Sicking bids as part of its plan to win 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 ambition of the vision 2030 and 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 grow between 2 to 3 as it adjusts its economy. So basically, it is not really if 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 sector takes a new step into this new Business Environment that saudi arabia wants to create. Yousef a lot of this comes down to Fiscal Consolidation as well, there are 20 make sure the citizens do not become too happy with some of the cuts. Which is why the reinstated a lot of the allowances and bonuses three and 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 succession has been settled. I think it creates a lot of stability politically and externally and internally. People know what is the elements of politics and who is there, and definitely mom and the definitely, mohammad bin salman is. Is important, it is a stabilizing factor. More so, i think 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 dont go all the way. So, it is not really important to have in a balanced budget. 2021, 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 necessary complications 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 a budget deficit of a single feather single figure rather than a double figure. Last year we had a fiscal deficit of 16 or 17 . Bes year i think it would good if we would have it around 10 or 11 . So that saudi arabia and the world begin to adjust into the new realities. Shery you mentioned earlier the change in Business Environments in saudi arabia. Of course, we saw the giant economy the giant company in saudi arabia being allowed to collapse. Watching businesses learn from this new environment in order to survive . Guest basically that the old way of doing business is coming quickly to an end. Just because you are a big Construction Company doesnt mean that you will be there forever. If you do not provide and cater and become an efficient participant in the economy. If you are in the rent seeking business forever it doesnt 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. So 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 at double digits. How can ordinary citizens adjust to the new saudi economy in and reality that they face . Guest it is also a great question because saudis and the wider use community in saudi arabia, which comprises now 65 below the age of 29, they have to also realized the need to have the right skills and be actively looking. Come in 80r youth needs 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 outh. Its y traditionally the country had relatively high unemployment, similarly to the case of france which had high unemployment as well, historically. I think that 12. 3 , 12. 6 , you will see that figure playing out for a few years before it adjusts to a new reality. So i am not to bend forward. Of course i would be worried if saudi arabia had unemployment at 20 , that i think for the first two years or three years, Going Forward you will see unemployment at this level given that there is an adjustment going on right now. Yousef how confident are you the saudis can keep up their leadership position in the opecnonopec deal when it goes beyond that deal . At the end of the day, they have fiscal responsibilities. Guest absolutely. But if they do not take a leadership role within opec, i think youll see opec not failing, but not being able to move ahead. It is up to saudi arabia to keep going at it. Fiscal responsibilities, you said it right, they need to contain the spending and extend the balance program, the fiscal balance program, to a little bit beyond 2021. It doesnt 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 plague sentiments, but we discuss which markets could be most vulnerable. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets, middle east. Geopolitical tensions, central uncertainty, and wheat oil prices, how has it affected the trading markets . We hear from someone at the trading department. It is such a big set of countries now, we really have to break that out. People think venezuela, there are a few of the problems that are behaving bradley behaving behaving badly, but broadly speaking, emerging markets are doing quite well. The balanceat sheet, verses where it was three years ago when we had a temper tantrum, last time when they announced the normalization of rights, most of the organization is in pretty good shape. Is exportingghana their oil, and oil prices are benefiting from the higher oil prices. A lot of things are happening in the past three years to stabilize these economies. Markets,urse, emerging look attractive for invective investors. In terms of how far this rally has to go. If you look at an index such as the msci emerging index, how much legroom does it really have . Not sit honest, we do there putting numbers on it, but at the same time our Asset Allocation committee which meets on a quarterly basis, is looking at that and equities. We think there is mileage to go but we are not going to sit there and put a specific number is as we know, all sorts of things happen at the moment. There are all theseforce majeu res and execute your activities taking place around the world was changed in a mix very quickly which change the pace very quickly. When it happens to the e. M. s, it depends a lot on what happens on the u. S. Dollar. We are seeing the coloration with the correlation with the yield curve. The graph is showing you this, the yield curve and the dollar have been increasingly linked. This is the 30 day correlation curve and the0 dollar index, it has increased. If the fed keeps tightening we could see the curve continue to flatten. That is what happened in the previous cycle. Does it mean that the weakness of the dollar, what upside could the e. M. Markets get . Trade ourcy Currency Team at the moment, in the shortterm and from a tactical trade perspective, is looking for a short period of strengthening of the dollar, only because they feel that the trump trade has been overdone or oversold. So, structurally, we believe that the dollar will continue in its longerterm. Direction of weakening but in the short term we think it will bounce back. Are there any more opportunities that may a you when it comes to the u. S. Markets . We have seen them become a little bit more sensitive to Political Risk as of late. Would you say it is worth the price you need to pay in order to get the u. S. Stocks trading at a premium to everybody else . Look, we have lots of views on this. The simple view is again, our Asset Allocation committee believes the large upsets have taken quite a runup. We are neutral to are the capital, we pulled that back a little bit. We however, continue to believe that small markets create a lot of opportunity. That said, our largecap Portfolio Managers are doing well at the moment. In this market, the active management space is doing very well. There is a premium to picking good Quality Companies versus weaker ones. There is also events like the amazonwhole foods from an active is in perspective that continue to drive our opportunities. For outflow. So, i am saying to you that our largecap space is something we are more there are shut about or neutral about, there is huge opportunity, let us not forget that it is a unique market. People always compare the u. S. Market to the rest of the world, but we do not have an amazon and the rest of the world. So how can we do a comparison of that . There is a fabulous column in Bloomberg View this morning saying that brexit is beginning to look like no brexit. If you look at the current state of negotiations, there is a view to be made around the 2016 vote being possibly pointless. What is your take in terms of where the negotiations are, what does it mean in terms of what you are telling clients to own . I think the u. K. , broadly speaking is undervalued at the moment. I think it presents an opportunity, has the pound sterling on too far . In negotiation, as the British Government is, it has to talk about a hard brexit even get a soft brexit. If it stops talking about a soft brexit, it will get no brexit. The view has changed, as theresas government appears to have been weakened. Now that she is having to talk about a soft brexit, people are starting to talk about a no brexit. Ado not think you can have referendum decision that was done in 2016 come i think it creates too much social and political issues and i think they will implemented. It is just a matter of. Shape and form is it the eu, is it the Eu Customs Union . What are we still a part of. But there will still be a brexit. In terms of the realtime measures of risk protection, btv 2850. Look at things have been moving in lockstep for the most part all the way from 2016. I want to point out that the againstrend is a bet the peg saudi real going up a dollar. Against the qatari riyal rid what do you tell your clients about the standoff between qatar and the rest of the gulf . We had a small insight into this in 2014. If you recall, that actually took longer. Whyt sure why are people anticipated that this would be wrapped up in seven days when it started in june. I think there was also a risk that it was going to take longer. This was going to have to be a solution at the end, it could not just be, let us hug and make up like it was in 2014. This time were really need to fix it. It has become more public, with the 13 point plan view put out there. There needs to be a resolution and the resolution is taking longer. In that timeframe it will cost money. I have read or heard numbers that it is costing 10 times as from a bring in staples foot perspective, because you have to fly things around the world. I think we have all read the story of cows being flown in from australia to provide milk. So there are really issues that need to be put in place to fix this thing. The longer it goes on, the more damaging it is for everybody. Qatar, it is kind of going to cost it a lot of money to keep itself going. But frankly, it has a lot of it is well. Let us not forget, it is rich, like your colleagues said. It is one of the largest it is as of gas, but distraction that we definitely do not need at the moment. Their management time is missing. So, how much do markets understand right now, that this issue could get prolonged . How much of it is already priced in . Thethey just discounting issue because it is just noise, and as you said, qatar is pretty rich . I do not think people are seeing it as noise, i think people are starting to believe it. If you have asked the same question a couple of weeks in some of people would have called it noise, said rep it up. I think now, people are starting to believe there is a structural solution required. I think the event of the last week where qatar is reconnecting , it looks tehran like it might take longer to set itself out. Some of the things people are starting to realize, this is not just a quick little leg round fight. Playgrounds, fight, there are some underlying issues here. When you look at the middle east, where do we include africa in that, to have a Bigger Picture . There are lots of things going on at the moment, in terms of opportunity. When of the places i was, i dont know how you place this as an investor, i was in kuwait last week and i am loving what is going on there. There is a bubbling up of opportunity in his this is, a lots of activity and hive of activity going on. It continues to be a standout. In the nonoil gdp, we have seen it go up, from strength to strength. People like to be bearish about it that in the gulf, as long as you have stable oil, not up, not down that stable, and i think we have been at around 45 to 55 a barrel, that is a good price. I was in south africa couple of weeks ago, there are some shoots of positivity coming out, despite the political noise, of activities going on in africa. Gonna come i mentioned earlier, nigeria, these are countries which a couple of years ago with Weak Oil Prices were in trouble. The reserves were down, but in ghana, the reserves are shooting up. We have political nuisance though, as you have seen, in pakistan as well. The risks oft of the emerging markets world, the Political Risks. Still ahead on the best of Bloomberg Markets middle east, potential gains for saudi and kuwaiti stocks from a footsie upgrade. Details next. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Ftse is expected to announce the results of its country classification review in november and there is a chance for an upgrade for kuwait and saudi arabia. We spoke to an equity strategist at the implications for markets. Guest from a macro perspective, 5 is a very low rate. I dont think it will have a huge impact on corporate. But i think what it says is that the uae will be the first mover among the gcc countries, and they are ready to go ahead. This puts the context of diversifying the revenue stream for the uae government. That is why the uae is one of our top macro picks. If you look at it relative to the other gcc countries, they seem to be doing more to counteract the oil prices. Yousef is this a source of concern . Because the economy is not moving as fast as a lot of people wouldve hoped . The equity market is already under pressure as one of the worst performers. We put it up on bloomberg as well to show us what has been happening. Btv 9109, showing you what has been happening in qatar and oman. They are not doing much better, as it stands. Is the vat going to hurt Consumer Confidence . Is it going to cut out quite a bit from the bottom line . I think it has a ready been expected in the news for a very long time. I think of these countries with lowered gdp per capita in the cases of oman and saudi arabia, for the expatriate population, i think it will have a bigger impact where the gdp in kuwait is on the highest in the world. I think the impact is going to vary from one country to another. With regards to the stock market, one thing to note is that for the gcc equities, they are very heavy on financials and real estate. In the case of the uae, it was clear that the vat would not be implemented on real estate transactions. So i think for the equities market it will not have a huge impact. Real estate dominates the gccs. Following on yousefs point, how about consumer plays . The only country where this is really the only two countries were consumer plays are relevant i think our saudi arabia and egypt. And egypt you had vat taxes for a very long time. Somenot think there are increases there, but i do not think they will be major evaluation is the big story. In the case of saudi arabia, you have a lot going on. The 5 vat may not be the most important news. Money coming in, lots of changes happening. Vat is a major step which will have to increase revenues, but i do not think it will have a huge impact on consumer companies. Coming up on the best of bloomberg middle east, the blockade of qatar continues. We will have more on their relationship with iran, next to red this is bloomberg. Yousef welcome back to the best of Bloomberg Markets, middle east. Im yousef gamal eldin. Qatar has decided to return its ambassador to iran. The nations standoff drags on. For more on the implications and the wider story we spoke to Senior Analyst graham griffin. This was an assertion they wont be dictated to by the countries boycotting it. At the same time i dont think we should read this as a strategic pivot. If you look at qatar as a broader interest, they are opposed to iran and other parts of the region. The us remains the main guarantor of qatars independence. I think especially with the Trump Administration in power qatar will be careful to avoid getting too close to the iranians. Is it more about signaling . Certainly. They want to say we are not just going to comply with your demands. Iran is an important neighbor. Qatars main economic asset. They have maintained good relations with iran. Iran can be a potential supplier of food items that previously qatar was bringing from saudi. Food is a basic need. They need to maintain ties 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 immediate economic benefits. Rather a larger realignment. I wanted to ask about another piece of qatari news. This talk of this qatari shake receiving a lot of praise and saudi arabia. He just started a twitter account. He has Something Like 300,000 followers. What is going on . What is the intention . It has been a Strange Development to watch. Hes a bit of a nobody, brother of a former ruler. Someone who was much younger than the brother in power. Its unclear what the saudis are getting at by promoting this guy. Maybe an attempt to play the game of promoting rival members of the royal family. I dont think its a serious bit at this point. The sudden appearance of this twitter account, over 200,000 followers in minutes, it speaks to a clear preplanned campaign and manipulation of social media, not just a spontaneous outpouring of support for this guy. 300,000 now. Its gone up. Elsewhere we had irans foreign minister saying last week and iranian diplomat might exchange visas. Is that a sign of rapprochement . I would not read it that way yet. We havent had confirmation from the saudi side that this would happen. 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 dont think we have seen any signs of lessening of tension between the two. I would be skeptical. What would be needed to begin sawing of relations . I dont know it is a concrete step. It is matter of time and the saudis to feel they have begun to push back against iranian influence. In iraq we see this new engagement. Again, i dont think that is going to lead to the saudi iraqi relationship. Its the beginning of a reengagement. 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 alltime low . We have seen some conflation flareup. The current scenario, is this the worst we have seen . We have had previous examples. After the iranian revolution, going back a ways, when the saudis felt threatened, they probably field less that way at this point though they do since a threat from iran. Certainly not a good period in relations. Given what is going on with qatar and syria, lebanon, iraq, it is one of the worst times. We had Jared 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 dont have the situation allows for progress to be made as long as netanyahu has little interest in a two state solution. In any regional conflict the u. S. Has incredible influence but often has trouble exercising it. We see with his visit to egypt, the u. S. Decided to withhold aid for human rights reasons and that led to a snubbing of kushner. The u. S. Often its partners in the region 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 saudis this needs to end is relatively limited. Yousef coming up, Tropical Storm harvey hits the heartland of the u. S. Energy sector. We have more on how the flooding could impact oil prices. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. In the record flooding that has crippled the heartland of the Energy Production is showing no signs of receding. Analysts say 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. We delayed 3 Million Barrels of shipment this week. We have the export delay. These are opposite forces. On the ground we have east texas production and refineries. On the other side we are losing production. What is important is the net of those forces together. What we lost 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 in 2004 that did major damage. Im 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. In terms of the flooding, the longterm damage, is that the thing we are going to have to worry about here . We have this shortterm output. About 429,00 barrels a day. Do we have to worry about longerterm damage . Yes. We have two issues. Power outages. Thats a big isues. 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. And to come back online. 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 ends 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. As expected. 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. Lowering utilization because of logistics. They are shutting down the houston channel. This is a terrible event from the perspective of damage, both economic and human. But in terms of opec, is this good news for opecs . Well, it could be a boon or a bane. If we have major damage to the refineries, production can recover. But if we have major damage to the refineries, that is going to reduce demand 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. However, it wasnt exactly what you would describe 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 then we are done. If we are not going to see that, at least once, aia is going to report on this on the impact of this hurricane. We have to wait more than 10 days to realize the impact on stocks. Yousef coming up, week oil prices are pushing countries to raise money from the debt market. But there is one holdup. We will tell you who that is, and why. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Gcc bonds have had a constructive first half despite a 50 fall in Oil 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 dont have domestic local debt capital markets. The governments need to raise money, which means local markets are not even started. The reliance on International Markets for debt funding is high. And have International Markets been helpful, 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. In terms of demand we did see a little bit of 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 changes, the money will ship to u. S. Bonds. The u. S. Dollar denominated bond market and the emerging markets space is correlated 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 threemonth paper to compensate for the risk of that technical default. Is the debt ceiling deadline something you are concerned about . The debt ceiling deadline is something we are looking at because it causes so much distraction. It is interesting for the data and other traders that want to make money, but for the longterm investors, it is any kind of strategy. Because the debt ceiling issue, the u. S. Government, as they risk making treasuries lest risky, it has multiple impacts on the system. It is in everybodys interest to make sure it in constructively. Whatever happens in between, we think it could end up in constructive territory. In that regard, yes it is a slope but we think any weakness may be a buying opportunity. Im sure many investors hope the Us Government 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 . I think gcc bond market is very highly coordinated to sentiment related to oil price. Absolute price and the direction, the sustainability is an issue. I guess, 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. In the last two or three months, we have had softness and muted new issuance. They were totally issued 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. Well be right here for the next week of trading in the middle east. This is bloomberg. 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 Koreas Nuclear threat. Brexit talks resume. These two sides are as far away as they have ever been. A gdp number of 3 . A jobs number that is still very good