1.2%
Other Assets 14.2% 1.6%
Source: CBK, KFHR
Loans extended by the banking sector increased by 17.5% (y-o-y) in 2008, as against a 35% growth in 2007. The growth
in loans was also the lowest since 2004.
Kuwait: Local Banks’ Credit Facilities by Sector (2002-Aug 2009)
30000
20000
10000
0
2002 2003 2004 2005 2006 2007 2008 2009
Trade Construction Personal Facilities Real Estate
Source: CBK, KFH
Since the beginning of 2008, growth in lending to personal facilities had slowed down, underpinned by slow deposit growth
as well as the central bank’s limits on borrowing. Growth in the real estate market also slowed, due to a law which prohibited
companies from trading or investing in residential property other than apartment buildings. Given that Kuwait is a relatively
undiversified economy, this resulted in the Kuwaiti banks having limited non-oil related exposures and sizeable balance-
sheet concentrations, both to the oil sector as well as to individual entities. The cyclical nature of the economy due to highly
volatile oil prices increased the banking sector’s exposure to consumer lending. This resulted in higher defaults on loans
due to the contraction in oil receipts on account of record low prices towards the end of 2008, which affected the sector’s
overall asset quality.

Even with the liquidity being provided to the banking system, we believe that credit growth rates will decelerate in 2009. So
far, banks are indicating that they have little appetite for new loan growth. This will not be so much of an issue of a shortage
of liquidity, given the measures taken, rather than one of reduced demand for borrowing from corporates as they redefine
their expansion plans in light of the global crisis.
Credit Growth Trend
40
35
30
25
20
%
15
10
5
0
2006 2007 2008 2009F
Source: CBK, KFHR
Furthermore, with the re-pricing of risk, the aversion to risk of both banks and borrowers has increased. The economic
picture in Kuwait has changed markedly over the last two months, owing not only to the change in liquidity, but also to the
sharp fall in the oil price.

United Arab Emirates

“Rebuilding Confidence”
A recovery in oil prices, rally in global equity markets, and a limited improvement in external financing conditions, have all
provided some relief to the UAE economy during the second half of 2009. However, liquidity remains tight and investment
activity curtailed, particularly in real estate where prices have fallen sharply. Meanwhile, the retail, trade, and tourism
sectors continue to be hit by the global recession, and the continuing departure of expatriate workers who have lost their
jobs is further compressing demand. We thus continue to expect the UAE to post a lower GDP growth rate of 1.5% in 2009
(IMF foresees a real GDP decline of 0.2% in 2009) recovering to 3% growth in 2010 as the contribution from oil as well as
non-oil sector is expected to increase.
UAE’s GDP Growth Trend (2006-2010F)
10.0
8.0
6.0
%
4.0
2.0
0.0
2006 2007 2008 2009F 2010F
Source: Central Bank of UAE, IMF, KFHR
Oil prices have staged a dramatic recovery, rising by more than 100% from their USD33.9p.b low in mid-February’09, to
hold at around USD70p.b in June’09. While still weak oil market fundamentals imply some risk of retrenchment however,
the strength and duration of the rally so far this year are sufficient to warrant revising our 2009 average oil price projection
to USD60p.b. with a further increase to USD75p.b in 2010. Although oil production levels remain constrained by OPEC
quotas, higher oil prices will provide a welcome boost to the UAE’s finances. This will help fund government fiscal stimulus
efforts, financial support to banks and to some state owned-corporate sectors, while still maintaining small twin fiscal
and current account surpluses. Increasing oil revenues have also boosted confidence, and helped buoy external market
perceptions of the UAE.
Hydrocarbon exports constitute 43% of total UAE exports, with re-exports ranking as second major contributor, constituting
39% of total exports. We estimate export revenue from hydrocarbons at AED264.5bln (US72.07bln) in FY09. Main re-
export items are precious and semi-precious stones, electrical appliances, machinery and textiles. FY08 exports witnessed
a 34% increase, on the back of hiking oil prices as well as increasing volumes and values of re-exports. Re-exports
witnessed a significant 33% increases in FY’08 due to their luxurious nature, hence, consumed widely in the 2008 boom.
This same nature is expected to lead to a severe decline in their demand in FY09 recessionary environment. Going forward,
we estimate FY09 exports to settle at AED676.4bln (USD 184bln) with hydrocarbon products and re-exports showing a
decline of 30% and 40%, respectively.

UAE Export Structure in 2008
Crude Oil
41%
Other Exports
6%
Gas
4%
Oil By-products
2%
Free Zone Re-exports

Exports 37%
10%
Consumer goods represent the major import group, constituting 53% of total imports, followed by capital goods and
intermediary goods. FY08 imports culminated to AED647.4bln (USD176.2bln), showing 33% growth from their 2007 level.
This is based on their nature, that we perceive as directly related to luxurious living (with regard to consumer goods) and
to economic boom showing in industrial growth (with regard to capital goods). Going forward, we expect FY09, imports to
witness 10% decline, due to massive layoffs, expatriate outflow and reduced business activity. FY10 is expected to witness
a 5% rebound with regard to imports. Accordingly, we forecast a trade balance of AED93.8 bln (USD25.5bln) in FY09 and
AED145.8bln (USD 40bln) FY10.
UAE’s Trade Balance Trend (2005-2010F)
300.00 70.00
250.00 60.00
50.00
200.00
40.00
150.00
30.00
100.00
20.00
50.00 10.00
0.00 0.00
2006 2007 2008 2009 E 2010 F
Exports Imports Trade Balance
Government Budget — Continued Expansions from Past Surpluses

Oil revenue constituted 77% of total government revenue in FY07 and is estimated to contribute 78% of total revenue in
FY08, implying high dependence on oil. We estimate state revenue for FY08 at AED320.25 bln, showing 40% growth on
the back of high oil prices. In FY09, however, a 30% decline in oil revenue is anticipated. Similarly, revenue from taxes,
constituting 6% of total government revenue, is expected to witness a 10% contraction due to reduced economic activity.
Accordingly, total state revenue is expected to settle at AED287 bln depicting a 32% contractionFY09 however, 35%
rebound is expected in FY10.

UAE Fiscal Balance Trend (2007-2010F)
140.00 25.00
120.00
20.00
100.00
15.00
USD bln
80.00
%
60.00 10.00
40.00
5.00
20.00
0.00 0.00
2007 2008E 2009 F 2010 F
Fiscal Revenue Fiscal Expenditure % of GDP
On the expenditure side, current expenses (i.e. salaries, wages, goods, services, subsidies and transfers) constitute 76%
of total expenses. We do not expect government to conduct expenditure cuts due to efforts to lubricate the economy, in
addition to rebounding oil prices providing the necessary cash. We expect current expenditure to witness a modest 5%
increase due to prudent recruitment as recessionary forces prevail. Equivalent increase is also expected with regard to
development and debt expenses.
Despite the higher government spending, the consolidated fiscal accounts for UAE are projected to remain broadly in
balance, after years of large surpluses. In addition, the current account is expected to remain in surplus – albeit considerably
reduced at 1.2% of GDP compared with 8.2% in 2008 – and official reserve levels should stabilise at around USD30bln. In
line with our USD75p.b oil price forecast, both the fiscal and current account balances are projected to return to surpluses
of above approximately 8% of GDP in 2010.
UAE Current Account Trend

25.00 12.0
20.00 10.0
8.0
15.00
USD bln
6.0
%
10.00
4.0
5.00 2.0
0.00 0.0
2007 2008 2009 E 2010 F
In FY09, we expect a tightened budget surplus settling at AED3.6 bln on the back of relatively lower oil prices and maintained
levels of expenditure in order to stimulate the economy. We roughly estimate the breakeven
price for oil at USD49p.b in Emirates. As oil prices continue to exceed that amount, expectedly averaging at USD60 p.b. in
FY09, the budget will show a positive surplus.
The relative strength of the twin fiscal and current account balances, together with UAE’s large accumulated savings (mostly
held by sovereign wealth funds), and manageable overall external debt levels, should provide reassurance to international
markets of the country’s overall creditworthiness. Certainly there appears to be scope for the federal government to take on
some of the debt of government affiliated corporations that are struggling to refinance in the currently strained international
credit markets. While a lack of data hampers analysis, rough estimates suggest that the UAE’s net external asset position
remains healthy, at the equivalent of 100% of GDP.

The UAE government has decided against joining the GCC single currency and has decided to retain the dirham exchange
rate peg to the dollar. The move was triggered by the decision to locate the GCC Monetary Council, the precursor to a
regional central bank, in Riyadh and, given that the road to monetary union was always expected to be long, there has
been little economic fallout from the decision to opt out. One-year and three-month AED forward exchange rates remain
unchanged. They continue to show little pressure on the currency with forward spreads having retreated from their highs
in September 2008 when the withdrawal of speculative funds and reduced access to capital markets sharply reduced US
dollar availability before the government intervened to provide liquidity support.
Inflation has fallen sharply in 2009 in line with the economic slowdown, reduced liquidity, and lower real estate and
commodity prices. The year-on-year rate fell to just 1.8% in April’09, with the average annual rate declining to 4.9% from
12.3% in 2008. Falling house prices (which comprise 39.3% of the consumer price index CPI) are the main driver behind
the slowdown. Last year the annual average house price index rose by nearly 40%, but the index has slipped back sharply
during the first four months of 2009 reflecting the ongoing correction in the real estate market. Inflation for the month of
June’09 turned negative for the first time since 1990 as falling prices for housing, food and other essential commodities had
a negative impact on the general price level in the economy. A brief period of monthly negative inflation is certainly possible
however, this is likely to be short lived, and we still expect annual average prices to remain positive at about 2% in 2009.
The governments counter cyclical fiscal policies, stronger oil prices, and efforts to inject liquidity into the banking system
and support domestic credit growth helped bolster demand in the second half of the year. At the same time, commodity
prices have started to rise again and the US dollar to weaken, which is likely to raise import costs.
UAE Inflation Trend (2000-2010F)
14
12
10
8
%
6
4
2
0
2006 2007 2008 2009E 2010F
While there have been some positive developments in the year to-date, the UAE economy continues to face numerous
challenges. Despite increased use of public funds, projects continue to struggle to secure financing, and many are being
put on hold or cancelled. Meed projects reported that USD406bln of projects are already on hold or cancelled, almost all
of which are in construction. While the government will ensure priority infrastructure projects go ahead, many real estate
developments are being put on hold reflecting financing constraints, greater risk aversion, and falling demand.
Delayed Projects in UAE

Power
Oil and Gas 2.0% Others
1.2% 1.4%
Construction
95.4%
Source:Meed,Zawya,KFHR

The UAE authorities have taken a strong and multi-pronged approach to dealing with the global financial crisis and to mitigate
its impact on the economy. As well as interventions to support the banking system, the federal and local governments are
implementing robust counter cyclical fiscal policies. Government spending has been raised, (federal spending is budgeted
to rise 21%) with the individual emirates willing to run sharply lower fiscal surpluses, or deficits (e.g. Dubai), and to draw on
large external savings. The UAE authorities have also started using funds raised in international bond markets to finance
priority projects and, with sovereign debt levels still low, appear to have ample scope to do more.
Governments’ Efforts to Revive the Economy

• Interest rates have been cut from 2% to 1% between September 2008 and January 2009
• In February 2009, the Dubai government announced that the CBUAE would purchase USD10bln of a
proposed USD20bln government bond program this year, with the funds expected to be partly used to help
state-backed corporates rollover their maturing debt.
• Central Bank has provided a USD13.6bln short term loan facility
• Allowed banks to withdraw up to 100% of their central bank reserves and introduced dollar swap facility
in December aimed at reducing dirham liquidity shortages. In January, it announced that it had provided
banks with dirham funds worth around USD1bln under the scheme.
• All bank deposits and interbank lending has been guaranteed for 3 years
• USD19bln provided in the form of long term bank deposits, convertible into a loan to raise capital if
necessary.
UAE • Amlak Finance and Tamweel, two large Dubai based Islamic mortgage lenders have been merged and
taken over by federal government.
• The Abu Dhabi government has injected new capital worth USD4.4bln into five of its banks.
• In a move to quash the rumours regarding Dubai’s inability to repay its debt obligations and to take
meaningful steps towards an economic recovery, the Government of Dubai recently unveiled a USD20bln
unsecured bond program
• Central Bank of UAE, announced with effect from 1 September ‘09, the interest rate on the liquidity
support facilities to banks shall be reduced from 2.5% to 1.5%. Liquidity support facilities to banks are the
mechanism whereby liquidity is injected into the banking system through discounting 1st class securities
held by banks. This measure would basically reduce cost of economic activities in the UAE, particularly
investment spending, and would contribute to sustained growth and support the national economy in
general.
Although government support has ensured banks to remain sound, credit growth has slowed sharply, and many businesses
are under strain, prompting a scaling back of investment programs, a streamlining of operations and some mergers,
particularly among the many government owned corporations. The retail, trade, and tourism sectors have also been hard
hit by the global recession, and this is being exacerbated by an outflow of expatriate workers who have lost their jobs,
leading to a further compression of demand for goods, services, and real estate. In addition, lower oil production as a result
of OPEC quotas will result in a large contraction in the oil sector.
While efforts are being made to strengthen official real estate data, particularly in Dubai, currently available information is
patchy. However, there appears to be a consensus that prices and rents are currently down 20-40% from their peaks in
mid-2008. The Dubai property market has been particularly hard hit. Key factors driving the sharp correction include:
• a decline in demand as foreign investors have retreated and expatriate population levels decline;
• a lack of funding as liquidity conditions have tightened;
• worsening consumer sentiment as it became clear that the UAE economy has not decoupled from the slumping global
economy;
• and a risk of oversupply as, despite cancellations, a number of large projects are due to come on stream at a time of
lower demand.

The worsening economic climate has led to expatriate redundancies which, given that expatriate visas are generally tied to
specific jobs, are synonymous with emigration. Estimating the level of net emigration is hard, but overall it seems plausible
that the UAE’s population could contract by up to 2% in 2009, mainly due to developments in Dubai. This will have an
adverse impact on consumer demand, including for real estate.
Dubai Population Trend

1.646 1.672
1.53
1.422
1.321
2005 2006 2007 2008 Mar'09
There are significant differences between the dominant Dubai and Abu Dhabi real estate markets. Both are expected to
undergo a sustained correction in 2009, but this should be more modest in oil dominated Abu Dhabi, and prospects of a
recovery there next year are more promising. In contrast Dubai’s greater emphasis on real estate development, its larger
risk of oversupply, and deeper integration with the global economy, suggests a more prolonged correction.
This year is likely to be a sharp reality check for the UAE prompting a healthy re-prioritisation of the huge project pipeline,
a correction in the overheated real estate market, and a wake-up call for banks. However, although the large exposure to
Dubai real estate may continue to act as a drag, we expect that the current actions being taken by the authorities, banks,
and corporations to strengthen and rebalance their positions, will ensure that the UAE is well placed to take advantage of
improving global conditions in 2010. This should include a recovery in oil production as higher oil prices allow a relaxation
of OPEC quotas, as well as sustained non-oil growth, albeit at a comparatively modest pace.
Liquidity Conditions Are Slowly Easing

The withdrawal of foreign deposits and curtailed access to international capital and wholesale markets continued to weigh
on UAE banks in the first half of the year. However, the situation is slowly improving in response to liquidity injections by
the authorities, deposit guarantees, and strong countercyclical fiscal policies. Interbank lending rates have fallen back from
their highs of late last year, although at 2.4% for 3 months in early July, remain elevated compared with similar US rates
(0.6%) and the UAE central bank base rate of 1%.
The UAE banks, which experienced dramatic growth during the period of high oil prices, have been struggling with mounting
losses since late last year as losses in the real estate and consumer loan portfolios continue to increase. The tightening
of the international credit market has now made it harder for banks to obtain short-term funding to cover their obligations.
Acute growth in lending which outpaced growth in deposits also exacerbated the liquidity crunch as banks are keen to
hang onto their capital, which may result in a sharp reduction in mortgage and lending facilities. The vulnerabilities of the
financial sector remain a concern for the UAE economy. The outlook for the UAE banking sector in 2009 looks grim with
concerns about lower GDP growth (KFHR 2009F:1.5%), deteriorating liquidity position, higher funding costs, increased
loan and investment impairments and significant exposure to a property price bubble, most markedly in Dubai. In addition,
in the absence of international bank partners, UAE banks are struggling to fill project funding gaps due to the sheer size of
the financing needs (which means many companies are reaching single creditor limits) and maturity mismatches with their
deposits.

UAE Broad Money Supply Growth
740
730
720
AED bln
710
700
690
680
670
Q1'09 Q2'09 July'09 Aug'09 Sep'09
While the prospects are encouraging that domestic liquidity conditions will continue to improve through the rest of the year,
buoyed by higher oil prices and government efforts to ease financing constraints, it is clear that overall credit growth in
2009 will be substantially lower than in previous years. Credit growth will probably tumble to around 5%, as concerns over
asset quality, rising NPLs and increased impairments charges on bank balance sheets continue to put a brake on lending.
The general slowdown in economic activity and shrinking liquidity has already been reflected in a steep fall in broad money
growth. Recent data from the central bank show that, having grown at an annual rate of between 25-45% during 2007-08,
growth in M2 (essentially money in circulation and bank deposits) fell to just 6.7% in May’09 .
Bank Deposits Recovering

While UAE banks have benefited from government support to shore up their capital they remain concerned over the
prospect of rising non-performing loans stemming from the region wide economic slump and crash in property prices, and
have focused on bringing down excessive loan/deposit ratios. These had been as high as 120% for some banks in late
2008. In addition, banks’ retail portfolios are under stress as the economic conditions have deteriorated. Although banks
continue to operate more stringent lending criteria as of Sep’09 loans and advances had risen by just approximately 6%
from the end of last year, while deposits had risen by 7.7% fromJan’09. The improving deposit position has helped bring
the aggregate loans/deposit ratio down to 104% in Sep’09, helped by government bond issuance and other support. Yet,
funding costs have not improved as deposit rates continue to remain relatively high. The potential for significant increase
in government deposits is also limited given the current economic environment, unless there is a positive upside on the
back of bond issuance during the second half of this year. Lower volume in the coming quarters will further improve liquidity
rates as banks try to bring their loan to deposit ratios down. Islamic banks generally are quite liquid and have maintained
their liquidity ratios at conservative levels. New bank deposits are apparently building up as confidence improves, boosted
by the rally in local and world stock markets since March, and as funds previously destined for the real estate market now
find their way into banks.
Capital ratios have strengthened in Sep’09 the aggregate capital adequacy ratio rose to 18% as the banks reduced cash
dividends, slowed loan growth, converted federal deposits into Tier 2 capital and in most of the eight cases received direct
injections of Tier 1 capital from their respective emirates’ governments.
120
100
%
80
60
40
20
0
2004 2008 Sep-09
Loan to Deposit Ratio Ratio Capital Adequacy Ratio

Nlp’s On The Rise

UAE banks saw increased provisioning charges in the second quarter impacted by the difficult economic environment. Non-
performing loans (NPLs) rose across the portfolio as the corporate books were also showing signs of deterioration. Sector
average NPL ratio increased to 1.1% in 2Q from 0.8% in the previous quarter. Profitability was hurt by a sharp increase in
provisioning charges in the second quarter and we expect provisioning levels to remain elevated during the rest of the year.
We expect NPL ratio of the sector to exceed 2% by end of this year.
UAE Banking System: Total Provisions for NPL (y-o-y)
8.00
7.00
6.00
5.00
USD bln
4.00
3.00
2.00
1.00
0.00
09
09
08
09
09
09
09
'0
'0
'0
'0
r'0
'0
p'
n'
b'
n'
ly'
g'
p'
ct
ar
ay
Ap
No
De
Au
Se
Se
Ja
Fe
Ju
Ju
O
M
Source: UAE Central Bank, KFH
The current quarter’s provisioning includes charges for exposure to the troubled Saudi groups. Since the banks have not
quantified their exposure to Algosaibi and Saad, it is hard to gather the extent of the impact. We believe that only part of
the exposure has been provided for and thus expect more provisioning in the coming quarters. We admit, though, that the
sharp increase in provisioning cannot be attributed to the troubled Saudi group alone, but is a general impairment seen
across the corporate portfolio. The UAE central bank data suggests that specific provisions in the banking sector have
increased by 28% to AED25.3 bln in July’09 since the beginning of this year. Meanwhile, general provisions increased by
57% to AED8.3 bln during the same period. With the economy still not out of the woods, we expect this upward trend to
continue during the rest of the year.
Despite The Recent Measures Funding Environment Expected To Remain Tight

The UAE central bank has announced a slew of measures to improve the liquidity of the banking system. The central
bank seeks to boost lending activities, thereby improving the health of the economy. In our view, this does not improve the
funding environment which continues to be constrained by highly priced deposits. Additionally, we would rather wait to see
the bonds/notes pricing of the banks, notably Dubai ones, to gauge the effectiveness of the government bond guarantee
programme. We would gain comfort if the central bank pumped more deposits into the banking system priced at lower
rates, which would be a benchmark in the deposit market. The recent reduction in Tier I capital adequacy requirement and
bond raising exercises in international markets further support our view that the funding environment is still under pressure.
Even if it improves, banks will be reluctant to expand credit due to asset quality concerns. As such, volumes are not likely
to pick up until economic conditions improve.
Of late, the UAE central bank has taken initiatives to improve liquidity in the banking system, reflecting the need to improve
the funding environment.
August 4 : The UAE central bank announced it will set up a new mechanism to determine the Emirates Interbank
Offer Rate (EIBOR) to reflect the true conditions of the market. According to the central bank, the EIBOR
is relatively high when compared with the repurchase (repo) rate which is at 1%.
August 26 : A new panel was established by the central bank to determine the EIBOR, whereby two foreign banks,
Royal Bank of Scotland and BNP Paribas, were dropped. Meanwhile, four local banks (Union National Bank
(UNB), First Gulf Bank (FGB), Mashreq Bank and Rak Bank were added to the list. The new mechanism
is expected to be implemented by the first half of September.

August 31 : Reduced the interest rate charged on the liquidity facility to 1.5% from 2.5%. This is again to boost lending
activities in the country by reducing the cost of funding of banks.
September 1 : The central bank cut the minimum Tier I capital ratio to 7% to be met by 30 September and the overall
capital adequacy ratio to 11%. Banks are required to increase Tier I ratio to 8% by June 30 next year.
These steps indicate the central bank’s efforts to reduce the funding cost of banks, which in turn may positively influence
lending. However, we do not expect this situation to reverse in the near future as funding costs remain high due to the
competitive deposit market. Also, asset quality concerns are constraining credit expansion. Though banks are tapping
the debt market/medium term note (MTN) programme following the government bond guarantee program, the funding
environment is still tight and expects funding costs to remain high. Improvement in the deposit market will help ease funding
pressure. We find the Abu Dhabi banks better positioned than their counterparts in Dubai in terms of funding and growth.
Deposits From The Government At Lower Cost Will Improve The Funding Environment
Direct deposits from the government would be a more effective tool to help the current funding environment. Particularly
when priced at lower rates in line with the EIBOR rates, this will serve as a benchmark in the deposit market. With ample
deposits at affordable rates, banks will not have to chase other clientele. This would naturally lessen the current competition
in the deposits market. As such, we would prefer to see liquidity directly pumped into the banking system in the form of
deposits. The Ministry of Finance announced a package of AED70 bln last year and so far has transferred only AED50
bln as deposits. Transfer of the remaining deposits and any other increase in deposits, at lower rates, would make a
pronounced impact on the funding environment. We believe, sustainable and responsible cheaper lending is one of the
best ways of boosting local and international economic growth. Much of the present economic difficulty across the world is
because people and companies are struggling to secure finance to buy, sell and invest.
Despite some signs of a return to normal bank lending in the UAE, we believe that banks will remain cautious, in light
of ongoing economic uncertainty and relatively high loan default rates. After a period of rapid expansion, loan growth is
likely to remain modest over the remainder of 2009 and into 2010, which will bring the loan-deposit ratio down to more
sustainable levels.
Real Estate
Abu Dhabi residential property saw almost 1,000 new apartments having been delivered to the market in the last quarter
and is expected to continue to see an increase in the supply of residential units in the third quarter, predominantly in
off-island locations, including Mussafah, Mohammed Bin Zayed City and Khalifa City. Approximately400 apartments are
expected to come online in October 2009 on Abu Dhabi Island, in addition to a continued supply of apartments coming
up in Khalifa City ‘A’. These apartments have generally been leasing slowly due to a mismatch between landlords’ rental
expectations and those of prospective tenants.
Nominal Changes in Residential Rental Rates

There has been a noticeable increase in activity in the leasing market prompting tenants to get better value for their money,
either by decreased rents, increased property size, better quality specifications, better amenities and accessibility. Despite
the Real Estate Regulatory Agency’s (RERA) attempts to provide a rental index earlier this year, it is the above mentioned
influences which are truly driving the current rental market activity. In general, increased interest and rumours of economic
recovery have caused some landlords to raise their rents. However, many of these units remain empty for several months
due to a significant amount of supply, and increased competition.
According to market research conducted by one of the leading real estate advisors apartment and villa rental rates have seen
minimal changes of -3 and 0% respectively. Currently, average rental rates in Dubai for studio apartments are AED44,000
per annum, whereas one-, two and three-bedroom apartments command AED77,000, AED106,000 and AED145,000
respectively. Rates for studios and one-bedroom apartments are beginning to stabilise, whereas there is still room for
further drops for larger units.

Average Apartment Rental Rate in Dubai-Q3
60,000
50,000
USD/pa
40,000
30,000
20,000
10,000
0 Al Barsha
BurDubai
Deira
Discovery
Gardens
DownTown
Burj Dubai
Dubai
Marina
Greens
Jumeirah
Beach
Jumeirah
Lake
Palm
Jumeirah
Sheikh
Zayed
Mirdiff
Studio 1BR 2BR 3BR
Source: Asteco, KFHR
Villas and townhouses are available on average for AED117,500 for two bedrooms, AED180,500 for three, AED227,500
for four and AED278,500 for five-bedroom units respectively. The majority of enquiries are for Jumeirah and Umm Suqeim
where tenants are looking for three-bedroom units between AED150,00 and AED180,000 per annum.
Average Villa Rental Rate in Dubai-Q3’09

160,000
140,000
120,000
USD/pa
100,000
80,000
60,000
40,000
20,000
0
Arabian
Ranches
Downtown
Burj Dubai
Green
Community
Jumeirah
Jumeirah
Islands
Meadows
Palm
Jumeirah
Springs
Umm
Suqeim
Mirdiff
2BR 3BR 4BR 5BR+
Source: Asteco ,KFHR
However, the attractiveness of cheaper rents and better value for money in Dubai could provide serious competition to the
upcoming Abu Dhabi units in the market over the next six to 12 months, including Marina Square and Sun & Sky Towers,
as a significant group of prospective tenants will benchmark these new developments against comparable developments
in Dubai (particularly in Dubai Marina), thus individual landlords owning units within these developments are expected to
be realistic in their rental expectations, particularly given the amount of competing units that will come on to the market at
the same time.
Average Apartment Rental in Abu Dhabi-Q3’09

70,000
60,000
50,000
USD/pa
40,000
30,000
20,000
10,000
0
Khalidiyah
Corniche
Mussfah
TCA
Hamdan
Passport
Road
Khalifa
Street
Airport
Road
Muroor
Mushrif
1BR 2BR 3BR

Following a period of falling rents, villa rental rates have stabilized off Abu Dhabi Island with high take-up levels being
witnessed at Al Raha Gardens and Sas Al Nakhl. Villas continue to attract investor interest, particularly in Al Reef (Arabic
phase), Golf Gardens and Al Raha Gardens despite a decline in capital values. In Q3 2009, townhouses on Al Raha were
available for AED205,000 for three bedrooms and AED210,000 for four bedrooms. On the Island, the average rental rate
was AED300,000 for three-bedroom villas, AED365,000 for four-bedroom villas, and AED385,000 for five-bedroom villas,
with Mushrif commanding the highest rentals, closely followed by Khalidiyah and Bateen. This is certainly driven by the
available supply in Mushrif and the lack of villas available in Khalidiyah and Bateen.Rental rates for Al Raha Gardens,
Khalifa ‘A’ and Muroor stabilized in the last three months.
Average Villa Rental Rate in Abu Dhabi-Q3’09
120,000
100,000
80,000
USD/pa
60,000
40,000
20,000
0
Passport
Al Raha
Gardens
Khalifa 'A'
Sas Al
Nakheel
Khalidiyah
Bateen
Mina
Al Falah
Airport
Manaser
Muroor
3BR 4BR 5BRMushrif
Office Rental Rates Decline Further

An increase in the total office supply has helped to ease office rents by an average of 13% since Q2 2009. The rate at which
rentals decreased, however, has slowed down. The fall in rents may help Dubai attract potential new tenants and increase
leasing activity. In addition, tenants and landlords are working towards lease agreements of up to ten years, with regular
reviews, to replace the current short lease terms. This will be beneficial to both parties as landlords can secure rental
income for longer periods and tenants are able to spread upfront costs like fit-out over a number of years.
Average Office Rental Rates in Dubai
140
120
USD/ft²/pa
100
80
60
40
20
0
BurDubai
Deira
DHCC
DIFC
DownTown
Burj Dubai
Downtown
Jebel Ali
Dubai
Internet
Dubai
Investment
Dubai
Media City
Jumeirah
Lake
Sheikh
Zayed
Tecom
Q1'09 Q2'09 Q3'09
Dubai International Financial Centre (DIFC) is the only area that has seen positive change, with an increase of 6%. Rental
rates range from AED350 per square foot per annum in private developments to AED500 per square foot per annum
directly from DIFC. This is due to the fact that there are very few small units available as companies tend to lease long-term.
In addition, the applicability of international laws attracts multinational companies. Rental rates in Dubai Healthcare City
(DHCC) remain stable as the free zone caters to a specialist industry.
As is the case for apartments and villas, demand remains low for office units alongside Emirates Road. Other areas such
as Tecom and Media City suffer from oversupply as many towers have been handed over in the last few months. However,

the recently launched Dubai Metro is likely to have a positive effect on take-up in these areas, although it is too early to say
to what extent. Deira will also become increasingly popular with three Metro stations within a five square kilometre radius.
According to a recent report by the International Finance Corporation and the World Bank, UAE has become one of the
world’s 10 most active reformers following the recent government announcement that the minimum capital requirement for
business start-ups has been eliminated and registration procedures simplified. The government has taken steps to entice
more company start-ups by choosing not to increase government fees and by making trade licence registration available
on-line The expected passing of laws currently under consideration which could extend the entitlement to 100% foreign
ownership may have a downward effect on rental rates in free zones and we are likely to see a greater level of parity
between free zones and non-free zones. However, this is unlikely to have a major effect on in- and outflow as companies
still benefit from simplified procedures as well as the availability of similar or supportive industries within the free zones..
The Abu Dhabi office market has witnessed smaller firms or trading companies setting up base in the emirate during the
past few months. Conversely, there has at the same time been a decline in the number of companies with branches from
other emirates registering their business in Abu Dhabi. The majority of these new companies have established themselves
in Mussafah, followed by the Western Region.In order to assist new start-ups the Federal Government issued a decree
amending Article 227 of the UAE Commercial Companies Law No. (8) (Companies Law) with the effect of abolishing the
AED150,000 minimum capital requirement. Around 608 new limited liability companies have taken this opportunity to set
up in Abu Dhabi.
Average Office Rental Rate in Abu Dhabi
600
500
USD/m²/pa
400
300
200
100
0
Hamdan
Khalifa
Salam
Corniche
Khalidiya
Airport
Road
Electra
Eastern
TCA
Passport
Road
Defense
Street
Corniche
Muroor
As Abu Dhabi continues its growth in line with Plan 2030, it is fast emerging as an attractive destination: 570 new foreign
businesses have been established in the emirate during this quarter. The majority of these companies have started from
a small base and, therefore, have not been able to absorb the excess office supply in the market and most have shown a
preference for cheaper rental rates over location.
According to the Abu Dhabi Chamber of Commerce and Industry (ADCCI), 4,263 (1,814 in Q3 2009) new companies have
registered in Abu Dhabi in 2009, with the majority taking offices on the mainland. The Eastern Corniche witnessed a drop
in rental rates of 12%, compared with Q2 2009. This was closely followed by Salam Street and Tourist Club Area (TCA)
which have experienced a lack of demand from office tenants due to ongoing road works. Salam Street and TCA showed
an 11% drop q-o-q.

Qatar
“Gas fuelled economy”
The country’s gas-fuelled economy is expected to grow at estimated 8.5% in 2009 and 10.5% in 2010; however precise real
GDP growth rates will depend on the timing of LNG output increases. Qatar economy registered a remarkable performance
in 2008 (estimated 9.8% y-o-y) on account of robust oil prices. Its nominal GDP reached USD100.41bln (QAR 365.48bln)
in 2008, expanding by almost 44% y-o-y. The effects of the downturn have been partly mitigated by Qatar’s significant
reliance on exports of liquefied natural gas (LNG) sold on the basis of long – term contracts at fixed prices which make it
insulated somewhat from the volatility of spot markets.
Real GDP growth trend

12.0
10.0
8.0
%
6.0
4.0
2.0
0.0
2005 2006 2007 2008E 2009F 2010F
Source: IMF, IIF,KFHR est.
Qatar’s position as the world’s largest LNG exporter is fuelling this strong growth and under-pinning the country’s long-term
economic prospects. Gas constituted 32% of the state’s income in 2008 compared with 27% for the oil sector.LNG exports
are expected to reach 77mln tonnes per year by the end-2010, from an estimated 43 mln tonnes per year in April 2009.
Qatar’s economy is expected to remain buoyant, as Qatar’s liquefied natural gas (LNG) industry takes hold and additional
oil capacity leads to increased export volumes. Output of associated natural gas condensates will also increase, along
with other gas-based industrial ventures, particularly in petrochemicals. However, Qatar’s gas mega investment projects
particularly in LNG, are ongoing with some delays that might affect the performance of the sector in the short term but would
not change the medium term positive outlook.
New projects are in the pipeline, namely Qatargas 2, Qatargas 3, Qatargas 4, and Rasgas 3. Each of these projects is
expected to add 7.5 mln tonnes per annum of natural gas. The completion of Qatargas 2 and Rasgas 3 by end of 2009 and
full execution of the other projects by FY12 is expected to bring, taking Qatar’s total LNG capacity close to 77 mln tonnes
per annum. Around 70% of Qatar’s production of LNG in FY07 was targeted to Asian markets, namely, Japan and Korea,
while 27% was targeted to Europe, namely, Spain, Italy and Belgium. Going forward we expect LNG exports to the USA to
contribute around 30% of total LNG exports, Asia 30% and Europe 40%. Thus, the impact of dampening factors related to
the credit squeeze, OPEC’s oil volume cuts and the reduced demand in export markets under the recessionary effects of
the international turmoil are less important in Qatar than elsewhere. In the near future, rising gas revenues are expected
to bolster state finances, allowing the government to increase spending to support the economy while still running a fiscal
surplus. For fiscal 2009/10 announced in April, USD10.4bln of the USD25.97bln budget has been allocated for spending
on non-oil and gas projects.

Qatar’s Contracted LNG Exports mln tonnes per annum

Destination(Supplier) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sales and Purchase Agreements
Japan(Qatargas1) 6.3 6.3 6.3 6.3 6.4 6.6 6.6 6.6 6.6 6.7 6.7
Korea(RasGas) 4.9 4.9 6.8 8.8 8.8 8.8 8.9 7.0 7.0 7.0 7.0
India(RasGas II) - - 2.5 3.8 5.0 5.0 5.0 5.6 7.5 7.5 7.5
Italy(Ras Gas II) - - - - - - 3.5 4.7 4.7 4.7 4.7
Spain(Qatargas1) 1.2 1.1 1.3 2.2 2.6 2.9 2.9 2.9 2.9 2.9 2.1
Spain(Qatargas1) - 0.1 0.8 0.7 0.5 - - - - - -
Spain(RasGas II) - - - 0.6 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Belgium(RasGas II) - - - - - 2.6 3.4 3.4 3.4 3.4 3.4
Belgium(RasGas II) - - - - - - 1.5 2.5 2.1 2.1 2.1
Taiwan(RasGas II) - - - - - - 1.2 7.7 3.0 3.0 3.0
UK (Qatargas II) - - - - - - 4.5 7.7 7.9 7.6 8.0
France(Qatargas II) - - - - - - - 7.7 7.9 7.6 8.0
USA(Qatargas 3) - - - - - - - 3.5 7.5 7.7 7.7
Total SPAs 12.4 12.4 17.7 22.4 24.1 28.2 38.9 54.5 61.3 61.0 61.0
Heads of Agreement - - - - - -
USA(RasGas 3) - - - - - - 1.0 8.1 10.8 10.2 10.2
USA(Qatargas 4) - - - - - - - - 5.3 5.3 5.3
Japan(Qatargas 4) - - - - - - - - - 0.9 0.9
Total HoAs 0.4 0.7 0.7 0.7 1.0 8.1 16.1 16.4 16.4
Grand Total 12.4 12.4 18.1 23.1 24.8 28.9 39.9 62.6 77.4 77.4 77.4
Source: Qatargas .RasGas, KFHR
Quarterly Data Point To Declining Nominal Gdp

Although large increases in LNG physical production will sustain positive growth in real terms (i.e. at constant prices),
nominal GDP is expected to decline by approximately 10% or USD91 bln this year as the value of oil output falls steeply.
Even with this reduction, Qatar‘s per capita GDP will remain amongst the highest in the world at around USD55,000. Data
from the Qatar Statistical Authority confirmed the declining trend, with nominal GDP estimated to be down 14.5% y-o-y
in the first quarter. The main driver of the decline was a 41% nominal drop in the oil and gas sector which accounts for
approximately 62% of GDP. This reflects the combination of lower oil and gas prices and reduced oil production. The first
quarter data also confirms the government‘s strong fiscal support as reflected in a 37% y-o-y increase in the government
services sector. The construction sector posted a 20% increase, reflecting in part the increased government spending on
infrastructure and development projects.
Oil and Gas

The hydrocarbon sector has been the Qatari economy’s backbone, contributing a significant portion (62% in 2008) of its
GDP, although the non-hydrocarbon sector’s share in GDP saw a gradual increase over the period 2005-07. Hydrocarbons
will continue to dominate the GDP’s composition particularly if one takes into account the new LNG production facilities
coming on stream over the next three years. LNG production capacity is set to expand to 77 mln tonnes per annum (mtpa)
by 2012, compared to a capacity of around 31 mtpa as of end 2008.
The Government’s oil policy has the twin aim of replenishing proven reserves within currently producing fields and identifying
additional new reserves. Qatar contains estimated proven oil reserves of 27.3bln barrel as at December 2008. Given an
average production of 801,000 barrels per day (bpd) over the past five years, proven reserves would last approximately
89 years. The majority of Qatar’s oil reserves are contained in the onshore Dukhan field which is solely operated by Qatar
petroleum can handle up to 335,000 b.p.d of oil and 800 mln standard cubic feet (MMSCFD) per day of gas. Dukhan
reserves are estimated at about 2.2 bln barrels.

Qatar’s Oil Reserves-Dec2008

30
25
bln barrel 20
15
10
0
2001 2002 2003 2004 2005 2006 2007 2008
Source: BP Statistical Review , KFHR
Qatar’s crude production and oil reserves were the lowest among OPEC member countries. State owned Qatar Petroleum
(QP) controls all aspects of the country’s oil sector, including exploration, production, refining, transport and storage.
Crude Oil Production

860
840
820
'000 bpd
800
780
760
740
720
2004 2005 2006 2007 2008 Q1-09
Source: BP,KFHR
Currently, Qatar has refinery capacity of around 80,000 b/d. By 2009 Qatar is developing Ras-Laffan refinery that would
produce 146,000 b/d. Ras laffan will be a joint venture between Qatar Petroleum owning 80% and Exxon Mobil and Total.
Qatar natural gas reserves stood at an average of 25.55Tcm over the period 2001-08, comprising around 35.3% and 14.6%
of Middle East and World reserves respectively on average over the period.
QP’s two major LNG projects, Qatargas and RasGas, which currently operate LNG facilities with a combined production
capacity of around 38.6mln tons per annum (mtpa) are undergoing major expansions to meet additional LNG export
opportunities. QP has allocated QAR61.7bln in its five-year plan, starting 2009, to meet the rapidly expanding needs of the
natural gas sector.
Going forward, the Qatar Government will maintain its focus on LNG investments, which are already in advanced stages of
development. Qatar plans to build a state of the art LNG projects that cost more than USD38bln that include Qatargas trains
1, 2, 3, and 4. Qatargas operates the LNG business in Qatar; its major shareholders include Qatar Petroleum, ExxonMobil,
Mitsui, Total and Marubeni. Currently it exports 10mln tonnes per annum of LNG to three LNG trains. With the expansion
and the development of Qatargas 2, Qatargas 3 and Qatargas 4, it will increase the LNG trains to seven from the current
three. Moreover, the government’s emphasis on infrastructure development, as emphasised in the 2009 budget, along with
a policy to award major contracts to domestic companies is likely to further enhance the pace of industrial development.
Qatar has executed a development plan for its abundant natural gas reserves and has already concluded sales and
purchase agreements (SPA) on future liquefied natural gas (LNG) output for more than two decades into the future. The
SPA contracts come with built-in price minimums that guarantee steady cash flows for Qatar Petroleum and the state.

Given that Qatar’s fiscal planning is structured around these guaranteed revenue streams and worst-case scenario oil
prices, we expect growth will continue to be well supported by the government’s expansion programme as well as high
investment spending. However, there is also the possibility that the government may review and shelve some of the
projects if the situation in the world economy deteriorates further.
Diversification Drive
The direct relation of non-oil sectors growth to the oil and gas sector has been moderately offset through the governments
increasing efforts to diversify its economic activities through manufacturing, building & construction, and real estate sectors.
Moreover, the government has dedicated QAR43bln for infrastructure, health, and education as a stimulus plan for the
economy in FY09. Of the former, coupled with falling oil revenues, would cause the total surplus to drop from its FY08 figure
to stand at an estimate of QAR11.1 bln, at 2.9% of GDP. FY10 surplus is estimated to stand at 7.2% of GDP. FY09 trade
balance will slightly increase by 1.8% up to QAR110.4 bln, due to minute increase of 0.4% in exports, and a 1.2% drop in
imports.
In addition to maintaining high growth rates during the downturn, Qatar is also determined to continue to drive forward with
its diversification strategy. The country’s hydrocarbons sector remains the backbone of the economy - contributing 62%
of GDP last year. The USD10.4bln allocated to development projects this year will play a crucial role in underpinning its
ongoing diversification. In October last year, the government launched the Qatar National Vision 2030, which will serve
as a blueprint for the social and economic future of the country. In stressing the need for reduced dependence on the
hydrocarbons sector, the plan calls for an expanded role for other industries and services within the economy.
The government is making efforts to diversify the economy, however, we strongly believe that growth in all other sectors
is fuelled by the oil and gas sector, hence, are estimated to grow in direct proportion with the oil and gas sector. A quick
review of dynamic sectors is provided as follows;
• Manufacturing Sector - The largest non-oil contributor to the GDP (at 7%) with main industries being petroleum refining,
chemicals, fertilizers and steel. These industries depend on natural gas as a main input for production. Consumer
goods such as footwear, textiles and household articles represent another main industrial component. Going forward,
we expect the sector to witness a 19% nominal growth in FY09, encouraged by government support;
• Building & Construction - Public spending on infrastructure is the main catalyst for growth in this sector with the aim
of paving the road for further economic growth and development. The sector has grown by 20% in FY08, fuelled by
government budget surpluses achieved over the past years. Going forward, we expect dynamic growth of this sector
to persevere following the gas sector growth. FY09 is expected to witness 40% nominal growth supported by declining
prices of building material. Currently, the country is planning 4 mega transport projects estimated at USD21.6 bln. The
projects are a causeway linking Qatar with Bahrain, the new Doha international airport, a massive new port project
at Mesaieed, in addition to establishing the first rail network comprising light people carrier in and out of Doha along
with heavy freight. The rail network will connect the Ras Laffan industrial complex with Doha and the Mesaieed port,
the airport and central Doha and bridge to Manama in Bahrain. This is in addition to a freight link with Saudi Arabia, a
six line metro system in Doha and rail connecting Lusail, Westbay and Education City. Completion of these projects is
expected to take place between 2011-2015;
• Trade, Hotels and Restaurants - The sector grew at 26% and 13% in 2007 and 2008, respectively. Tourism in Qatar
is mainly business based, accordingly, with the 2009 expansion in LNG projects we expect approximately 15-20%
nominal growth in the sector.
External Accounts Remain Strong

On average, oil and gas constitute around 80% of total exports. IN 2008 Qatar’s exports increased by 30% on the back of
higher oil price from an average of USD74.b in FY07 to USD95p.b in FY08. We expect oil prices to average at USD60p.b.
in 2009 nevertheless, in our view the large new LNG production capacity, which is due to come on stream during the year,
should boost exports and offset the projected 65% decline in oil earnings. While total hydrocarbon exports are expected
to drop by 24% to around USD 20bln in 2009, we expect total exports to settle at QAR212bln (USD58.2 bln) in FY09 and
expected to reach QAR265bln (USD 72.8bln) as oil prices rebound. This is expected to generate another large current

account surplus equivalent to 7.8% of GDP, albeit down on the 14.1 %achieved in FY2008 The surplus should provide
resources to support the governments‘counter cyclical fiscal policy and measures to boost confidence in the economy, some
of which are being effected through the Qatar Investment Authority (QIA) Imports witnessed a 26% increase in 2008 on the
back of a booming economy. However, a slowing down economy is expected to manifest itself in flat imports growth settling
at QAR90.0bln in FY09. On the other hand, the government efforts to boost economic activity are expected to promote
imports of capital goods in FY09.Services, investment income and transfers accounts represent a net outflow in the Qatari
external account. All of which are expected to slow down at a moderate rate as inflows from oil and gas decline.
Current Account Balance Trend 2005-2010F
20.00 20
15.00 15
%
USD bln
10.00 10
5.00 5
0.00 0
2005 2006 2007 2008 2009F 2010F
Current Account Share of GDP
Source: IMF, IIF,KFHR est.
A Surplus State Budget Expected In FY09 And FY10

The government has been able to secure a budget surplus averaging 12% of GDP over the past 5 years mainly resulting
from growing oil and gas revenue. Oil and gas revenue contributed 59% of government revenue in 2008 amounting to
QAR93.7 bln showing a 34% rise. In 2009, however, the expected decline of 65% in oil and gas prices should be partially
offset by a 50% increase in production of LNG. Crude oil price is expected to average at USD75p.b) in FY10. This combined
with further expansion in LNG production is expected to lead to 35% increase in oil revenue in FY10. As international oil
prices exceed this level, we perceive a surplus in the state budget.
The 2009/10 budget, approved in April, shows a 14% decline in projected revenues while spending remains more or less
unchanged over the 2008/09 budget, resulting in a projected deficit of around USD1.6bln. However, historically actual fiscal
outturns bear little resemblance to the budget, and this is likely to be the case again. The 2009/10 budget was based on
an oil price of USD40p.b which is likely to be considerably exceeded. Prices have already averaged USD50p.b so far this
year, and our forecast is for a full year average of USD55p.b, rising to USD75p.b in 2010. The government is expected
to devote QAR43bln for infrastructure, health and education as a stimulus plan for the economy in FY09. Accordingly, we
expect a budget surplus of QAR13.2bln (USD3.6bln). In order to equip itself for further expansions that might be necessary
to stimulate the economy, the government issued USD 3bln bonds (i.e. a USD2 bln with a 5 year tenor at 5.15% coupon
and a USD1 bln with a 10 year tenor at 6.55% coupon).
Fiscal Balance Trend 2005-2010F

12.00 20.00
10.00
15.00
8.00
USD bln
6.00 10.00
4.00
5.00
2.00
0.00 0.00
2005 2006 2007 2008 2009F 2010F
Fiscal Balance Fiscal Balance %of GDP
Source: IMF, IIF,KFHR

The Qatari riyal is tied to the US dollar through a peg set at QAR3.64/USD. The government has renewed its commitment
to maintain the peg since oil exports are dominated in US dollars. Moreover, we expect the peg to remain in place as it
facilitates the future planned move to a unified GCC currency. We expect the unified GCC currency to be enacted in 2011.
As the US dollar will strengthens against the Euro, pressure for revaluating the Qatari riyal would ease.
Despite the peg to the US dollar, Qatar’s central bank has refrained from cutting interest rates in accordance with the US
monetary policy. Accordingly, Qatar ended up with interest rates significantly higher than other GCC countries. Qatar has
maintained its policy rates unchanged since the financial crisis deepened in October. Liquidity dry up around the globe
decreased the possibility of deposit inflows in order to take advantage of the higher interest rates. Currently, the central
bank overnight deposit and lending rates are set at 2.0% and 5.5%, respectively. However, banks 3-months deposit rates
are set at 1.53% in Jun09.
Domestic Liquidity And Inflation Fall Sharply

The combination of the withdrawal of speculative inflows which had been betting on an exchange rate revaluation in 2008,
and falling oil and gas revenues during early 2009 has been reflected in a sharp decline in broad money growth (M2). This
turned negative in April’09 (2008 or 2009?) when M2 (essentially money in circulation and bank deposits) declined by
5.7%y-o-y, although the rate slowed to 4.5% in May’09 from QAR 50.87bln at end-2008 however, in jun-09 narrow measure
of money supply M1 moved up from QAR50.86bln at end of 2008 to QAR 51.45bln while the broader money supply(M2)
accelerated from QAR 184.00bln at the end-2008 to QAR 188bln in second quarter of 2009.
Money Supply Trend

60.00
50.00
40.00
USD bln
30.00
20.00
10.00
0.00
2005 2006 2007 2008 1Q'09 2Q'09
M1 M2
Source: Central Bank ,KFHR
Consistent with both the contraction in liquidity and a decline in the heavily weighted house price component of the CPI,
inflation has also fallen steeply. Having peaked at 17% in the first half of 2008, year-on-year inflation fell to just 1.3%in
the first quarter of 2009, while the rent, fuel and power index declined 3.1%. Some improvement in liquidity is expected in
the second half of the year in line with stronger oil prices and LNG exports, and recent government measures should help
stabilize housing prices. Nonetheless, the 2009 average inflation rate is projected to remain at 1.5% in 2009 and 3% in
2010.
Qatar inflation Trend
16
14
12
10
%
8
6
4
2
0
2005 2006 2007 2008 2009F 2010F
Source: Central Bank , KFHR est.

Despite the increase in government spending to mitigate the impact of financial crisis on the economy, the Central Bank’s
net international reserves have considerably increased to QAR57.01bln in Jun09 moving up from QAR35.8bln at the end of
FY08 and continues to mirror the Bank’s ability to meet demand or foreign currencies and to defend currency peg.
International Reserves
60
50
40
QR bln
30
20
10
0
2006 2007 2008 1Q'09 2Q'09
The World Economic Forum in its Global Competitiveness Report 2009-10 has ranked Qatar as the most competitive in
the Middle East and North Africa (MENA) region with a world ranking of 22. Qatar ranks 21st in the world in upgrading
its institutional framework, it has the 14th rank in goods and labor market efficiency. The country has opened up to
foreign investment significantly and has made great strides in adopting latest technologies such as mobile telephony and
broadband. Over the past few years, it has been the fastest growing economy in the GCC region. According to the World
Investment Report 2009 published by UNCTA, FDI in Qatar soared 43% in 2008 versus 2007. Sectors that attracted
maximum investments are liquefied natural gas, power and water, and telecommunication projects.
Banking
Banks in Qatar have lately been feeling the pinch of the crisis and its spillovers. Banks risk appetite seems to have
diminished markedly following the outbreak of the crisis as lending activity to the both public and private sector contracted
in the first few months of the 2009. In a bid to revive lending and support the economy, the government offered in Mar’09
to buy part or all of the DSM investment portfolios of local banks with a provision of any dividends received on such equity
portfolios for 2008 to be provided to the banks and for subsequent years to be provided to QIA. The government had bought
QAR 6.5 bln(USD1.8bln) worth of banks’ investments as part of the plan. The investment portfolios were priced at cost less
impairment booked for these securities. The conventional banks received about 45% in cash and 55% in bonds maturing in
5 years carrying a coupon of 5.5% per annum. The Islamic bank have received entire amount in cash. The banks have the
right to repurchase the entire portfolio, or any part of it, after a 12-month period from the date of sale and within a maximum
period of five years at the original sale price.
The government has also issued sovereign bonds worth USD3bln and rated as ‘AA-’ by Standard & Poor’s. The bonds
have two tranches: a five-year USD2bln bond maturing on April 9, 2014, and a 10-year USD1bln bond maturing on April 9,
2019. The proceeds of the bonds will contribute to the general financing of the State of Qatar’s budget in 2009, including
providing funding for entities that it owns or controls.
In May 2009, Qatar government announced that it will spend QAR15bln (USD4.1bln)on acquiring the real-estate portfolios
of nine local banks to boost the domestic real estate sector. The move involves the government taking over the real-estate
investment portfolios of Qatar National Bank, Commercial Bank of Qatar, Doha Bank, International Bank of Qatar, Qatar
International Islamic Bank, Qatar Islamic Bank, Masraf Al Rayan, Ahli Bank and Al Khaliji Bank.
Public sector deposits have declined and credit growth slowed

In June 2009 public sector bank deposits fell by 14.5% as oil revenues shrank. The drawdown also reflects a possible
move away from using bank financing for various public development projects as bank credit to the public sector also fell
by 22.5%. This decline in credit to the public sector pulled down overall bank credit by 3.5% in the first half of the year.
However, credit to the rest of the economy continued to grow, most noticeably to the industrial, (30%) real estate and
construction sectors (9.8%), although personal finance growth stagnated.

Commercial Banks Public Sector Deposit

25.00
20.00
15.00
USD bln
10.00
5.00
0.00
2006 2007 2008 1Q'09 2Q'09
The loans to deposit ratio has declined

Although private deposits grew 13.7 % in the first half of the year, the sharp decline in public sector deposits contained
overall bank deposit growth to 4.5%. Year-on-year the rate of deposit growth has fallen to just 3% from rates as high as 60%
in mid-2008 when oil prices peaked. Despite the deposit slowdown, with loan growth also falling sharply, the aggregate
loans to deposit ratio has dropped from 114% at end-2008 to 106% in June’09. However, this is still above the 90%
prescribed limit, and thus continues to constrain banks ability to lend. Despite the central role the industry plays in the local
economy, those ratios are noticeably below GCC average and put Qatar’s banking penetration in the second lowest level
among neighbouring countries, signalling a broad growth potential for the industry.
Loans and advances totalled to QAR 230bln in June 09, marking a drop of 5% from a total of QAR 243bln in December
2008. This is in keeping with the general risk evasive mood prevailing. Loan-to-deposit ratio of the Qatari banks declined to
109% in 2Q’09 (vs. 114% in FY 08). In order to offset the deposit shortfall, banks appear to be turning to external funding
to finance their assets, as reflected in an increase in foreign liabilities due to banks abroad over the last couple of months.
This has pushed commercial banks overall net foreign asset position into the red in May. However, both public and private
sector deposits are expected to revive in the second half of the year as oil and gas revenues pick up and the fiscal stimulus
takes effect. Deposit growth is likely to remain relatively depressed through 2009.Total deposits are still below their June
2008 peak, and with our expectations for oil prices to remain subdued well into the medium term, petrodollar inflows into
the banking sector are likely to remain muted. Consequently, tightening up of credit facilities will be the principal means to
rein in the loans-to-deposits ratio.
Qatar’s Commercial Banks: Loans vs. Deposits

80.00 40.00
60.00 30.00
USD bln
40.00 20.00
20.00 10.00
0.00 0.00
2006 2007 2008 1Q'09 2Q'09
Loan Deposit Loan-to-deposit ratio
Source: Qatar Central Bank, KFHR
In 1Q09, the average Non performing loans to Gross loans ratio of the three banking majors rose slightly from 1.1% in
FY 08, to 1.2% in Q1 09. Understandably, the average coverage ratio rose from 85% to 89% in the same period. A large
personal loan and real estate loan component may pose further threat to the industry, notwithstanding the government
support.

The general economic slowdown will likely mean that the proportion of non-performing loans (NPLs) increases. While this
is to be expected as a cyclical phenomenon, the banks’ exposure to the domestic real estate sector poses addition risks as
Qatar appears to be following in the footsteps of Dubai and experiencing its own real estate correction. Real estate loans
now account for 17.7% of total loans, up from10.4% at the end of 2008. Moreover, real estate loans were equivalent to
18% of total deposits in the end of March, far above the supposed 15% limit that Qatari banks are meant to adhere to. This
high exposure to the real estate sector and the likelihood that NPLs will shoot up if the market corrects or collapses will
pose increased risks to banking sector stability. A further risk comes from the personal loans segment, which in January
accounted for 23.9% of bank lending.
NPLs are likely to increase in the third quarter due to the global economic environment. Yet we find Qatar’s asset quality
one of the best in the region, underpinned by a benevolent government. NPL ratio for the sector increased to 1.5% in the
second quarter from 1.3% in the previous quarter. We expect it to rise to 1.8% in the third quarter as bad loans increase
amid the current global economic environment. On the other hand, slow credit expansion will limit deterioration in asset
quality. During the second quarter, the banks sold off some of their real estate and bad loan portfolios to the government.
This caused the provisioning levels to increase significantly in the second quarter. We believe that this exercise should
have removed bad loans that are causing uncertainty in provisioning levels in some regional counterparts. As such, we
expect provisioning levels to be lower than the previous quarter, though relatively higher than earlier quarters due to the
economic environment.
Major Qatar Banks Results in (QAR mln)

2007 2008 1Q09 2Q09 3Q09
Qatar National Bank 2507.5 3652.5 1010.61 2067.43 3126.88
Commercial Bank 1390.7 1702.4 6101.1 943.28 1337.76
Doha Bank 926.5 964.5 329.6 646.35 850.81
Qatar Islamic Bank 1255.4 1642.5 350.22 812.64 1001.15
Ahli bank 302.6 425.8 86.25 171.64 213.30
Masraf Al Rayan 1079.6 917.0 209.7 386.49 600.63
International Islamic 480.0 501.2 136.7 255.21 396.53
Al Khaliji Bank 74.3 103.5 51.7 108.40 136.34
Total 8016.6 9909.4 12204.2 5391.44 7663.4
Source: Bank’s Reports, KFHR
Overall, banks in Qatar are adequately capitalised with capital adequacy ratios that are well above the minimum 10%
required by the Qatar Central Bank. The banks are also fully compliant with Basel II requirements regarding prudential
regulations and risk classifications. Apart from this, many banks have raised their capital in 2009 by allocating shares to QIA
to the extent of 5% of their capital. This measure will help the banks to shore-up their capital adequacy ratio and to leverage
their balance sheet and will help the banks to tap lending opportunities the country would offer in the coming years.
The government’s presence as a key shareholder will back the performance and stability of the banking sector, especially
during the current critical situation. In order to safeguard the banking sector from the ongoing global financial crisis, the
Qatari government took following measures:
• Maintain repo rate and lending rate at 5.55% and 5.50%, respectively in 2008.
• In Oct’08 government announced to buy, through Qatar Investment Authority, an additional capital of between 10% and
20% to all national banks listed on the DSM.QIA bought stakes in all the listed banks except Qatar National Bank, in
which it already holds 50% equity stake.
Up until now, Qatar’s strong economy along with the government’s strategic initiatives and continuous efforts to stabilise
economy by maintaining liquidity has been successful in limiting the effect of the crisis.

The Qatari banking sector appears in a far more favourable position relative to its regional peers and is expected to ride out
the current global financial turmoil comparatively better. Indeed Qatar is widely expected to report strong GDP growth as
compared to its GCC counterparts over the next few years on the back of a doubling of LNG output capacity and continued
infrastructural expansion plans totalling USD197bln worth of government-backed projects. Other factors that will support
the banking sector’s growth include an aggregate average credit ratio below the required limit of 90%, comparatively low
exposure to currently volatile sectors such as real estate and equity markets, and less reliance on wholesale funding (11%
of liabilities).
In our view, the key risks for Qatari banks are related to liquidity and asset quality. Deposits’ funding is not keeping pace with
loan growth; affecting banks’ liquidity positions. In FY’08 banks resorted to funding from the inter-bank market to fill the gap.
We believe this year to be more challenging for banks in terms of funding, leading to a slowdown in balance sheet growth.
We are also concerned about banks’ credit quality in terms of their exposure to the consumer and real estate sectors. In
our view, the risk of impairment losses on financial investments was reduced largely by the government ‘buying’ domestic
equity portfolios of almost all the banks. We understand the exception was Ahli Bank that had disposed its domestic equity
portfolio before the government’s announcement of the scheme.
Real Estate
The sector contributed around 4% of GDP in FY08. The sector witnessed 50% CAGR over the past 5 years revealing
dynamic growth fuelled by petrodollar influx manifesting itself in higher standard of living in addition to new demand
generated by expatriate inflows. The sector is further promoted by government laws allowing non-Qataris to own and lease
real estate properties. Non-Qataris can also sell the property according to Qatar laws or use the property in commercial
purposes. Currently, residential property sales plummeted due to banks’ reluctance to finance such activities. However, it
was reported that no major declines occurred with regard to rental of different residential units. Looking ahead, we expect
real estate prices to witness a 15-20% decline, on the back of declining prices and sliding demand. This will be further
encouraged as new units are being added.
Data on real estate prices is patchy, but there has been a sharp correction from the peaks of mid-2008. The Doha property
market has recently experienced its first real estate cycle, with prices and rentals having declined significantly as the market
have passed through the peak over the past six months. This has resulted in a subsequent slowdown in the pace of supply
coming online as the previous period of rapidly escalating rents and prices across all asset classes had resulted in supply
levels outstripping current demand.
Major Qatar Projects

Project Developer Value(USD)
Lusial Qatari Diar 16.2bln
The Pearl UDC 15bln
New Doha International Airport Various 7bln
Barwa Al Khor(Urjaun) Barwa 7bln
Industrial City & Port Expansion QP/Ras Laffan Industrial City 3.6bln
Al Waab City NBKS Group 3.2bln
Qatar-Bahrain Friendship Qatari Diar/Various 3bln
The Gate Salman Bounian 150mln
Source: Various,KFHR
Current resale prices for freehold property at Pearl and Lusail are estimated to be down 20-25%, while a survey by Aswaq.
net of Al Arabiya television has estimated that villa prices are down almost 35%. Major factors behind the correction
are the curtailment in credit, and disinvestment by both locals and foreigners as the global credit crunch hit home, the
economy slowed, and confidence slipped. However, despite weaker demand growth, the overall market is not thought to be
oversupplied. Sales may have slowed sharply, but reports from property consultants suggest the market will clear relatively
quickly if prices are realistic and finance is made available - most likely in 2010.

The significant drop in rents and prices experienced over recent months has increased the competitive environment
amongst developers, which will ultimately result in better quality product. It has also increased the relative attraction and
competitiveness of Doha from an occupier / end user perspective, which will in turn generate greater demand for quality
real estate across the city.
Office Market
The office market in Doha has seen significant change over the last few years with the CBD shifting from the traditional
C–D ring roads to the West Bay area, which will eventually house 180 towers. A number of government agencies have
relocated to West Bay, as well as some family offices which account for the majority of current demand. Doha’s office
market is typically two-tiered, consisting of new high-rise Grade A office buildings in the Diplomatic District, and lower grade
low- to mid-rise office buildings along the C and D Ring Roads. The Diplomatic District has grown significantly in recent
years to become the new central business district of Doha and has been the hotspot for many government institutions and
international companies operating in the hydrocarbon and financial services sector.
The supply of modern office space stood at just 2 00,000 m² in 2007 but has more than doubled during 2008 to around
600,000 m². Forecasts indicate that the total office stock will reach 1.2 mln square meters by 2010, a six fold increase in
supply over a four year period, which is significant by any market standard.
The office market is currently bearing the brunt of uncertainties in the global economic downturn in the form of falling rental
rates and low take-up rates for newly completed office buildings in the Diplomatic District. The average office rental rate in
the Diplomatic District is estimated to have fallen by 25 to 30% during the first half of 2009 to reach an average asking rate
of QAR200 per square metres in Q2 2009.
While office buildings in the Diplomatic District that were completed prior to the onset of the economic slowdown currently
achieve occupancy level ranging from 85 to 90%, several newly-completed office buildings remain unoccupied as many
companies adopt a wait and see attitude towards expansion. It is expected that an additional 350,000 square metres
of Grade A office space will be available by the end of 2009. Reduced office rental rates are proving beneficial to those
companies with lower start-up funds or who have been operating from older, inefficient buildings as the current market is
providing them with the opportunity to take up Grade A office space at an attractive price.
Diplomatic District
Grade A -Rent starting from QAR180/m²
Average Occupancy Rate 85-90%
Additional Grade A Office Supply,Q4-09 350,000
Retail Market
With one of the highest levels of GDP per capita in the world, demand for retail in Doha has been strong in recent years.
High levels of private wealth have resulted in strong demand for high end retailing. The two major malls in Doha, Villagio and
City Centre, have been experiencing high occupancy levels of between 95% and 100% and rents ranging from USD750 to
USD800 per m2 per year. However, about 500,000 m2 of quality retail space is expected to come online in Doha by 2011,
which will double the retail stock within the city. Faced with this increased supply and declining global tourism, rentals in the
Doha retail market are expected to decline in the short term.

In the longer term, the completion of the Qatar– Bahrain Friendship Bridge (estimated completion by 2013) will generate
additional retail demand by increasing the level of road arrivals into Qatar. The Pearl Qatar and Lusail developments will
significantly increase the amount of retail supply in the city. The Pearl Qatar alone will add almost 200,000 m2 of GLA to
the retail supply with a number of high-end fashion boutiques and branded retail outlets planned. This fits into the integrated
lifestyle environment being created for residents on The Pearl Qatar.
With the onset of new supply entering the market, competition will increase, forcing developers to adopt new strategies to
define and deliver unique selling points. As with other markets across the Gulf, this is likely to result in both ‘winners and
losers’ with greater differentiation between retail projects in Doha.
Average apartment resale prices-Q209

20,000
15,000
QAR/m²
10,000
5,000
0
The Pearl West Bay Lagoon Lusial
Plaza
Low High
The secondary market for the three projects has been experiencing distressed selling as property owners who are unable
to fulfill their mortgage loan obligations attempt to dispose of their assets by lowering asking prices that can vary from
QAR11,000 to QAR15,000 per square metre at the Pearl-Qatar, QAR10,000 to QAR12,500 per square metre at West Bay
Lagoon Plaza, and QAR12,000 to QAR14,500 per square metre at Lusail.

Bahrain
“Surviving the undercurrents”
Lower regional growth and a slowdown in foreign investment and trade flows are likely to reduce economic growth sharply
in 2009 to 2.5%--stronger than in many countries however in 2010 growth should begin to pick up to 4%, underpinned by
continued monetary and fiscal expansion and by rising regional demand.
Bahrain GDP Growth Trend (2004-2010F)
10
6
%
0
2004 2005 2006 2007 2008 2009F 2010F
Source: Central Bank, KFHR
The government measures are expected to be a vital support to growth, as consumer credit stagnates and unemployment
rises (although expatriate workers, who typically remit much of their earnings overseas, will bear the brunt of job cuts).
Government consumption is expected continue to rise, however the government plans to cut capital investment spending
substantially in 2009-10 compared with 2007-08. Investment growth is expected to be limited as the government typically
accounts for just under one-third of fixed capital formation, and foreign direct investment is also expected to be subdued.
Exports of goods and services will decline in 2009 owing to lower regional growth, before picking up modestly in 2010
however lower import demand will boost the overall growth rate in 2009.
Oil price trends are the main determinant of the trade balance, with oil accounting for around 80% of export earnings and
over half of the import bill. The trade surplus is expected to narrow sharply in 2009 as lower prices for oil and aluminium (the
main non-oil export) more than offset the impact of reduced import prices. The services balance is forecast to remain firmly
positive, with declining demand for Bahrain’s services offset by lower demand for imported services. The income balance
will remain in deficit as profit repatriation and debt interest payments outweigh dividends from foreign assets, although
both profit repatriation and dividends are expected to fall sharply in 2009. Workers’ remittances account for virtually all the
country’s current transfers, and the transfers deficit is forecast to narrow in 2009, given the likelihood of job losses among
expatriate workers. The current account is expected to record surpluses of 3% of GDP in 2009 and 6% of GDP in 2010.
Bahrain External Trade Trend (2006-2010F)
25.00
20.00
USD bln
15.00
10.00
5.00
0.00
2006 2007 2008E 2009F 2010F
Export Import Trade Balance
Source: CBB, KFHR

Current Account Surplus (2006-2010F)
3.50 20
3.00
2.50 15
USD bln
2.00
%
10
1.50
1.00 5
0.50
0.00 0
2006 2007 2008 2009F 2010F
Current Account % of GDP
Source: CBB, KFHR
Bahrain, which has dwindling oil resources, is expected to register deficits as they need an oil price of USD70p.b for their
budgets to balance. This is due to the fact that historically the government has based its budget on conservative oil price
forecast. We believe, Bahrain would witness a marginal budget deficit in 2009 which would amount to approximately 4%
of GDP
Bahrain Fiscal Balance (2006-2010F)

8.00 10
6.00
5
%
4.00
USD bln
0
2.00
0.00 -5
2006 2007 2008E 2009F 2010F
Revenue Expenditure % of GDP(RHS)
Source:CBB,KFHR
Similar to other GCC states, government spending is expected to be vital to avert the threat of turning the financial crisis to
an economic one as it accounts to nearly one third of the country’s GDP. The authorities spent 73% of funds appropriated
for capital projects. Ostensibly, the matter was related to fear of causing further inflationary pressures through stronger
demand. However, it remains to be seen whether the authorities would end up spending funds set aside for development
projects or repeat the practices of the past few years.
Consumer price inflation is expected to moderate in 2009-10, because of slower domestic demand growth, a drop in world
commodity prices in 2009 (and only minimal price growth in 2010) and the stabilisation of the US dollar (and thus the
Bahraini dinar) against the euro and other world currencies. Inflation is therefore forecast to slow to an average of 2.2% in
2009-10 and 3% in 2010. The strengthening of dollar and consequent moderating inflationary pressures across the Gulf
region have allowed regional central banks to slash interest rates as they seek to defrost credit markets during a global
financial crisis.

Bahrain Inflation Trend
3
%
0
2006 2007 2008 2009F 2010F
Source: Central Bank , KFHR
Bahrain intends to enter into a currency union with Kuwait, Qatar and Saudi Arabia. The introduction of a single currency
is likely to take until at least 2013, as the member states pursue convergence on inflation and seek a consensus on the
functions of the planned central bank. Meanwhile, the Central Bank of Bahrain is expected to maintain the dinar’s peg to
the dollar at the rate of BHD0.376:USD1 that has been in place for over two decades.
The composition of the total debt in Bahrain’s financial profile has seen a shift from conventional instruments like
development bonds and treasury bills to Islamic instruments like Islamic Leasing Securities and Al Salam Islamic Securities.
The increasing proportion of Islamic instruments in its public debt profile is in line with the government’s aim to make the
Kingdom an Islamic financial hub.
Domestic Public Debt Outstanding

800
600
BD mln
400
200
0
2006 2007 2008 1Q-09 2Q-2009
Al Salam Islamic Securities Islamic Leasing Securities
Treasury Bills
Source: Central Bank , KFHR
Banking
The Bahraini banking sector benefited from a buoyant economy. Real GDP growth was 6.3% in 2008 (2007:8.1%).
However with global recession, stress on banking system liquidity, lower government spending due to falling energy prices,
capital markets volatility, a property market bubble and political instability could all negatively affect the local economy and
therefore banks performance.
The banking system’s total assets grew at a CAGR of 24.9% during 2003-2007, boosted by the good fortunes of the oil
industry and the corresponding increases in liquidity. In 2008, however, total assets increased by a meagre 2.7% (2007:
31.2%) to USD252.4bln (2007: USD245.8bln) or 13.7 times of GDP, as the global economic slowdown impacted the banking
sector growth in Bahrain. The total banking assets stood at USD262.9bln at the end of 2Q09.The wholesale banks’ assets
declined by 3.8% (2007: +19.5%) to USD188.9bln while total asset base of all the retail banks increased by 28.3% (2007:
+114.4%) to USD63.3bln. Bahrain banks’ balance sheets are dominated by foreign assets, which constitute 80.8% of the
consolidated banking assets in 2008 and 79% in the 1Q09. This signifies their importance and role in the development of
the Bahrain banking industry. However, this could pose a risk to the banking sector if the slowdown in the world economy
intensifies and foreign investors exit the banking system in order to cover losses in their respective country.

Bahrain: Total Assets Growth Trend
300
250
200
USD bln
150
100
50
0
2006 2007 2008 1Q-2009 2Q-2009
Source: Central Bank of Bahrain, KFH
Bahrain: Share of Foreign Assets in the Banking System
250 86
84
200
82
150 80
USD bln
%
100 78
76
50
74
0 72
2006 2007 2008 1Q-2009 2Q-2009
Foreign Assets Share of total assets(RHS)
Source: Central Bank of Bahrain, KFH
As at end of 2Q09, a marginal decrease in retail banks’ deposits was witnessed which declined from USD26.04bln to
USD25bln at the end of 2008.In 2Q09 retail banks’ deposits grew at a slower rate of 29.0% (2007: 51.2%), given concerns
arising from the US subprime crisis as well as tighter domestic liquidity on the back of falling oil prices. Share of loans
to business increased from 58.1% in 2007 to 65.7% in 2008, mainly driven by high growth in the construction and real
estate sectors during the year. However lending to business’s declined in 2Q09 marginally(0.2%), share of personal loans
declined from 0.6% in second quarter at the back of the central bank’s policy to tighten the credit throughout most part of
the year.
Bahrain: Retail Banks’ Deposits
30000 60
25000
40
20000
% y-o-y
USD mln
15000 20
10000
0
5000
0 -20
2006 2007 2008 1Q-09 2Q-2009
Deposits Growth
Source: Central Bank of Bahrain, KFHR

Bahrain: Retail Banks’ Outstanding Loans and Advances to Non-Bank Residents
12000.00
10000.00
8000.00
USD mln
6000.00
4000.00
2000.00
0.00
Business Government Personal
1Q-08 2Q-08 3Q-08 4Q-8 1Q-09 2Q-2009
Retail Banks Credit to Business Segment, Jun-09
Hotel &
Manufacturing
restaurants
12.0%
Tranport & 2.2% Others Mining &
comm 10.0% quarrying
2.2% 0.2%
Non-banking Agriculture
Fis 0.2%
5.9%
Construction &
Trade real estate
39.8%
27.5%
Central Banks’ Regulatory Actions

Saudi groups Saad Group and Ahmad Hamad Algosaibi & Bros, both of which defaulted on some of their debt, have now
casted doubt on Bahrain’s regulatory system. The Central Bank of Bahrain (CBB) was forced in July’09 to take control
of Awal Bank, owned by the Saad Group, and The International Banking Corporation (TIBC), a unit of Ahmad Hamad Al
Gosaibi and Brothers (AHGB), after it became clear that neither bank could meet its loan obligations. However, the CBB is
now moving to apply lessons learnt from the affair. According to the documents published in early Sep’09 the central bank
proposed an overhaul of the Bahraini banking system, bringing in new rules on bank liquidity and improving local scrutiny
of banks’ balance sheets.
Under the new rules, the CBB would introduce a minimum liquidity ratio of 25 %. This would ensure that banks can cover
a certain percentage of their long-term liabilities with assets that can be sold at short notice. The central bank also plans
to extend its rules on maturity mismatches to wholesale banks, ensuring their long-term lending obligations do not out
pace their access to short-term funding. These mismatch ratios already apply to local retail banks. However, wholesale
institutions such as Awal and TIBC make up a significant chunk of the financial industry in Bahrain, with such “offshore”
banks comprising 82 of the 145 banks registered in the kingdom.
This division between wholesale and retail banks would help insulate the local banking community from systemic threats, as
does the diverse nature of the Bahraini financial sector. Compared with rival banking centres such as Abu Dhabi and Doha,
Manama has a strong suit in niche industries such as Islamic finance, insurance and asset management. Approximately
412 financial institutions are registered in the kingdom.

Moody’s Bahrain Banking Outlook Negative
In view of the expected weakening in the financial metrics of rated Bahraini banks within the context of weaker regional
economies in Aug’09 ratings agency Moody’s Investor Services has given negative outlook for Bahrain’s banking system.
The negative medium-term credit outlook for the Bahraini banking system reflects Moody’s expectation that the difficult
credit and business conditions will continue over the next few months. The negative outlook is also driven by the more
challenging wholesale funding conditions in the GCC within the context of the global financial crisis and consequent risk
repricing.
Banks in Bahrain have seen profits decline as they took provision against a rise in loan defaults, with private Saudi groups
Saad and Ahmad Hamad Algosaibi & Bros, the most prominent companies to undergo debt restructuring. Moody’s
negative outlook came one month after the Bahrain central bank seized two banks belonging to Saad and Algosaibi
in a bid to manage the fallout of the financial trouble at the two Saudi firms. Moody’s primary focus will be on the likely
increase in non-performing loans, with construction and real estate exposures being an area of particular concern.
According to the rating agency despite the challenging credit conditions Bahraini banks would able to absorb credit
losses and are unlikely to raise capital however, the decline in asset prices have exerted pressure on the capitalisation
metrics of some wholesale banks that have significant proprietary investment portfolios.
Moreover, Moody’s notes that the retail banks’ franchise dynamics are unlikely to be materially affected by the ongoing
economic slowdown, given their focus on bilateral corporate lending and retail finance and their solid deposit funding
profiles. The rating agency cautions that wholesale banks, by contrast, do face significant franchise challenges because
of the challenging wholesale funding conditions. According to Moody’s the stability of the system resides in the clear
distinction between the retail and wholesale sectors and in the fairly robust regulatory and supervisory environment. The
rating agency recognises that wholesale banking, which also includes investment banks, carries more risk, but that bank
failures can be isolated because wholesale banks do not form part of the domestic payments system.
However, Moody’s notes that links do remain between the retail and wholesale banking sectors, including common
sources for international funding, exposure to the regional real estate sector and participation in the interbank markets.
Circumstances that could lead to a systemic crisis include: (i) the failure of one of the larger wholesale banks to which
several Bahraini banks could be exposed; or (ii) the failure of one or more wholesale banks because of risky real estate
exposures that could lead to a crisis in confidence, which would in turn also affect retail banks with less risky exposures
to the sector.
Source: Moody’s,KFHR
As witnessed in 2H08, Bahrain’s financial services sector also faced the negative impacts of the global financial crisis.
The slump in the regional property markets added to the woes of the sector as Bahrain’s banks has significant exposure
to regional property investments. Given the tightening of liquidity on the back of the global credit squeeze, Central Bank of
Bahrain (CBB) cut its key policy interest rate three times in 4Q08 and lowered interest rates for all categories of loans in order
to increase the country’s economic activity and boost the confidence in the economy. With the inflation concerns abating,
expect another round of cuts this year if the economic environment deteriorates further. Expect domestic demand interest
rates to fall further this year, given the current liquidity crunch in the market as well as reducing inflationary pressure.
In continued effort taken by the CBB to ensure the smooth functioning of the money markets CBB has announced a cut
in its key policy interest rate by 25 basis points with immediate effect. The CBB’’s rate on the one-week deposit facility will
be reduced to 0.50% from 0.75%.The CBB has decided to keep the rate on the overnight deposit facility at 0.25% but has
reduced the repo and lending rates to 2.255 from 2.75%. The CBB’s lending standing facilities remain available for banks
at their initiative to assist them to meet their liquidity needs.
The CBB has also reviewed terms for the FX-swap facility which allows eligible counterparties to offer US dollars against
Bahraini dinars for one-week maturity. The facility was initially introduced to help ensure the smooth and effective functioning
of the money markets in Bahrain, an objective which has been successfully achieved. The CBB has decided it will now offer
an additional USD/BHD FX-swap facility with a one-month maturity.

Bahrain: Central Bank’s Key Rate Changes

5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
One-week deposit Reverse repo rates Repo rates
facility
9-Oct-08 30-Oct-08 18-Dec-08 15-Sep-09
Source: CBB, KFHR
Real Estate
By the end of the second quarter as the status of most projects became clearer and macroeconomic figures provided positive
indicators some clarity emerged about the future direction of the residential real estate sector in Bahrain. Transaction
activity during Q2 2009 came to a standstill in the off-plan market although secondary market transactions are still taking
place in small numbers. Developers have not generally cut off-plan prices in order to maintain market confidence but they
are increasingly likely to be facing cashflow difficulties and in many cases will need to seek refinancing to continue with
their projects.
Bahraini real estate developers are eying investments in the country’s low-income housing market to ride out a dearth of
demand for high-end residences. Real estate developers have scaled down projects still in the design phase and have
significantly slowed down construction of projects already under way to postpone delivery until the markets recover. The
market for luxury villas, the upper end of the market has slowed down dramatically in Bahrain, even if not as drastically as
in Dubai. The government is currently drafting plans for the construction of 14,000 low-income units.
At Diyar Al Muharraq, a 10 square kilometre development off Bahrain’s northern coastline, construction has slowed
down due to the dips in the market, but between 500 and 1,000 affordable housing units will be delivered next year. CB
Ellis estimates there will be some 60,000 residential units delivered to the market until 2013, out of which 38,00 will be
government-sponsored low-income housing units.
The mortgage market in Bahrain experienced a slowdown in the first and second quarters of 2009, and this is expected
to continue at least in the short term. The mortgage market in Bahrain continues to be dominated by Shariah-compliant
products in which development risk is carried by the lender. This is making the products both expensive and scarce. The
mortgage market was at an embryonic stage in its evolution when the current banking and finance crisis took hold with a
relatively small variety of products and options for potential buyers. This could be considered a considerable upside factor
for prices over the next few years as the market settles down, risk levels drop and cost of finance reduces. The residential
mortgage market is forecast by leading providers to double by 2012 to over BHD700mln.
At present, mortgage rates in Bahrain are prohibitive and this will naturally stunt the market until liquidity and appetite for
mortgage business returns to the banking sector. Most villa compounds, particularly those in upper income expatriate areas
in north east Bahrain, continue to report relatively high occupancy levels and rental rates have generally stabilised after two
or three years of rapid rental rate increases. In the apartment sector, the significant delivery pipeline may cause a demand/
supply imbalance for some time yet, but again, the return of job creation will be key to filling vacant units.
In Dubai for example, many thousands of units remained unoccupied after completion and this may be the case in Bahrain,
particularly with the luxury apartments soon to be completed in Juffair and the north coast of Bahrain. If this is the case, a
large proportion of new apartments may never actually enter the supply chain, this would cause a shortage of housing and
would quickly revive the sales market. Again, activity in this sector would also be a function of the availability and pricing
of mortgages.

Oman
“Slow and Steady”
The Omani economy witnessed robust growth in 2008 with 44% growth rate in nominal terms compared to 2007, supported
by accelerated activities in both oil and non-oil sectors. However, the slump in oil prices since the last quarter of 2008 and
weak international demand for goods has contributed to significant decline in Oman’s economic growth and the overall
fiscal balance and external accounts are expected to be under pressure in 2009 so far. Nevertheless, the real GDP growth
is expected to remain in the positive territory in 2009 to approximately 3.5% (estimated 10% in 2008) due to sustained
domestic demand, continued capital expenditure by the government, and above all, on-going diversification activities in the
non-petroleum sector. The medium term fundamentals of the economy continue to be strong.
Oman Real GDP Growth Rate 2006-2010F
9
8
7
6
5
%
4
3
2
1
0
2006 2007 2008E 2009F 2010F
Source:Central Bank,IIF,IMF,KFHR
Oil and Gas

The oil and gas sector continued to play a dominant role in the economic affairs of Oman in 2008. Oil and gas together
accounted for 51.3 % of the nominal GDP, 79.1 % of the net fiscal revenue, 84.9 % of exports of Omani origin, and 76.0 %
of total merchandise exports (including re-exports) in 2008. Reversing a sustained declining trend witnessed since 2001,
the aggregate oil production increased by 6.8 % to 277mln barrels in 2008 compared to 259.3mln barrels in 2007. The
increase in oil production owed to the discovery of new oil fields as well as the use of modern technology such as Enhanced
Oil Recovery (EOR).
As regards trend in oil prices, average Omani crude oil prices rose by 55 % to USD101 per barrel in 2008 compared to
USD65.2 per barrel in the previous year. Highly favourable oil prices that prevailed in the greater part of 2008 along with
a modest increase in crude oil production translated into significant windfall in government revenues, which in turn, were
used to increase public spending and thereby expanding aggregate demand. Beside crude oil, the Sultanate of Oman has
also been exploiting natural gas resources from its hydrocarbon fields. Unlike crude oil production, natural gas production
witnessed a marginal decline in 2008, reaching 30.2 bln cubic meters compared to 30.3 bln cubic meters in 2007.
Oman showed some positive signs of economic health in 2Q09amidst the ongoing global economic crisis. While GDP
growth in current prices declined in the second consecutive quarter by 28.1%y-o-y from OMR5,757.9mln in Q208 to
OMR4,137.1mln in 2Q09due to decline in oil prices however, GDP grew by 1.9% q-o-q, after two consecutive quarters of
negative growth in 4Q08and 1Q09. In 2Q09only three of the sixteen economic sectors contributed negatively to quarter on
quarter growth compared to eight sectors in 1Q09. The largest negative contributor to GDP growth year on year was the
oil sector, adding -22.5% points to the -28.1% GDP growth. The non oil sector also made a negative contribution of -5%
points.
2008 witnessed inflation hitting double digit growth rates for the first time since 2000, standing at 12.4% on average for
the year. The Central Bank of Oman took several anti-inflationary policy measures such as hike in reserve requirement,
tightening of the lending ratio and absorption of excess liquidity through larger issuances of CBO CDs in the first half of
2008. As the global inflationary pressures abated considerably and there was sharp decline in crude oil prices in the second

half of 2008, the CBO shifted its monetary policy stance and restored the reserve requirement for banks back again to
5%.and lending ratio back to 87.5% to avoid credit contraction to the February 2008 level .
Inflation Trend
14
12
10
8
%
6
4
2
0
2007 2008 2009F 2010F
Money supply (M2) and total credit have continued to grow in 2Q09y-o-y by 20.7% and 8.2% respectively but at a much
more moderate rate than the levels seen in 2008 in Oman and the GCC. Where very high rates of M2 and credit growth
are associated with economic ‘boom and bust’, the current moderate growth of M2 and total credit point to stable economic
growth. These more moderate rates of growth have been accompanied by positive real interest rates that price credit more
realistically unlike during 2008 when real interest rates were negative. Total credit stood at OMR9.65bln in 2Q09and grew
by 20.73% compared to last year, down from 2Q08’s figure of 52.2%. M2 showed similar tendencies, money supply for
2Q09was OMR7.6 bln and grew by 8.2%, down from its peak of 37.8% in 1Q08. Quarterly data also shows both M2 and
total credit growth to be slowing. M2 quarter on quarter growth for 2Q09was 0% while total credit growth was 2%.
Inflation in Oman is expected to follow a declining trend up to the end of 2009 and 2010. This is mainly backed by the world
recessionary pressures. Moreover, the decline in oil prices as well as imports of food and beverage would have a major
downward impact on inflation up to the end of 2009. Preliminary consumer price index (CPI) data for the first seven months
of 2009 reported inflation at 1.8% in July’09, down from 13.8% in July’08 the decline in oil prices as well as imports of food
and beverage had a major impact cooling inflation up to the end of the year. Going forward, CPI inflation is expected to
decline to 3.3% in 2009 and 3% in 2010.
Oman currency remains pegged to the US dollar and domestic interest rates tend to track those in the US.Oman will not join
in the regional GCC Monetary union. Inflationary pressures appear to be receding and credit growth has slumped alongside
a tightening in monetary policy. The decline in inflationary pressures had led the Central Bank of Oman’s (CBO) monetary
policies to shift from a contractionary policy aiming for controlling inflation to an expansionary policy aimed at providing
more liquidity.
External Account
We estimate the export revenue to fall by 25% in 2009, having risen by an estimated 29% in 2008, before picking up again,
by 15%, in 2010, broadly in line with movements in global oil prices. Owing to a slide in government revenue, the import
bill will also fall in 2009, to USD26.23bln, from USD37.66bln in 2008. However, because of an increase in demand for
consumption goods in 2010, imports are forecasted to rise by almost 7%. Nevertheless, the trade surplus is expected to
remain strong, at an annual average of USD8.3 bln in 2009-10.
The current account surplus increased from 6.2% of nominal GDP in 2007 to 9.1% in 2008 despite larger outflows caused
by higher growth in remittances (41.2%) as well as investment income payments (7.6 %) in the form of interest and
dividends, together with significant decline in investment income receipts (51.8%).The surge in oil prices sharply boosted
the country’s external account position on annual basis, current account more than doubled reaching OMR2.1bln(USD
5.4bln) by the end of 2008, reporting its second largest surplus as compared with OMR2.1bln(USD5.4bln reported for 2006
and the trade surplus peaking at OMR5.7bln(USD14.8bln) despite a surge in imports.

Current Account Balance 2006-2010F

6.00
5.00
4.00
3.00
USD bln
2.00
1.00
0.00
1.00 2006 2007 2008 2009F 2010F
2.00
In 1Q09 total exports declined by 30.4% y-o-y to OMR 2.2bln as non oil exports dropped by 10.5% in 1Q09 compared
1Q08when non oil exports increased by 38.2%. The value of non oil exports for 1Q09 was OMR 374.3 mln, down from OMR
433.6 mln in 4Q08. Re exports also declined by 5.3% in 1Q09 compared to 1Q08.
Oil and gas exports also showed a decline in 1Q09. Oil and gas exports for the period totalled OMR 1,449 mln, down by
38.5% from OMR 2,356 mln in 1Q08. This was largely due to a decline in the price of oil which dropped from an average of
USD87.43 in 1Q08 to USD44.95 in 1Q09.
Trade Balance Trend

40.00
35.00
30.00
25.00
USD bln
20.00
15.00
10.00
5.00
0.00
2006 2007 2008 2009 E 2010 F
Exports Imports
Source: Ministry of Economics, KFHR
The value of total net imports stood at OMR1, 548 mln in 1Q09, down 3.6% y-o-y. The majority of this decline was due to the
decreases in the value of imported intermediate consumption goods. The total value of intermediate consumption goods
imported in 1Q09 was down 25.5% y-o-y. An increase in the value of imports of both capital and consumption goods has
slowed at 12.4% and 47.1% respectively but still remains strong.
National Budget 2009

The government’s budget for the 2009 fiscal year was endorsed by Royal decree on 1st Jan 2009. It was drawn up during
a period of extreme financial turbulence that has seen the global economy slip in to recession and oil prices fall by 74%
from the highs. Nonetheless, the government has increased spending compared with the budgeted total for 2008 in order
to push ahead with its investment program.
A deficit of OMR810mln is projected based on revenues of OMR5,614mln and spending of OMR6,424mln. Education,
health, and defence and social security remain the major focus areas of government spending. The government hinted that
this budget could be a flexible one in that it may entail adjustments if oil prices fall below USD45 p.b.

Oman Budget 2009

Revenue RO mln % Capital Revenue
&Repayments, 1%
Taxes and
Oil 3522 63% Fees, 11%
Gas 670 12%
Other Current
Other Current revenue 756 13% revenue, 13%
Taxes and Fees 599 11% Gas, 12% Oil, 63%
Capital Revenue and Repayments 67 1%
Expenditure RO mln %
Education 790.15 12.3% Others,
4.7% Education,
Development 12.3%
Healthcare 269.8 4.2% Projects,
12.5% Healthcare
Defence 1496.79 23.3%
, 4.2%
Housing,
Transport 1053.53 16.4%
5.3%
Defense,
Oil&Gas 1368.31 21.3% 23.3%
Oil&Gas,
Housing 340.47 5.3% 21.3%
Development Projects 803 12.5% Transport,

16.4%
Others 301.92 4.7%
The increase in spending nearly doubled the forecast budget deficit of OMR810 mln from OMR410mln in 2008.The increase
in budgeted spending reaffirms the government’s commitment to proceed with its investment program. Given the lower
project costs and raw material prices are supporting this move. This shows the underlying health of the economy and the
strength of government finances.
Oil Production And Price Assumptions

The government expects total oil production to reach an average of 805,000 barrels per day (bpd), which is 7.3% higher
than current production of 753,000 barrels per day (bpd). The average price for Oman Crude Oil decreased by 52.2% in
2Q09 since 2Q08 from USD 97.36 to USD 46.49.Average daily oil production has been on a declining path during the
period from 2003 to 2007. However, oil production has increased 7.2% y-o-y in 2Q 2Q09 up from 67.8 mln barrels to 72.67
mln barrels while q-o-q production increased by 2.6% from 70.8 mln barrels. Continuing with this momentum, we feel that
achieving the targeted production for 2009 would not be overly optimistic.
Crude Oil Production and Oil Price
300 120
Average USDp.b
250 100
mln barrels
200 80
150 60
100 40
50 20
0 0
2006 2007 2008 Q109 Q209
Oil Production mln barrels Average Oil Prices USDp.b

Oil revenues are estimated on the assumption of an average price of USD45 p.b. Based on these assumptions, net oil
revenues are estimated to be OMR 3,522 mln, accounting for a contribution of 67% of the total revenues. This revenue is
2.5% less than that was expected in the budget for 2008. Revenues from gas are estimated at OMR 620 mln, unchanged
from 2008 estimates, and accounts for 12% of the total revenues.
Current and capital revenues are estimated to reach OMR 1,422 mln, showing an increase of 22% over the 2008 budget.
Total government revenues of OMR 5,614 mln are expected to increase by 4% as compared with the revenue estimates
of 2008. Oil and gas revenues estimated for 2009 represent 75%t of the total while current and capital revenues constitute
25%.
Fiscal Balance Trend 2007-2010F
25.00 10.00
20.00 8.00
USD bln
15.00 6.00
%
10.00 4.00
5.00 2.00
0.00 0.00
2007 2008 2009 F 2010 F
Fiscal Revenue Fiscal Expenditure % of GDP
After running successive budget surpluses, the government has announced plans to boost expenditures to approximately
11% in 2009 – which will likely drive a budgetary deficit of 4-5% of GDP in 2009-10.However in our view, we expect the
oil prices would average around USD60p.b in 2009 thus the overall fiscal position is expected to balance compared to the
deficit anticipated in this year’s budget with an assumed oil price of USD45p.b. An economic rebound linked to the global
recovery will mean less reliance on government spending to stimulate growth and a recovery in government revenues, but
an equally large government deficit is likely next year before the shortfalls begin to narrow.
Positive On The Economy

We continue to be positive about Oman’s economy in the long term as the government moves ahead with its investment
expenditures even at lower oil prices. We believe that in spite of relatively lower levels of oil production, ongoing investments
in infrastructure related projects are sustainable and this would spur the economy over the long term. This is supported by
the government’s willingness to move ahead with its spending plan.
At the end of June the State General Budget Account showed a surplus of OMR 0.02 bln, a decline of 99.8% from OMR
1038 mln compared to the same period in 2008. This is partly due to the drop in government revenues of 21.3% and
increases in government spending by 5.3%. Current and investment expenditure have both increased by 2.9% and 17.3%
respectively while government support for the private sector decreased by 22.9%.

Fiscal Balance Trend

8.00
6.00
4.00
USD bln
2.00
0.00
2.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
4.00 2007 2008 2009
Revenue Expenditure Deficit/Surplus
The country’s government revenues fell by 21.3% by the end of June 2009 to OMR3,235.1 mln against OMR4,108.5 mln
during the same period in 2008 .33.3% decline in the Sultanate’s net oil revenues which stood at OMR1,844.9 mln by the
end of June 2009, against OMR2,765 mln during the same period in 2008, and an 8.3 per cent decline of gas revenues
which stood at OMR366.1 mln, against OMR399.3mln.
The government’s total general expenditure rose by 5.3% to OMR3232.6 mln by the end of June 2009, against OMR3,069.7
mln during the same period in 2008. The rise in the general expenditure resulted from a 17.3% increase in investment
spending which stood at OMR1,062.4 mln, against OMR906 mln during the same period in 2008 and a 2.9% rise in current
spending which amounted to OMR2003.5 mln, against OMR1947.6 mln during the same period in 2008 .
The loss of government revenues is almost wholly due to the reduction in net oil revenues, overall oil revenues have
dropped by 33.3% y-o-y and hence due to still relatively low oil prices. However other government revenue streams have
also shown declines; gas revenues dropped by 8.3%, customs revenues by 23.6%, capital revenues by 72.1%. Corporate
income tax revenue increased 63.9% y-o-y in 2Q09.
In view of the adverse international developments, sustaining high rate of growth in Oman has emerged as a major policy
challenge in 2009. Although fiscal position will be under pressure, it will not pose a near-term financing problem as the
Government has accumulated large amount of foreign assets from fiscal surpluses during the recent years. The Investment
Stability Fund created by the Government would support the unexpected downturn in the local stock market. Recent
recovery in oil prices provides fair amount of comfort for better fiscal and external balance. Although inflationary pressures
are expected to abate further, it is unlikely to decline to the level observed in the western countries. Liquidity management
will continue to receive priority by the CBO keeping in view the developmental needs of the economy and medium term
outlook on inflation expectations. Although the impact of the global financial crisis on the banking system has so far been
limited, the CBO will continue to monitor the asset quality of banks and financial institutions in view of the cyclical downturn
of the economy. The CBO will keep a strong vigil on the evolving international scenarios and use its instruments flexibly to
strike a balance between sustaining high growth momentum and controlling inflation expectations as the situation warrants
within the limited scope of pursuing independent monetary policy under a fixed peg.
The Ministry of National Economy announced that it would continue its expansionary fiscal policy to stimulate growth. The
government announced a stimulus package providing USD2 bln for the financial sector. The CBO provided funding through
the exchange of reserve facilities and market stabilisation funds worth USD391 mln to support the Muscat Securities
Market. Thus, citing the government’s healthy position and support to financial system, Standard and Poor’s maintained
the Sultanates’s ‘A’ long term and ‘A-1’ short term on its sovereign credit rating, On March 12, 2009 Standard and Poor’s
Rating Services maintained the Sultanate’s ‘A’ long-term and ‘A-1’ short-term sovereign credit ratings In the light of the
nation’s net asset reserve position.

Governments’ Efforts to Revive the Economy

• Jan. 27 2009 - Oman said it would start a USD 389.7 mln market-maker fund on Feb. 1.
• Jan. 1 2009- The central bank reduced bank reserve requirements to 5%t from 8% and raised the
lending ratio.
• Dec. 4 2008- The central bank said it amended bank reserve requirement rules to release 270 mln riyals
OMAN into the banking system.
• Dec. 31 2008- Oman raised its repurchase rate by 47 basis points to 2%, having lowered the rate by
more than 200 basis points between November and mid-December.
• Nov. 3 2008 - The central bank allocated approximately USD2bln to local banks to provide dollar
liquidity.
According to Ministry of Finance figures, the new budget is expected to report OMR810.0 mln deficit as compared to
OMR400 mln deficit last year. The ministry’s view is that it is important to counter recessionary cycle through increasing
government expenditure on major development projects aimed at diversifying the economy even if it would have resulted
in deficit. The increased investment expenditure decided by the government is a matter of policy to continue with key
infrastructure and development projects.
This policy is long-term and based on the future developmental requirements of the country. However, it is important to
note that given that the budget is based on a conservative oil price assumption of USD45p.b, Oman government will most
likely end up with a comfortable surplus in 2009. This is mainly as oil prices have started to recover considerably in 2009,
exceeding the budgeted price.
Banking
Commercial bank’s total assets increased by7.8% to OMR 13.9mln in Sep09 from OMR 12.9bln a year ago. The expansion
in assets was driven by 11% growth in credit which stood at OMR 9.6bln at the end of Sep09. Aggregate deposits witnessed
a growth of 12.6% over its corresponding period in 2008 to reach OMR8.9 bln. Core capital and reserves of commercial
banks at the end of September 2009 amounted to OMR1.63 bln, roughly representing 12% of total assets. Provisional
figures of net profits of commercial banks amounted to OMR195 mln for the period January to Sep’09.
The current banking trend depicts a continuous slowdown in both deposits and credit growth. The trend has been in line
with the general slowdown in the real economy with GDP at current prices registering an annual decline of 19.8 % in the
first quarter of 2009. Despite the slowdown in the pace of growth in deposits and credit, commercial banks remain liquid,
particularly at the short end of the market as evidenced by their investments in short term CDs.
Commercial Bank’s Total Credit and Deposit
12000
10000
8000
OMR mln
6000
4000
2000
0
2005 2006 2007 2008 2Q09
Total Credit Total Deposits
Source: Ministry of Economics,CBO, KFHR

Commercial banks’ total assets increased by 11 % to OMR 13,668.8 mln in July 2009 from OMR 12,315.3 mln a year ago.
The expansion in assets was driven by 16.2 % growth in credit which stood at OMR 9,623.6 mln as at the end of July 2009
compared to OMR 8,280.9 mln at the end of July 2008. Investments in securities (both domestic and foreign) increased by
23.3 % to OMR 1,558.1 mln in comparison to OMR 1,264 mln a year ago. Most notably, outstanding investments in CDs
issued by the CBO increased by 41.2 % to OMR 1047 mln at the end of July 2009 from OMR 741.5mln as at the end of July
2008, whereas commercial banks’ outstanding investments in foreign securities decreased from OMR 293.5 mln to OMR
256.3 mln during the same period under reference.
Commercial Bank’s Total Assets
14000
13500
OMR mln
13000
12500
12000
11500
July'08 Dec'08 July'09
Total Assets
Source: Ministry of Economics, CBO, KFHR

Contents Research Team
“Road to Recovery” Baljeet Grewal

Managing Director
Tel: 603-20557877
2009-10 Outlook & Perspective 4 baljeet.kaur@kfh.com.my
Country-Specific Outlook Nurazlin Azman Tabassum Khwaja

Nurazlin.azman@kfh.com.my tabassum.khwaja@kfh.com.my
Kuwait: “Building Blocks” 20

Tursina Yaacob Meeta Anand
Saudi Arabia: “Catching Up” 34
tursina.yaacob@kfh.com.my meeta.anand@kfh.com.my
United Arab Emirates: “Rebuilding Confidence” 50
Qatar: “Gas Fuelled Economy” 62

Waina Leong Mashkurah Abdul Latif
Bahrain: “Surviving the Undercurrents” 74 waina.leong@kfh.com.my mashkurah.latif@kfh.com.my
Oman:”Slow and Steady” 82

Noor Ashikin Ismail Yong Chin Siong
noorashikin.ismail@kfh.com.my yong.chin.siong@kfh.com.my
Kuhan Balasegaram Sharon Thiang

kuhan.balasegaram@kfh.com.my sharon.thiang@kfh.com.my
Darshini M. Nathan Isman Ariffin

darshini.mahendra@kfh.com.my isman.ariffin@kfh.com.my
Imran Nurginias Ibrahim Nur Aina Abdul Ghani

imran.ibrahim@kfh.com.my aina.ghani@kfh.com.my
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GCC Economic Outlook 011209

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Disclaimer & Disclosure

KFH Research Ltd

“Road to Recovery” Baljeet Grewal

Country-Specific Outlook Nurazlin Azman Tabassum Khwaja

Kuwait: “Building Blocks” 20

Qatar: “Gas Fuelled Economy” 62

Oman:”Slow and Steady” 81

Kuhan Balasegaram Sharon Thiang

Darshini M. Nathan Isman Ariffin

Imran Nurginias Ibrahim Nur Aina Abdul Ghani

2008 Economic Indicators Forecast

2009 Economic Indicators Forecast

2010 Economic Indicators Forecast

© KFH Research Ltd 3

GCC Economic Overview

GCC Banks Asset size in 2008

Kuwait Saudi Arabia

Source: Central Banks, KFHR

GCC Oil vs. Non-oil Real GDP

-2 2007 2008 2009F

Source: IIF.IMF, KFHR

© KFH Research Ltd 4

GCC Current Account Surplus

Source: IMF, IIF, KFHR

Private Sector Credit Growth as % of GDP

Source: IMF, IIF, KFHR

Drivers of Change in Credit Growth to Private Sector in GCC

© KFH Research Ltd 5

Projects on Hold/Cancelled in GCC

Source: Meed, KFHR

Government Measures Mitigated Crisis Impact

Policy Response to Global Financial Crisis

© KFH Research Ltd 6

Key Policy Challenges

Policy challenges of a medium-term nature requiring priority attention include:

Gcc Economic Recovery Taking Hold

GCC vs. World GDP Growth Rates (2007-2010F)

-2 2007 2008E 2009F 2010F

Source: IMF, KFHR

© KFH Research Ltd 7

Oil Price Recovery

GCC Real GDP Growth Rate

UAE Qatar Bahrain Kuwait Saudi Oman

Source: Central Banks, IIF, IMF, KFHR

© KFH Research Ltd 8

Current Account Surplus as % of GDP

Source: IMF, KFHR

© KFH Research Ltd 9

GCC Fiscal Surplus % of GDP

Source: IMF, KFHR

GCC Inflation Trend

Source: IMF, KFHR

© KFH Research Ltd 10

GCC Capital Markets -Improved Investor Sentiment

GCC Equities Performance 3Q 2009

© KFH Research Ltd 11

GCC Equity Market Indices Performance YTD (3Q 2009)

Saudi UAE UAE Kuwait Qatar Bahrain Oman

Source: Various Stock Exchanges, KFHR

Source: Zawya, KFHR

© KFH Research Ltd 12

GCC: Equities Volatility (2Q 2008-3Q 2009)

Source: Zawya, KFHR