tv Best Of Bloomberg Markets Middle East Bloomberg September 1, 2017 7:00pm-8:00pm EDT
♪ welcome to "best of bloomberg markets: middle east." the major stories driving headlines from the region this week, qatar's economy is still willng the blockade, but it able to keep up the act for long? oil prices remain weak. we discussed if the u.s. energy sector could get that push higher. in saudi arabia's economic transformation is taking place as part of its plan to wean the economy off of oil. they are seeking bids for his first utility power project.
guest: it is a possibility, but of course it is not necessarily what saudi arabia does this year , but what it does over the next three to five years and how possible it is to accomplish the 2030 andof the vision a national transformation plan, and to adjust for the new realities of growth. the new realities of growth is that saudi arabia could very well go between two to 3% as it adjusts its economy. it is not really is saudi arabia goes into a recession, but what happens over the next three to four years and how the economy adjusts and how the private intor takes a new step this new business environment that saudi arabia wants to create. yousef: a lot of this comes down to physical consolidation, as well, what they are trying to do -- fiscal consolidation, as
well. that is why they are reinstating a lot of the allowances and bonuses. in terms of the shakeup in the royal secession we saw over the midsummer, to what extent is that going to slow down or possibly accelerate fiscal consolidation? guest: i think it is a very good question. i think the issue of secession -- of succession has been settled. people know what is the elements of politics and who is there, and definitely mom and the taliban -- definitely mohammad is there. i think it is a stabilizing factor. more so, what is important is that they adjust as they have been doing over the last several months what is required under the fiscal adjustment program so
that they don't go all the way. tois not really important have in 2021 a balanced budget. it could be extended further on because if you cut down a lot of the spending, remember that capital spending and investment is key for the saudi economy. that creates a number of necessary publications in terms of growth. the economy could very well have a fiscal surplus, but then go into a recession. one needs to avoid this. think saudi arabia quickly realizes this, and they will go slower on the fiscal consolidation. nevertheless it is important to maintain budget deficit of a single figure rather than a double-figure. last year we had a fiscal deficit of 16%, 70%. think this year -- 17%. i think this year it is good if we had around 10 or 11%.
shery: you mentioned earlier the change in business environments and saudi arabia. -- what's should businesses learn from this new environment in order to survive? oldt: basically that the way of doing business is coming quickly to an end. just because you are a big construction company doesn't mean that you will be there andver if you don't provide become an inefficient participant in the economy. it doesn't mean that you will have an existence in saudi arabia. i think this is the new climate of doing business. you need to actively engage and actively think of how you are producing value added to the economy, hence the new energy and all of that wind and what
have you that was recently announced. saudi arabia and its business environment is, i think, entering a new stage where they think about jobs and think about being productive participants in the new economy. shery: talking about jobs, that is one part of the saudi economy facing a lot of problems. we are seeing the unemployment rate in double digits. how can ordinary citizens adjust to the new saudi economy in reality they face? guest: it is also a great question because saudis and the wider use community in saudi 65%ia, which comprises now below the age of 29, they have to also realized the need to have the right skills and be actively looking. nothing is going to be given to them. they need to be educating
themselves in order to participate. at the same time, the private sector needs to do its job as well. they need to adjust to the new realities whereby they need to hire saudis that have these special skills. it is a reality check from both sides, supply and demand. the supply side needs to realize the only way going forward is for saudi arabia that engages with its use. traditionally saudi arabia had relatively high unemployment, similarly to the case of france. france had high unemployment, as well, historically. 12.6%, yout 12.3%, will see that figure playing out for a few years before it adjusts to a new reality. i'm not too worried. i will be worried of saudi arabia has unemployment at 20%, but i think for the first two to three years going forward you will see unemployment at these levels given there is an adjustment happening right now. yousef: how confident are you
the saudis can keep up their leadership position in the opec-non-opec deal when it goes beyond that deal? they have fiscal responsibilities. guest: absolutely. if they do not take a leadership role within opec, i think you'll see opec not failing, but not being able to move ahead. -- it issaudi arabia up to saudi arabia to keep going. they need to contain the theding and just extend balance program, the fiscal balance program to a little bit beyond 2021. it doesn't really hurt. i will give you an example in the case of greece. they have a fiscal surplus, but the economy is in a recession, so what is it good for if you have a fiscal surplus but your economy is in a recession? yousef: coming up, political
♪ tensions,opolitical central uncertainty, and wheat oil prices. have all these risk -- and weak oil prices. have all these risks affect emerging markets? guest: i think you really do have to -- people think venezuela, there are a few of the problems that are behaving bradley -- behaving badly and have certain issues, but probably speaking, emerging markets are behaving well. if you look at the balance sheet versus where it was three years ago left him there is this announcement of normalization of rates, most of them, the current account aggregate is in pretty good shape. a for example,
they are benefiting. there's a lot that's happened in the last three years that , butlize these economies eventually softer growth rate of developing markets from a trade perspective is attractive for investors, so money flows that way. yousef: in terms of how far this rally has to go, if you look at an index like the emerging markets index, how much more leg room doesn't really have? guest: to be honest, we don't sit there putting numbers on it. our allocation asset committee -- our asset allocation both -- we do think there is mileage to go, that we are not going to put it doesn't number out there because as we know, all sorts of real things take place around the world that change dynamics pretty quickly.
what happens depends a lot on what happens to the u.s. dollar. we are seeing this correlation is well with the yield curve when it comes to the dollar index. you can see the chart 9466 showing exactly this, where the yield curve and dollar have been increasingly linked. to the 30 day correlation between the 210 curve and the dollar index. if the fed keeps tightening how we could see the curve continue to flat. that's what happened in the previous cycle. does this mean further reasons for the dollar cut -- further weakness for the dollar, and if so, how much more upside could these markets get? guest: are currency team at the moment are in the short-term, from a technical perspective, ofking for a short period
strengthening and the dollar because they feel the trump trade has been overdone or oversold the other way now. structurally we do believe the dollar will continue in the longer-term direction of weakening, but in the short term we think there's a little bit of a bounceback. shery: are there any more opportunities that remain attractive when it comes to the u.s. markets? we have seen the become a little more sensitive to political risk as of late. would you say it is worth the price you need to pay in order to get those u.s. stocks trading at a premium to everybody else? guest: we've got lots of views on this. the simple view is that again come our asset allocation committee believes the large caps have taken quite a run-up. we are neutral towards our large capital. we do, however, believe that the small and mid-cap provided a lot of opportunity. that said, our large-cap
portfolio managers are doing incredibly well at the moment because in this sort of nondirectional market, the active management space does incredibly well. there is a premium to begin good quality companies versus weaker ones. there's also events like the amazon whole foods from an activist's perspective that drive up opportunities. on a broad note, i am saying the large-cap space is something we are a bit more bearish about were neutral about. there is huge opportunity. let's not forget it is a unique market. people often compare the u.s. market to the rest of the world. have an amazon and the rest of the world, see how do you do a comparison of amazon versus anywhere us in the world is mark -- the world? yousef: there a brilliant column this morning saying brexit is beginning to look like no brexit. given the current state of negotiations, there is a view to
be made about it being possibly pointless. what is your take in terms of where the negotiations are at, and terms of what you're telling clients to own? guest: i think the u.k. broadly speaking is undervalued at the moment, and that presents an opportunity. has the sterling gone too far? at the same time, when you are in the negotiation of the british government is, it has to talk about a hard brexit to even get a soft brexit. if you start talking about a soft brexit you will get no brexit. this is where the view has changed as theresa may's government has gotten weaker. now that she's talking about a soft brexit, people are talking about no brexit. i don't think you can reverse a referendum decision that was done in 2016. i think that creates too much social and political issue. i think they will implement it. i think it is a matter of shape that is ato i think
the eu, is at the eu customs union? what are we still a part of? yousef: in terms of what is going on with the car story -- the qatar story, those are twelve-month forwards moving in lockstep with this chart going back to 2015. want to point out the latest move didn't really do much in terms of that spread. this would be the bet against the saudi uptick against the dollar. sitting -- same thing for the qatari riyal. what do you tell them about the current standoff between qatar and the rest of the gulf? guest: we had a small insight into this in 2014. if you recall, that actually took longer. not sure why people anticipated this was going to be sort of wrapped up in seven days when it started in june.
there was always a risk it was going to take longer. this was going to have to be a solution at the end of it. it could just be, let's hug and makeup. , we time it is really really do need to fix it. it's become a bit more public with that 13 point plan being put out there. there needs to be some resolution here, and the resolution steps are taking longer. it is costing money. i've read and heard numbers it is costing 10 times as much to bring in staples from a food perspective because you have to fly things around the world. i think we've already the story about cows being flown in from australia to provide milk. there are very real issues that need to be put in place that need to fix this thing. the longer it goes on, the more damaging it is for everybody. there's no doubt about that. it is going to cost qatar a lot of money to keep itself going, but frankly it has got a lot of it, as well.
let's not forget, it is pretty cash-rich. it is one of the largest exporters of gas. there is good cash flow. but it is a distraction we don't meet at the moment because the management time is a lot on this thing. how much do markets understand right now that this issue could get prolonged? how much of it is already priced in, or are they just discounting this issue given that it is just noise, and as you said, qatar is pretty rich? guest: i don't think people are seeing it as noise. i think people are starting to believe it. if you'd asked the same question a couple of weeks in, i think people thought they would wrap it up and sort things out. i think now people are saying to believe it is a structural solution that is hired. i think the event -- is required. i think the events of the last week where qatar has reconnected caused somehas
concern about this taking a little longer to sort itself out. some of those things i think people are starting to realize, that this isn't just a quick little playground fight. this is serious, and it to fix -- and they need to fix the underlying issues. yousef: where are the pocket of opportunity in the middle east, and word you include africa in that? guest: there's lots of fun things going on at the moment in terms of opportunity. i was in kuwait last week, and i am loving what is going on in kuwait. there's this bubbling of opportunity and businesses and entrepreneurs. a real hive of activity going on. i think the uae continues to be a standout. we've seen nonoil gdp in the uae go from strength to strength. people like to be bearish about it, but actually as long as you have stable oil -- not up or down, but stable -- that is a pretty good price, and i think
we are adjusting to realities. the middle east looks pretty good. i was in south africa a couple of weeks ago. despite all the political noise, there is positivity coming out of activities going on in south africa. ghana i mentioned earlier, nigeria. these are companies a couple years ago was weak oil prices that were really in trouble. the reserves were down. now the reserves are shooting up, they are looking great. we do have political nuisance as we've seen in pakistan. this is part of the risk of the world. yousef: still ahead on "best of bloomberg markets: middle east," potential gains for saudi and kuwaiti stocks from that upgrade. all the details next. this is bloomberg. ♪
announced the results of its country classification review, with strong chance of an upgrade for kuwait and saudi arabia. we took to -- we spoke to its equity strategist about the implications for markets. guest: from a macro perspective, 5% is a very low rate. i don't think it will have a huge impact on corporate. the uae will be the first mover among the gcc countries, and they are ready to go ahead. this was the context of diversifying the revenue stream for the uae government. that is why the uae is one of our top macro picks. atyou look at it resident -- relative to the other gcc countries, they seem to be doing more to counteract the oil prices. yousef: the economy is not moving as fast as people would've hoped yet. we've put this up on the bloomberg, as well, to show what has been happening.
shows you what has been happening with qatar and oman relative to the emerging markets index. stands, isn't that going to hurt consumer confidence? isn't that going to cut out quite a bit from the bottom line? guest: i think it has already been expected for a very long time. countries with lower gdp per capita in the cases of oman hassaudi arabia, i think it a bigger impact than the countries like qatar, uae, and kuwait where the gdp is some of the highest in the world. i think it will vary from one country to another. with regards to the stock market, one thing to note is for the gcc equities, it is very heavy on financials and real estate. in the case of the uae, it was clear that it would probably implemented on real estate
transactions that it would not be of limited on real estate transactions -- it's would not be implemented on real estate transactions. plays?how about consumer that: the only countries are relevant for this are saudi arabia and egypt. that is going to have a major impact because valuations there is a bigger story. in the case of saudi arabia, you have a lot going on. the 5% might not be the most important. you have potential subsidy removals, as well. there are a lot of changes happening. the rate is too low to have a huge impact on consumer companies. yousef: coming up on "best of bloomberg markets: middle east," the blockade on qatar continues, but that didn't stop it from
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at the same time i don't think we should read this as a it --gic visit -- put pivot. qatar as a at broader interest, they are opposed to iran and other parts of the region. especially with the trump administration in power qatar will be careful to avoid getting too close to the iranians. >> is it more about signaling? like certainly. they want to say we are not just going to comply with your demands. i ran is an important neighbor. qatar's main economic asset. they have maintained good relations with iran.
potentialn be a supplier of food items that qatar was bringing from saudi. tiesneed to maintain simply for food supplies. >> certainly in light of the new trade reality they are facing they have to look for other trade partners who can replace supplies coming in from other places. i think they will keep those relations within a certain framework focused on the economic benefits. >> i wanted to ask about another piece of qatari news. shakealk of this qatari receiving a lot of praise and saudi arabia. he just started a twitter account. he has 300,000 followers.
what is going on? ?hat is the intention >> it has been a strange development to watch. someone who was much younger than the brother in power. it is unclear what the saudi's are getting at by promoting this guy. to play theempt game of promoting rival members of the royal family. sudden appearance of this twitter account, it speaks to a clear preplanned campaign and manipulation of social media, not just a spontaneous outpouring of support for this guy. >> 300 now. elsewhere we had iran's foreign minister saying last week and
iranian diplomat might exchange .isas is that a sign of rapprochement? >> i would not read it that way yet. even if it did it would be a small step to repair what is a quite antagonistic relationship. given they continue to be opposed across the region i don't think we have seen any signs of lessening of tension between the two. i would be skeptical. begint would be needed to selling of relations? >> i don't know it is a concrete step. it is matter of time and the saudi's to feel they have begun to push back against iranian influence. in iraq we see this new engagement. i don't think that is going to lead to the saudi iraqi
relationship. it's the beginning of a re-engagement. as they begin to feel they are restoring those ties them of building new relationships, increasing their influence, that can lead to them to feel confident enough to reach out to the iranians. >> is this an all-time low? we have seen some conflation flareup. , is thisnt scenario the worst we have seen? >> we have had previous examples. after the iranian revolution, when the saudi's felt threatened, they probably field less that way at this point though they do since a threat from iran. given what is going on with qatar and syria, lebanon, iraq, it is one of the worst times.
kushner in the region this week here to solve many of the region problems ranging from the israel palestine conflict to the gcc spat. what chance does he have of solving those issues and what pressure does the u.s. bring to bear? >> i mean. with israel palestine, the chances of a resolution are small. you don't have the situation allows for progress to be made as long as netanyahu has interest -- little interest in a two state solution. in any regional conflict the u.s. has incredible influence but often has trouble exercising it. the u.s. decided to withhold aid
for human rights reasons and that led to a snubbing of kushner. -- its partners know it once a lot of things in return. they can push back on any attempt to exercise pressure. while they can prevent it from escalating further the actual levers they have to tell the saudi's this needs to end is limited. yousef: coming up, tropical storm harvey hits the heartland of the u.s. energy sector. more on how the flooding could impact oil prices. ♪
shale production could take a big hit from closures along the gulf coast. we spoke to an independent energy analyst about the impact on oil prices. >> we have the important impact. this week.shipment we have the export delay. these are opposite forces. east texasnd we have production and refineries. on the other side we are losing production. what is important is the net of those forces together. in terms of production is almost equal to refineries. the impact is going to be on the delay imports.
that is what is going to make the difference, assuming we have no damage. if we have damage we will have to look at what happened during hurricane ivan that did major damage. >> i'm looking at a map on the bloomberg. it shows some of the recent hurricanes we show in the gulf of mexico. this is squarely heading to the gulf of mexico. terms of the flooding, the long-term damage, is that the thing we are going to have to worry about here? we have this short-term outfit -- output. do we have to worry about longer-term damage? >> yes. we have two issues. power outages.
and the other issue is flooding. the refineries are built to withstand weather but not extreme weather. the worst thing is a major flood. if we have major flooding that takes time to prepare. >> what about the supply chain. we have a lot of transport affected by this. to say nothing with workers dealing with damage to their homes. how is that going to affect the industry? >> this is the main issue. if the storm or hurricane ins tomorrow we still have problems because we have to get workers to the facilities. they are going to care more about their families, of course. if they have tornadoes as we have seen in some areas. that is going to play a big
role. some refineries have not shut down. because of logistics. they are shutting down the houston channel. this is a terrible event from the perspective of damage, economic and human. this goodf opec, is news for opec's? be a boon or a bane. damage to theor refineries, production can recover. if we have major damage to the refineries that is going to reduce substantially and then they will start building an opec does not want to see that. it will be a nightmare for opec if we have major damage.
>> interesting. we did see oil picking up off of the back of this storm. it wasn't exactly what you would decide as a dig jump. in terms of oil prices they have been range bound. what catalyst should we watch out or in terms of a big move? >> it is the same story in the last two months. we need double digits. if we have it for two or three weeks and we are done. that,are not going to see at least once, aia is going to report on this on the impact of this hurricane. we have to wait more than 10 ons to realize the impact stocks. up, week oilg
prices since the start of the year. another concern has been the ongoing golf spat. we spoke to anita. >> it is a big twist. we don't have domestic local debt capital markets. they need to raise money, which not evenal markets are started. the reliance on international markets is high. and have international markets been help full, of course. every time half a billion last year and four times borders. high demand. very high demand. the region is reasonably well
rated and very wealthy. seen terms of demand we did disruption in u.s. credit markets. nervousness in the corporate bond sector. would you expect that to impact gcc bonds? >> it does. it does affect the dollar denominated bonds as well. there is a lot of the investor base now, sitting in the u.s.. the u.s. pension funds. whatever happens in one part of the world does tend to affect the other part as well. depending on relative value tonges, the money will ship u.s. bonds. the u.s. dollar denominated bond market and the emerging markets space is correlated with the judge or -- with each other in that regard.
>> if you bring up the chart on the bloomberg, it shows the difference of spread between one and three month treasury builds and it is starting to converge around zero because investors are starting to demand higher rates versus the three-month paper to compensate for the risk of that technical default. is the debt ceiling deadline something you are concerned about? >> it is something we are looking at because it causes so much distraction. data interesting for the and other traders that want to make money, but for the long-term investors, it is any .ind of strategy u.s.ebt ceiling issue, the
government, as they risk making risky, it hast multiple impacts on the system. it is in everybody's interest to make sure it in constructively. whatever happens in between, we think it could end up in constructive territory. think is a slope but we any weakness may be a buying opportunity. >> i'm sure many investors hope they act rationally on this one issue. the last part of the year, what are you looking for in terms of risks or catalysts for the gcc fixed income market? >> gcc is highly coordinated to sentiment related to oil price. absolute price and the
direction, the sustainability is an issue. if there was some unhinged hinging of the current expectations of oil prices remaining above 50 that could have an impact. another thing is if the sovereigns fund the differences and increase supply hugely. and mutedd softness new issuance. issuedre totally overseas and not dumped into the local market. that lack of supply has cap bonds high. qatar comes in with another 15 billion and oil gets done between september and november, that can have an impact on the spread.
another thing, rates. we expect the impact of the rate hikes in the u.s. and the benchmark used. that is not something we see as a major risk. yousef: that is it for this best of bloomberg markets: middle east. we'll be right here for the next week of trading in the middle east. this is bloomberg. ♪
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>> coming up on bloomberg best, stories that shaped the week in business and around the world. the damage around the storms in the gulf coast. >> it is a production impact and refined product impact. >> tensions rise over north korea's nuclear threat. in.it talks are >> these two sides are as far away as they have ever been. >> a gdp number of 3%. it jobs number that is still very good. >> and