Transcripts For BLOOMBERG Best Of Bloomberg Markets Middle East 20171007

Some in his administration disagree. Our executive editor joins us about what to expect from the saudi kings visit to moscow. It shows the extent to which russia has succeeded in inserting itself in the middle east. Also, a much broader role in building relationships with the saudis. For the saudis, it is crucial. They are seeing the russians as a diversification effort, not the full reliance on u. S. Power. No one is saying the relationship with the u. S. Is bad, but they are looking for other allies, other relationships to build to protect their own interests. Yousef weve seen big energy deals coming out of this. Can we expect tangible results in terms of Foreign Policy . Will they have measured results in key areas . Syria is the big one. I think what they are looking for from the russians on that is help limiting iranian power. I dont think the saudis are expecting the russians will suddenly come out and say they support the saudi line on this and do everything we can to limit iranian power in syria, however, they are hoping to convince russians there are other interests in syria and other interest for russia, and to not put all of their eggs into the iranian basket. Lets continue the conversation on oil and bring in head of Asia Research at a bank in singapore. It is interesting putin suggested he could be open to the opec cut. Then we heard from the opec secretary general, he suggested everything is fine, so what is everybody worried about, the equilibrium price is in sight. Who is right . I think they are both right in the sense that the Oil Prices Trading partially as if the production cuts could be extended. It is factoring in the possibility of it happening. Whether they will or wont, well have to wait and see. I think it is trading accurately where it should be, u. S. Production recovering from a hurricane. The only other thing i would say is the numbers we are getting from, i would say every economy in the world, have been beating expectations for all of the highfrequency data coming out. Japan, the pmi and china, the pmi in u. S. And europe. Global growth will probably be faster than what we expect. Therefore, you could extrapolate demand for oil would be higher, as well. Yousef the iea cannot with comments saying the recent price gains are no reason to celebrate yet feared they are keeping a close eye on what is happening with the Iranian Nuclear deal and venezuela. How much risk would you factor in . Mark it looks to me like the geopolitics are taking a backseat around the world. We have not heard about north korea in a while. Also, the defense secretary, general mattis, said yesterday that as long as the iranians continue to abide by their side of the deal, i dont see why we can continue it. Yousef coming up, governments in the region are trying to cut costs without upsetting social unrest. The latest balancing act. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Oman has pledged to create 25,000 Public Sector jobs, but it risks adding to a budget deficit that was the gulfs widest last year. Take a listen. Oman like most other countries in the gcc relies on revenue. The drop in oil prices, the budget deficit has widened. The budget for 2017 was based on relatively conservative assumptions of oh prices, 45 of oil prices, 45 per barrel. This leaves some room to maneuver in the budget. This announcement of 25,000 people has to be put in context. There are people, servants that retire over time. These new ones will have to fill the positions of the retirees. Plus, you might need to open a number of new functions of the government. The population is increasing. The recent element of organic growth that has to be factored in. Yousef i look at how the Oman Stock Exchange has performed, far this year. One of the worst performing indices in this part of the world. Lets take a closer look at a technical level on the bloomberg. G btv 5124. Relative strength for dubai, saudi arabia and oman. I radically, oman and 71, indicating this exchange, these stocks could be overbought. What will be the next catalyst for oman . It is muddling through right now. The next catalyst is oil price. There are some distinct developments. There are a number of Large Infrastructure Projects that are coming to fruition. A recent one is the new airport that will be opening in the next few months. There is the highway to dubai that is being completed. There is a new development in terms of interest by china in the omani is a structure, especially a huge project that has been going on for several years. It is a 2000 square kilometer freezone with a port that is already built, which is being improved in terms of infrastructure. China has 10 billion on these projects over a few years. I think this could be a catalyst for chinese and Asian Companies to look at oman as a logistics hub. We have other areas growing in the indian ocean, so this could add to the infrastructure capacity. Tell me more about the relationship between oman and china. There is that dependency that starts to grow, the catalyst for growth in a region that needs it in terms of oman. When it comes to the geopolitical relationship, do you think that is growing, and how tight is oman with china these days . Fabio oman, the easterly relationship between oman and china is not very long, so now it is being developed and involves the economic sphere. Looking at broad geopolitical issues, what i would say is this. The history of the second part of the 20th century, the economic history, hinged on the immigration of the european and american economies, with japan and australia as a sort of sideshow. The history of the 21st century will hinge on the integration of china, india and africa. Because these are the areas of the world which will drive growth throughout this century, and oman has a very favorable geopolitical position because it has always been sort of a neutral country, but also has a very important and strategic geographical position because it is in the middle of the integration process. That is what i think has caused the attention of chinas authorities and chinese firms. Yousef up next, kuwait makes it onto the ftse russell emergingmarket index. Saudi arabia did not make the cut. We look at how kuwait did it, just ahead. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Ftse russell has refrained from adding saudi arabia to its emergingmarket index. Neighbor kuwait did make it. They have both made several steps over the past few years. We talked about more on how kuwait managed to do it. Obviously this is a very important decision for kuwait. It validates the efforts and the long planning that was put together by the cma in kuwait, and implemented by a dedicated team that has worked hard for the last 2. 5 years between the cma in kuwait and kuwait. Weve seen estimates for the amount of the inflow this is excited to drink, around 600 generate,cted to around 600 million to 822 million, and expected waiting of about 0. 5 . How much are you forecasting in terms of inflows and where you think your weighting will come in . I think it is premature to discuss figures or percentages, as obviously terms of the percentage weighted, this is more of the technical permission will come through in march of 2018. However, i think from several meetings weve had from International Investors, whether in kuwait or abroad, we sensed there was a great interest in the market. Obviously a lot of the infrastructure issues needed to be addressed before International Investors can feel comfortable and confident in entering the market. These are the steps we have taken so far. So i think there will be a tremendous interest coming through, whether from index trackers, the ftse itself, or others who have been looking at important changes in the Capital Markets in kuwait. Tracy im going to ask you about those capital reforms, but before that, setting aside ftse, we have another decision, another potential decision from another benchmark index provider. That is msci. When do you think you might see msci inclusion . We honestly has been engaged in dialogue with all index providers, whether it is ftse, msci or dow jones. We supply them information on the steps we take on the ground. Obviously they have their own channels to go back to in terms of investors and markets to get feedback. S p, dow jones put us on the watchlist for a potential upgrade in 2018 earlier this june. The dialogue with msci is continuing. Tracy you mentioned reforms you have been undertaking to your Capital Markets to make them more attractive for investors. What else do you have up your sleeve . Is there more to do on that front . Oh yes. We have together a threepage plan for infrastructure reforms, for the markets, and what weve done thus far is the first phase, which came lives in this in may of this year. That allows us to satisfy all the requirements for the ftse upgrade. Some of those identified supplement types, Corporate Tax reductions, so on. We still have for our plan, to finish two more pages. That is to come online in 2018, it will include significant changes to the market itself, the exchange. There will be a fragmentation of the market to three different segments premier, standard and auction. There will be an introduction of repos. Those will all come into effect in the second phase of implementation. The final phase really tackles upgrading the structure to standard by the principles that by the bank of international settlement. Also, basically establishing a Central Clearing party, as ccp, for cash and derivatives, as well as introduction of standard derivatives. That is expected to come in hopefully by the end of 2018, early 2019. Tracy a happy man is the Kuwait Capital Market Authority vicechairman. Thank you for joining us. Lets get more perspective on that story with our equity strategist. She joins me on set here in dubai. One of those inflow estimates, i think it was 822 million, that was yours . Did you hear anything that changed your mind . It was pretty straightforward. We have a set of liquidity by 50 for stocks to join the benchmark, we estimate the flow. Our estimate could be on the conservative side appeared there could be some upside if we see strong Price Performance from kuwaiti stocks and lucrative the continues to remain the high. You can see more names making the ftse cut. I think it is a bit conservative. Tracy kuwaiti stocks have been stellar outperformance in recent months. I want to bring up a chart here. I grabbed some recent indexes and benchmark of great. I think the msci is an purple, the ftse is in pink. They tend to coincide with peaks in the market. This is qatar getting upgraded by the ftse russell, and this is msci upgrading. As a mean the kuwait index will have to fall from here . The peak in the qatar index and pakistan was and limitation. We are talking for the kuwaiti market technically speaking to be september, 2018. Which is why we expect to see Strong Performance from the kuwaiti market. The ftse is important from passive inflows perspective, but bear in mind there are a lot of frontier managers that track the frontier, and that is 20 of the weight. Tracy ive heard a lot of complaints about overweighting kuwait. They have to close a bit if they are underweight. So the kuwaiti market can outperform the index. I think it creates a headache for managers, maybe they have left some allocations pakistan, left to upgrade. Tracy before you move on to the broader saudi picture, i want to go back to the ftse russell decision. This is part of the transformation of saudi arabia, opening up Capital Markets to foreign investors. How big of a setback is the decision to leave them out of this particular upgrade . I think it will have some potentially downgrade today and this week, but it will not last very long. First of all, the liquid coming out of ftse was not like they delayed the decision, they were kind of confident saudi arabia would meet the requirements through early 2018. We think it can be easily solved, the saudi authorities continue to work with them as providers and investors in order to address concerns. Just because saudi is such a major inclusion, i think index providers cannot afford to included in the benchmark without being 100 comfortable with the trade balloting. Tracy it is a huge market. It is leapfrogging frontier not even frontier. Lets pivot to the saudi economic story. We saw the decline in gdp. Is a recession for the full year a given . We are getting close, but you have to bear in mind a lot of it is driven by the fact that there have been output cuts on the oil side. Oil gdp is contracting sharply because of cuts. There is very little capitalist spending going on in saudi arabia at the moment, which explains why the gdp is contracting. I would not say it was a big surprise, but not a positive reading at this stage. There are other positive developments going on in the kingdom, as well. Tracy as an equity strategist, how do you play this story, this transformation story . I saw some of the saudi insurance stocks jumped strongly off of the news of women being allowed to drive. Are there other plays in the shortterm . In the shortterm, probably not. I think it is too early, we have to wait and see what happens. Medium and longterm, the decision for allowing women to drop will be positive. Women in the labor force is low. As we see Women Joining the labor force and saudi arabia, it will be good for disposable income for saudi at least, good for overall spending and consumption, which will be positive for the economy. More demand in the economy and probably a pickup in the economy. That is not a shortterm story. It takes time. Tracy for now, where does saudi rank in your list of mina investments . We are underweight in saudi, overweight in egypt. I think there are selective stocks in saudi arabia we would advise investing in. Some of the banks are selectively looking at, the Dividend Rate is quite high. Some health care names, health care insurers. In addition to supermarkets. There are selective names in saudi arabia that continue to do well in our view, but they are very selective. Yousef next, how Lower Energy Prices have weighed on growth and what countries are doing about it. That is ahead. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Lower Energy Prices weighed on growth across the gulf in the three months through june. Saudi arabia contracted an annual rate of 1 . Qatar, which has been cut off by the saudiled blocks since june, saw gdp grow 0. 6 year on year, compared with 2. 5 in the first quarter. Our government reporter has more. The similarities are not huge. Qatar is a small country, saudi arabias much bigger, over 30 million people. Saudi arabia is much more dependent on oil, qatar is the biggest exporter of lng. You can see low oil prices are in fact inflicting a lot of pain across the region. Even qatar, which was really a huge amount of infrastructure and still building it to host the world cup, a lot of growth was generated from that, data from the Second Quarter yesterday showed us that basically even they were feeling the pain. That was before their neighbors led this boycott of the economy, where they severed diplomatic and transport links. That is inflicting a lot of pain on them. Tracy lets take a look at saudi arabias economy. It has not contracted for two consecutive quarters since at least 2010. For seeing the effects right now of what the government is doing there, the spending cuts, consumer demand, how is that playing out . Certainly it is not playing out the way they hoped it would sometimes you may never know how these things will play out. They are kind of overhauling the entire economy and move it away from Oil Dependency into growing the private sector. The problem, the private sector is not growing as they wanted it to and economists are calling what we are seeing stagnation. They have a big unemployment problem they need to tackle first. For that, they need to create jobs, mostly by the private sector, that is not happening. Economists are expecting next quarter we will see quite a bit of no growth, pretty much. On the qatari side, we are seeing a situation that will probably be exacerbated by the boycott that the rest of the gulf is forcing on them. Tracy we will get you back and when we have the next quarters data for sure. First, lets hop over a couple of oceans and seas, investors in u. S. Credit markets have been piling on the risk in search of higher returns and showing they are not going to roll over completely. At least for deals over the past week, Money Managers have said enough. Where are we exactly in the credit cycle . Lets ask the ceo of arena management. He is joining us live from abu dhabi. It is great to have you on the program. I guess i gave away my first question. This is the question, the answer Everyone Wants know, where are we in the credit cycle . Dan i think, first of all thanks for having me, i appreciate being able to attend here in abu dhabi. With regard to the Global Markets and developed markets, we think it is very late in the cycle. We are not macro investors, that across different collateral types, corporate, mortgages, abs, etc. , we are seeing very tight spreads in liquid markets and many illiquid markets, negotiated markets away from securities and Capital Markets. Ultimately, the fundamentals point, more downside than upside. Tracy i prepped a chart that shows spreads on the work barclays highyield index, you cant see a from abu dhabi but i think you know what it shows. We are getting close to touching the post crisis low we saw in 2014. We are not that far off from even the precrisis low. Does u. S. Credit at these kind of spreads make sense to you . Dan we are as tight as we have been in the last 12 five years. You go back to what happened in 1994, 1998. We are very tight on absolute spread levels but the underlying transactions that are building that spreads, making the spreads are increasingly overleveraged, to longer duration, and generally too stretched. The spreads tell a story, but i think in the story is not as drastically told as when you look underneath the hood and at the underlying credits. Angie you have hinted at the space that is kind of hidden for investors. We have to pick of private equity as putting private money to work, and investors can play off of that. Talk about private credit here, and what benefits can investors as well, companies in the middle east, can benefit from. Dan i think private credit is somewhat extended if you look at. All a lot of people were for two private credit when they are talking about the market Corporate Lending of various sorts, opposed to the Broader Market that covers many types away from corporate. You combined the availability of private Corporate Credit with the two have trillion dollars of private equity capital, it makes for difficult environment. In the u. S. , europe or the middle east, i would be very aggressively looking to basically sell everything that is not nailed down. Whether that means a selling equity or issuing debt securities, it is a very easy market relatively speaking if you have a quality enterprise. I think the real opportunities on the investor side are away from the middle market space, in more structured finance as is, real estate assets, other things that were much more occupied by the banks and much more abandoned by them. Angie i have to ask you about shadow banking. Especially in the shadow of china right now. A lot of concern about shadow banking and pl, with the debt market looks like, if it is a huge bubble getting ready to burst. Can china handle it . Dan i think we will be the last to know when that happens. The last time there was a large buildup of ntls, was caught out by a number of market observers. At the end of the day, they ended up avoiding large scale asset skills at the company subsequently listed. In our business, our prior business, we created one of the initial npl services, it can be lucrative and interesting. The system of records in foreclosure and china is very much in its infancy. The notion that those loans will ultimately be resolved in the way they have been in some other developed markets i think is in question. In all likelihood, it will be something that mirrors the relative successful process they went through before in the creation of Asset Management companies to effectively move those loans off the Balance Sheet of the country. I think we will see something along those lines. Tracy and you pivoted to something angie is very interested in given her region. I will pivot to something we care a lot about here in the middle east. Lets talk about energy, specifically the u. S. Shale players. There is an argument that the shale story has also been a Capital Market story in that you have had a lot of easy financing available to those companies to keep them going. What is the financing environment able for u. S. Shale players right now . Dan whenever you have an energy crisis, obviously oil and gas go down drastically as they did, 1824 months ago, you see who is caught out in terms of over providing, the over providing leverage to the energy world. I think there has been, there is so much capital out there you are seeing a lot of people regain access to the Capital Market, even the world where the prices have rebounded. Weve spent a lot of time in direct access to loans to oil and Gas Companies that have suffered as a result of the prior collapse of prices. Given the buoyancy, people are we setting for prices going for it in resetting Capital Structures based on that. Given the ease with which middle Market Companies have been able to borrow in highyield markets, i think they are getting much more of a active, more active than the would be even the troubled industry recently had as a result of the price to climb. Yousef coming up on the best of Bloomberg Markets middle east, a forecast for a decline in u. S. Stockpile lends some support to crude prices. We will look at the strength of that sector. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Oils bull rally stumbled last month as opec members pumped more crude. Also, u. S. Explorers are back in the game. Our Energy Reporter has more. Anthony we are at a higher range now, perhaps that is something to get used to. We see these bounces and falls in crude. We were down to below the 30s not so long ago in a lot of memories of the Oil Executives and ministers over here. I think the companies have been saying since the drop have started, since we came down from those 100, 100plus levels, they had to get ready and get businesses ready to be able to be profitable and continue to invest at lower levels. I think they will still be doing that. If they prepare themselves for 50 oil and they are getting 55 or 60 oil, that is more cash to shareholders, more to investment makers. We are coming from a period where we had several years of little or no investment or money being pulled out, it will have an impact. A lot of the same executives are saying with the end of this decade from these projects that shouldve of taken place before did not, there will be more oil in the market. They will be playing catchup in the market. This is a market that moves, a lot of different moving parts. We saw some of a positive for the oil price push over the kurdish referendum last week. That would likely not last, assuming people will find a diplomatic solution to the issue. Of course, if oil gets taking off the market, we will see it coming back up again. Assuming there is going to be depomed exhibition, this is more of a bargaining chip, we should see markets continuing to be supplied as they are now. Tracy talk to me about positioning. I built you this chart just for you. You can pull it up on the bloomberg, 9563. It shows the cftc net long positioning data for brent and wti. Brent in particular is at a record long position. What is going on here, are all these oil bulls because offside is indeed this turns out to be a shortterm supply gap as ed morse put it . Anthony forcing more link in the market as people get in and vy for the higher scenario. We have also heard about the saudi minister speaking to hedge funds and talking about what their plans are. Maybe they are buying into that story, that opec have been saying for four months now, they were seeing 60 oil by the end of the year. Your close to that now, the do fear. As i said, some of the geopolitical things in this region are temporary. One would hope, in terms of stability of the region. It at the same time, we are also hearing about this length, about opec and the iea talking about better demand forecast the may have been talking about before. We are also seeing opec saying some of these stockpiles are coming down closer to fiveyear averages, which is what they were aiming at. And these are issues that are more to the fundamentals, so longerterm demand and that lessening overhang of the stockpile. These are fundamental changes to the fundamentals of the market. That may be what is impacting this kind of longer few that shows a little bit of length. Again, the market is fickle, it will move up and down as people see these things. We will see what happens as we go towards the end of the year. Tracy hold that thought, i want to bring in our guest, morten frisch. To anthonys point about these projects that have been delayed because of oil prices, if you have this oil price recovery, what are the chances you see income is ramping up production the way they have historically . Morten it has already started. Even with the dip in prices last summer. What you are now seeing, as the curves showed, the wti is going very long and also brent is starting to pick up. It means the companies on both sides of the atlantic are now hedging for the future. They dont believe prices will go to 60. If it goes to 60, it will not stay there very long. Two or three months at the most, i think, because if this happens, what we will see in the United States is that the shale producers will come in with high volumes of new production, they will even start them converting, the drilled and completed wells in field areas around the United States. What we see is that the prices we saw here on this program year ago may been between 45 and 50 per barrel. Apparently we are in a high position, this is partly forced by americans in the United States, are not yet adjusted to that. What would happen there. Refineries are coming on screen, reductions coming back on screen. The u. S. , for example, exporting more than 200,000 barrels to china. These people have taken it up instead. People in angola, they drove up the brent price. Harold hamm addresses, he criticized the energy administration. Tracy this was a bloomberg interview. Morten yes, he said these people, they are really driving down the price. Theyre not being americans. I disagree with him. You will remember he made a big mistake in november 2014, then he sold all of the hedge positions of the company he ran, continental resources, he got in excess of 400 million for them. That was a very expensive and. That was a very expensive and i think that the u. S. Department of energy, the adjusted numbers are solid numbers. The main problem in texas is probably bottlenecks in midstream, facilities come up for example. That could hold that production by 3000 barrels per day. Yousef coming up next, saudi arabia is ushering in social reform that could face resistance in certain sections of society. We will take a closer look at those next. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. Saudi arabias economy contracted for the Second Quarter in a row as the kingdom grapples with low oil prices. They are also struggling to cope with Economic Reforms underway. The Saudi Administration may face more testing times as they push reforms on the social front, as well. Our team leader joins us for more on whether moves like allowing women to drive will face resistance. Alaa they are linking both. There is a crackdown on dissent, and the justification is according to analysts, to push these controversial reforms without much opposition. Especially, before the current administration, the saudi ruling system was based on a consensus among senior princes, and with the clerical establishment. Now some of these senior princes have been sidelined so that these reforms can go ahead. Obviously what could be risky here is basically doing away with the alliance between the ruling family and the clerical establishment and relying on the Wider Population for support. I say risky because we dont know how it will pan out. Tracy there is a really great bloomberg story right now, it plays on the old Silicon Valley model of move fast and break things. We know that the crown prince has invested in a lot of Silicon Valley tech startups. Does that motto, that way of doing things, actually work for a society like saudi arabia . Alaa he sees himself as an embodiment or representative of the young generation. He was namechecking people like mark zuckerberg. They are contemporaries. He is 32yearsold. There is a bet here on the young generation of internet savvy, tech savvy people and entrepreneurs that want change in saudi arabia. So he can push for that. Obviously, people are monitoring signs for backlash, as you cannot just silence 100 of the opposition. Yousef that is it for the best of Bloomberg Markets middle east. We have a busy week ahead. Im yousef gamal eldin. Join me then. This is bloomberg. Coming up on bloomberg best, the stories that shaped the week in business around the world. Violence in las vegas. The u. S. Response to tragedy. It was an act of pure evil. Conflict in catalonia. Spain struggles for unity. 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