|FOCUS19/07/20191EmergingmarketandGCCratesremainsupportedbyeasingglobalfinancialconditions,particularlyintheUSandEurope(seeEM–Lookatsystemicfactorsandseethefuture).Weexpectratesmarketsandsovereigncreditacrosstheregiontobesupportedbyglobaltrends.ThespreadoftheSARratescurvetotheUSDwidenedinMayandJune,buthastightenedsincethebeginningofJuly(Figure2).Weexpectthespreadtotightenfurtherasgeopoliticalriskintheregionsubsides.Forwardswapscontinuetopredictmonetaryeasing–around50bpofcutsarepricedoverthenextyear.MARKETVIEWFOCUS|CEEMEA19July2019GCC–PegsanddeflationtousherinratecutsKEYMESSAGESStubborndeflationandloweconomicactivitymaketheGCC’smacroclimateripeforratecuts,inourview.AlthoughweexpectthefirstratecutsbyGulfcentralbankstotakeplaceon31July,wethinkdeflationinSaudiArabiaandtheUAEwillpersistformuchofQ3.Werevisedownour2019CPIforecastsforSaudiArabiaandtheUAE.FortheUAE,wealsocutour2019realGDPgrowthprojection,reflectinglimitedupsideforboththeoilandnon-oileconomies.ThelargestGCCeconomiesareinthegripofstubborndeflation:Qatarhasthelongestrecentdeflationtrackrecord—sinceJanuary2017—whileSaudiArabiaandtheUAEarenewcomerstonegativepricegrowthterritory(Figure1).SimilartrendsacrosstheGCC:Whilestillconfinedtotheboundariesofinflation,pricegrowthhasbeenanaemicinKuwaitandOmansinceQ12018,andBahrainsinceQ42018.Underlyingthistrendisageneralsoftnessindomestichousingmarketbroughtonbytheimpactofthe2014oilpricecollapse.WethereforethinkGCCeconomiesstandreadytobenefitfromananticipatedratecutattheendofJuly,followedbyanotherinSeptemberthatmayhelprevivelocaldemandconditions,albeitwithlimitedimpactonGDPgrowth.PleaserefertoimportantinformationattheendofthisreportFig.1:OldandnewcomerstodeflationFig.2:SpreadcompressioninJulylikelytocontinueSources:Bloomberg,BNPParibasEMECONOMICS|EMSTRATEGYMohamedAbdelmeguid,MiddleEastandNorthAfricaEconomist|ShaunDaly,CEEMEAStrategist|BNPParibasLondonBranch0.40.50.60.70.81.52.53.54.5SAR5YSwapUS5YSwapSpread(RHS)-4.0-2.00.02.04.06.0Jul-18Oct-18Jan-19Apr-19SaudiArabiaCP...
