PMI data for February show weak non-oil private sector economy activity in Egypt, Saudi Arabia and UAE confirming a slow start of the year, following January’s weak numbers. Activity continued to shrink in Egypt (at 48.1, up slightly from 48.0 in January, and below 50 for a fifth consecutive month), while it accelerated slightly in Saudi Arabia (54.4 versus 53.9 in January) and UAE (53.1 versus 52.7 in January) from January’s four-year lows.   Minor up-tick in activity for KSA and UAE: February PMI numbers showed a minor up-tick in economic activity in KSA and UAE, but the outturn remained at nearly four-year lows. A pick-up in new export orders was the key driver of relatively better activity in February as domestic demand showed minimal expansion – Saudi Arabia showing a better picture for domestic demand. Weak readings come as no surprise in light of government spending cuts and slower payments to contractors as lower oil prices send budget balances into the red.   Egypt remains in contraction despite easing of deposit rules: In the case of Egypt, the Index registered the fifth consecutive month of contraction. Activity remains dampened by foreign exchange shortages, which are weighing heavily on businesses, as well as poor external demand – the latter showed an improvement in February but remained in contractionary mode. The easing of deposit limits earlier in February has had a limited impact on improved activity, in line with our expectations, given that the limits remain quite low. The USD250,000 a month limit implies that most businesses can deposit a maximum of USD3 million a year, which obviously is a very low amount for most businesses.   No signs of inflationary pressures in Gulf…: The input cost index was fairly stable in KSA and UAE in February, showing no signs of cost pressures building. This is particularly interesting in KSA as it shows that businesses have not yet adjusted their output prices following fuel and electricity price hikes in December; actually, output prices fell slightly in February compared to previous month. Such trend is in line with our expectation that 2016 is not likely to witness major second round effects of the fiscal measures adopted in December 2015 - the government will keep a close eye on prices to ensure the measures are socially accepted. Limited inflationary pressures are also supported by a stronger dollar and weak global commodity prices.   …But impact of EGP weakness and new tariffs building up in Egypt: The trend is different in Egypt, where a spike of the EGP in the parallel market in February (a move of close to 6%) and recently imposed import tariffs on a wide number of consumer goods are starting to drive prices higher. The output price index rose to its highest since July 2015, catching up with cost pressures building over the past few months. Inflationary pressures are likely to continue building up this year with a devaluation of the EGP on the cards sometime this year (likely in 2H2016) and a value-added tax possibly being introduced before end of year.      Macro outlooks unchanged: February numbers confirm our views that PMI readings are likely to remain weak across the board in MENA in 2016. In the Gulf countries, lower oil prices are leading to twin deficits, forcing governments to slash spending, and are also weighing on confidence. Activity, however, is likely to remain in positive territory as government maintains wage growth and spending on key infrastructure projects. In Egypt, foreign exchange shortages are likely to continue weighing on activity. Inflationary pressures are building and recent credit numbers show companies are easing their CAPEX spending amidst rising uncertainty. We, therefore, see further downside risks to our real GDP growth forecast of 3.7% in FY2015/16. (Markit, Mohamed Abu Basha)