tv Best Of Bloomberg Markets Middle East Bloomberg June 2, 2017 7:00pm-8:01pm EDT
>> welcome to the best of bloomberg markets. the major story driving headlines from the region this week, the gulf has been rocked by a deepening spat between senior nations. sympathy for iran remains under attack in saudi arabia and united arab emirates as president trump says iran is the de-stabilizing influence in the middle east. saudi arabia made headlines with foreign reserves falling the -- and- falling below that is after the kingdom raised
money from the international islamic bonds specifically. south africa's controversial president survives attempt to drive him out of office but remains under pressure. the majority of the african national conference wants zoom out. the growing tensions in the gulf with saudi arabia continuing to attack qatar over its ties to iran. bloomberg's executive editor covered this escalating row. >> it came out of the blue a little bit. you may remember the three countries have withdrawn from qatar over some of this conflict over support of the broad -- support of the muslim brotherhood in egypt. exploding is suddenly on the scene again after the ciampa visit, after this show of unity of american support for
the saudi line on iran. front, theyunited really want americans support. now they have trump support on it. and they see qatar as not being in line with iran. >> this is all over some statements that would appear. that is being removed. how reliable is what they are saying right now? thing, is the surprising , it is official news agency.
they would be distinguishing themselves from that. it is mainly in the newspapers. was first to come out and say officially that there was a crisis. what fed the rage was the newly elected iranian president made consolatory noises, saying they want to overcome some of the differences. >> we spoke quite a bit about some of the reactions of some of their peers. how has qatar reacted to some of this? saying they were hacked, these are statements they may or may not have made. much reactioning to the attacks that are coming mainly in the saudi media.
so far they have been quiet in terms of reacting. tension between these three important countries in the region. >> we spoke with the renaissance capital ceo. >> lets big about this divide, these tensions. from what we are seeing for the credit default swaps, take a look at what is happening on the market. some pressure on qatari stocks. nothing significant yet. see thee market side we only significant thing is withally foreigners -- foreign investor risk amy him on the market, the answer is a bit prolonged. we are seeing some volatility there. nothing significant. we are not seeing the markets crash. is theother big theme
lack of volume and a lack of liquidity in these markets. interest as a of prepares to open up the emerging market index. in terms of the ranking of global exchanges, it is one of the worst performing exchanges. of the sectorst are trading from the downside. the banks, look at that. there was a view from the bank market is that the underpricing the big opportunity that could be at play here. is there a fundamental disconnect between the reality and some of the other perceptions? reality orook at the
around the $50 price, reserves are being depleted. that is being reflected in the market. long-term in my view. foreigners slowly trying to chip in and stocks that are expected to be heavyweights in the potential inclusion. we are still two years away from that. i think it is going to be difficult. if we are asking about the market rice inclusion i think that is still a bit early. >> saudi arabia is a huge market with a reputation of being less agile than the rest area how has this impacted investors? >> in the beginning i was on
whatr to increase in april we found instead is it went down almost by the same amount. by 8.5 ilion dollars. the current is accelerating. the was the surprise in data, especially people don't know what is driving this, what is driving the decline. that is the concern here. >> so what is the speculation behind the reasons of this unexpected drop? there must be some fury out there. the government gave one possible explanation before this month. he said the government didn't withdraw from its with that from its reserve. so what you are seeing could be a result of the career contractors, those contractors
are paying back overseas vendors and that is leading to the reserves decline. there is speculation around capital flights. again, why is capital leaving? is a because people are looking for other investment opportunities? or because people are concerned about the economic direction of the kingdom. monthare watching the 12 -- what is the critical number? you struggle to find someone to tell you this is really critical. the netagencies look at assets of the kingdom. it's around 100% of gdp, really strong. the concern is, people don't
know why did reserves are declining heading in one direction. that's basically creating uncertainty. when will this decline ease? the government says -- week rather spend through -- raising debts rather than reserves. the government isn't -- there aren't really that many signs of the government increasing spending in the economy. that's concerned. if people don't know what's driving this decline. >> more on this from what tony and, bank of america merrill lynch managing director and frontier research. >> this continued drawdown is something we have been expecting. economyxpect the saudi to be really lackluster this year. we expect 2017 to be a difficult year for the banks in saudi arabia. he expect issues to start
showing themselves such as asset quality deterioration and the like. is a real headwinds that the saudi economy is facing. we strike that run on to continue. the good thing is, the saudi government is implementing a lot of new and, i think very worthwhile changes which are really going to start to stem the flow of currency out of the country. >> in terms of the reform process and what kind of returns, are coming off the back of that -- but that altogether on a chart that we can pull on the bloomberg -- fabulous representation of what's happening with capital inflows, in terms of foreign investor net. i know lines of greener inflows -- with the current price their is a reference line and white -- as much as you might see a few increases their as of may, the reality is, as a percentage of total volume on the saudi to -- these are almost negligible amounts of participation. in your latest research, you underscore what we have been
hearing all along, including from -- the bank ceo -- or in africa -- he expects $35 billion of inflows of the back of an emerging market -- is that too bullish? >> i think looking at the saudi's potential inclusion in the embassy emerging markets, that's probably one of the most interesting and opportune event that's going to happen in our region. 35 billion, 36 billion is fully plausible and could indeed be too conservative on our numbers. there are scenarios depending on how large the ipo of saudi aramco is, and what the valuation there is ultimately. we see a range in the market for what the valuation could the. there are scenarios where you could see a multiple of the
number coming in, or be a unlikely to read this reform and market inclusion is a hugely important driver of foreign currency inflows into the saudi economy. it is needed very much. the data today confirms that even further. this pace of reform is becoming more crucial for the saudi economy. now is your data shows here, people are not invested in this market. there's a very big opportunity, people are beginning to wake up to it. thus far, it has been benchmarked. people are now thinking, it's about time we start to do the work on this. if on the 20th of june we see the inclusion coming through from msdn -- on its watchlist, people are going to start waking
up. if want to kick the tires, this will be a big eel. big deal. >> how long will it take after the inclusion happens are just for -- for investors to wake up and flock to the market? >> we have got a number of presidents for this. if we look toward the inclusion of guitar in the uae from frontier markets into the emerging markets -- that took the length of time. we think this will happen on a more expedited races for saudi arabia. let's say june 20, a positive result comes out, we think it will take a year for consultation -- investor base. if they come out with a positive result, we will see in june of next year -- an announcement saudi will be included, and the inclusion will come in june of 2019. the key thing is that investors won't wait until june 2019 to start putting money to work in the saudi economy. it will come around 2018, between the middle of 2018-middle of 2019, that's when you will see big close -- as we did with the uae and qatar. bear in mind, during that time, most markets gained eight pe points.
this is a big opportunity. people aren't invested yet, they are going to start looking at this, we are very excited about the potential opportunities. >> the fact is, saudi arabia has moved incredibly fast when it comes to the pace of reforms. as investors haven't really caught up with the changes. how have all of these changes affect investors directly? >> the number one concern is the increased burden at the pace of reforms is putting on corporate profits. there is still a lot of unknowns on that side read we are seeing a lot of difficult austerity measures being put to place, whether it the removal of subsidies, removal of electricity pricing races, gasoline price increases, many other -- taking a lot of fat out of the system so to speak. that undoubtedly is going to have to start impacting corporate earnings.
the good thing is, we think there's a lot of efficiency gains to be made in the saudi economy. they haven't really been driven, or being provided incentives to really change that until now. we think there's a lot of efficiency gains to come through the saudi economy. i could surprise us. we party seeing corporate profits take a hit because of the changes implemented in 2000 18, but the reality is, it could've been a lot worse. companies are counteracting this by implementing new measures themselves to offset that. there's a real opportunity for gains here that we didn't foresee. that could be interesting, but still there is an air of caution. there's still a lot of headwinds being faced in the saudi economy. when we look at banks for example, we are cautious but optimistic. that's the view we have on saudi arabia general.
bloomberg markets: middle east. seeking damages of at least $26.5 billion from iraq's self-governing kurdish region. as for delays to adventure. the story emerged on wednesday when anthony dipaola joined us with the details. >> that's a huge figure in terms of damages the company is seeking. of course, this is a court case in course now, so we don't have any visibility really on what kind of damages would a will get and how much. this was a filing they made with the u.s. district court in washington dc. the same time, dennis and the kurdish -- government are going through an arbitration court case in london. it's already over the summer -- some judgments -- some of the awards in favor of donna gas. but the u.s. case does, it
allows donna gas to register the case with u.s. courts, that would allow them eventually to go after kurdish ashtead if the kurds don't pay up on awards that they've already been given -- that they may expect to come down the road. >> you saw the case -- and corporate now. what happens next. ? >> we're waiting for the decision on exactly those damages, the $26.5 billion figure that yousef mentioned. it done against ceo -- on their earnings calls earlier this month, said that they expect that hearing to go ahead in september, and that they would know the amount of that award in september. this is the first time that the company has come out and disclosed the amounts they have been seeking. they haven't said it yet. this is a big figure for the market to see. coming into some money there obviously would help donna gas with some of their financial issues they have been battling
-- back payments and overdue debt for a while. they got a $700 million -- coming up in october that they need to pay off. they've got about $300 million in the bank, so they are looking at restructuring that. really what we're talking about with these awards, is company's growth down the road. they want to develop those fields and curtis dan. they think they would huge potential to go on produce more oil. as is the best of bloomberg markets middle east. we get you more on the economic outlook for the region, with monica malik from abu dhabi commercial banks. ♪
>> welcome back to the best of bloomberg markets middle east. it is saudi arabia said increase spending again? we spoke about the kingdoms economics. >> we have seen tensions before. in 2014. none oftive side is them fed into the economic side, economic policy, trade and so on. with kuwait as the mediator we hope that any impact on the economy will be not from the economic side.
as you mentioned, oil. i think those are the areas of focus for us as economists in the region. the state of play when it comes to saudi reserves, this has the attention of experts in the field. your blue line, your white line is your saudi reserve dropping $500 billion for the first time since 2011. how do you explain this? bond sale should have contributed to an increase. what is happening here? is the cash burn too high? >> it surprised us. that 9 billion in april would have led to a slight rise in reserves. was an $8.5ead saw billion drop.
that was not expected. we did see funds moving into the monetary data. deposits,overnment increasing and also you saw government reserves in the banking sector increasing. nevertheless the size of the drop, the magnitude of the drop, not only in april, spending remains high. not budgeted spending. spending.dgeted investors will need to see that coming down since oil prices have recovered somewhat and we have seen government remaining tight on spending. >> we were talking about saudi arabia and the decision to reduce exports to the u.s. specifically. they have not done that in the past.
how significant is this shift? is significant. a of the visible inventory buildup we've seen has happened in the u.s.. part of that has to do was show production. it also has had to do with strong imports into the u.s.. because the focus of the market is on two factors, the supply gap and supply access, and inventories, saudi arabia is targeting those visible inventories. one of the areas we highlighted in our research is there were a number of issues with the earlier deal. production could still focus on key markets including the u.s.. this is a very important shift. there were no indications how other opec countries were going to respond, if they would see the same starts.
another critical point is we are moving into the higher demand season in the gcc as temperatures rise. a lot of the production will domestically.ed this has come down over the years for local power generation but the demand increases in the summer. >> what happens if other countries join saudi arabia, specifically target exports to the u.s.. is there a likelihood we could see prices being impacted more significantly than just brought output cut's? >> that's the area of focus. it's the question of shale producers. if you see inventory falling sharply in the u.s., we would seem more shale production coming in. this is going to be an issue that is going to remain for opec and other non-opec members
involved in the deal. to critical issue is looking balance at this point, not having such a rebound in oil that you have a be resurgence of shale production. they want oil between 50 and $60 so they could ease the pace of fiscal consolidation. we've already seen that this year in activity in saudi arabia. >> let's cross into egypt. the latest decision to go ahead with a 2.4 billion dollars spending plan to offset the decline people have seen in real incomes after inflation surge. what is that going to do to egypt? have twok they balance. we've had a deep pace of fiscal ahead of the imf deal at
the end of last year. rather that is the subsidy reforms or the introduction of the ap. we have seen highly positive developments with capital inflows. reserves have gone up. but thisides some room is going to be a long-term adjustment and what they haven't tackled so far is job creation, job growth and without having support measures in place, the economic impact will drive economic activity more down. it will constrain it in one of the key areas they do need is to provide a social safety net for the people who most need it as reforms continue. >> we are in the month of ramadan. region and wider economic trend what are you saying? see slightlyly you
quieted pace of activity -- economic activity. activity,roject before we enter the quieter. deals done to get does tend to slow. compared to 10 or five years ago it is stronger. you have seen more business as usual. the one thing i remember from last year, covering saudi, we had so many announcement about the economic plans. those came the evening after the fasting was completed. things are changing bit overall we seem to have quieter economic activity during ramadan. >> we are seeing the markets react to robin don -- from a don rammadan.
what is that going to do to prices? >> i don't think you're going to see that much secondary inflation on the back of the spending increases. what you will do as the government looks to move ahead with further fiscal reforms on energy prices, that's going to be the main catalyst. we are not so much worried about driving inflation. we already have seen with devaluation the secondary impact has started to come down as a result. we believe it is performed driven. we don't believe the 200 point basis hike will have much impact. the transmission in the real economy.
so it's going to be a reform driven story. you need social spending to provide a safety net for those most vulnerable. >> that leads to a key follow-up. work, transition doesn't it wasn't the best way to deal with it, what should they do more to bring inflation under control? is a medium-term investment story in the case of egypt. a lot has to do with the inefficiencies of the distribution system. in food prices from the production space at the farms to getting it into the shops and two households. a lot of investment is needed. improvement in getting food and other products to the market. for these areas you do need
investment. investment in egypt has been low over the last year and is not kept up. , they have hoping tackled the first part of mod the capital inflows and the ability for the government to meet its deficit. we are not concerned anymore about meeting external funding. the next stage will be to boost economic activity, to create jobs, to improve the structure of the economy. ef: coming up, how much longer can the south african president hang onto his job? this is bloomberg. ♪
will show he is hanging on by a thread. the latest survey says his popularity with voters and his own party has reached an all-time low. seen calls to have him ousted opposition parties. it seems now there is pressure in his own party for him to leave. thing,do know is the big the credit rating downgrade which happened after he reached out to his cabinet. the mounting pressure from within the ruling party could have him unseated. >> what is going to be the next milestone that could decide his fate? what is the key event? the africanhat national congresses committee, the decision-making body in the agency met over the weekend and
cited the downgrade is a big concern and as a reason for him to be stepping down as president. there will be a ratings review this friday. we will keep a close on that. that could be a pressure point. they may lose more and more support. it's lost support in every election since it was elected in 1994. it has another presidential vote in two years time. itsould see it facing biggest loss in support and of feet overall in ruling the country. as his influence retreats who could be the winner out of this drama? >> it does seem as though the succession battle has been open. they can now start debates. one of the front runners is his
ex-wife and former au chairwoman. she has been leading a campaign, going to the brunches. campaigning as the first female and southof the party africa. another from broner -- front runner, supported by not only union leaders but mounting more and more support from the business sector and business leaders. >> more on the impact on the rand from barclays. >> the rand has been one of the best performers in may. a lot ofe best things, high-yielding currencies, any bad news is being bought into. flooding wall of money into assets, looking for a low volatility environment. i think that is going to continue despite news that you would think what have an opposite impact.
that was clearly felt this morning. overall that is going to continue. dollarively soft u.s. where yields are capped as well and low volatility. it is hard to see this turning around any time soon. , bullet upp a chart on the bloomberg. these are the one day price changes. spikes,see some of the in terms of the political africa, whatsouth would a continuation of the government mean for the economy and country for foreign investors? >> overall, clearly investors are looking for an upturn in economic data. whether that is brought about by political change or not is
something that is still a focus at the moment. there has been a number of political uncertainty, a number of issues weighing on the presidency. that's one to be something that's going to lurk in the background. the moment overshadowing this is the money that continues to come in. the stability in the political environment may even help this. that's uncertain at this point. it is very volatile. that's going to continue to be the case in south africa. ramadan. the best investment strategy for this time. ♪
>> performance is actually contrary to popular belief positive. one interesting thing is you have a rebalancing. you have a lot of inflows into specific stocks from benchmark names. , you canthe inclusion see the market has done 6%. they might see some positive performance in the next few days. following that, in egypt, getting removed from the index, that will be a negative. a buying opportunity once outflows are out. there will be some bargains as result of outflows this week. that is what investors should be looking at. >> put up the seasonality
function. , you canhe saudi's expect this summary. the month of june, there tends to be a negative. that is the same case. the 10 year average as well. it is not ramadan specific. which sectors could you trade here? does the traditional thinking apply more consumer spending. look at retail. go defensive on construction and banking. is that valid? >> to some extent it would be valid. i think that would support the consumer same this year as going into it people were not -- were more negative. the outlook look slightly better. consumers will stand
out. >> you mentioned we should see a lot of activity due to the rebalancing. what should we expect through that? should we see trading slowing over the region? that we tendarket to recognize? >> across the board without exception you have volumes falling on rom it on. if you have a global macro event following 240 or $30, that would be higher volumes across markets. awards the end you have review coming up. that is going to be important for saudi arabia. maybe traders will come back to their seats earlier then usual. >> do you think we should see a
pickup in the middle of ramadan? >> i think individuals come back to the market then definitely. that is why volumes have been lower. i think they are still adjusting and with that, a.b. be they come back to the market. >> how do you see that review playing out in the market aside from volumes? >> we think this is going to mean foreign investors will look at saudi arabia more closely. at the moment you have all the world to look at not on your benchmark. there's no urgency to look at saudi arabia. in dollar terms it is less. i think there is a lot of room for foreign influence and saudi arabia. depending on positioning we expect 25-50,000,000,000 dollars.
>> coming up on bloomberg best, the stories that shaped the weekend business around the world. political tensions that the world on edge. implications for trade, currency and global stability. >> transatlantic relations are as poor as they have been in a long time. know who he isto talking to here. >> economic data sends ambiguous signals. leaders add insight to a complex picture. what's north korea's