Cash and saudi arabia tested the waters with its first u. S. Dollar. A year since the reveal we spoke to the man with a seat at the table of change. Here is our conversation with the stretching the strategy advisor. When we look at the shift that is happening in Economic Policy, it is huge, different from what we had gone through. We used to call the fiveyear plan. Today, we have the structure that was set out last year. We can see today, fully operational. That is pretty clear for us when we report to the different government bodies. There is one of the entities that is called the performance center. It is responsible for gathering the data of all the programs, the initiatives, and the progress of the projects going on. As we have all seen, there was the initial report of the program. Most of the initiatives have already kick started and have gone with 5 to 10 completion. In terms of the policy changes, in terms of the mechanisms that they are driving a lot of the processes, talking about what changed fundamentally. You have a good inside view into these different parts and what is a very complex machinery. What has changed fundamentally, what is fresh and what is new . The main thing changes his Economic Policy. You used to rely on subsidies and some sort of socialist economic policies. Now it is has gone away from that to apply some capitalist policies. It is more into the subsidies and the government spending, which was quite clear which was seen in the fiscal balance program. That was the most obvious one because that one that came out ready and part of the reforms that happened in 2015. There are more programs common in the coming in the pipeline similar to that at a strategy level and highlevel. It will take care of some parts of the economy, or some parts. A painful price being paid, the price of economic growth. As you go through this difficult transformation. We put this up on a chart. Green bars is your saudi real gdp growth quarter on quarter. It has come down. For reference, the Brent Crude Oil price in blue. The last print at 1. 19. For the fourth quarter. When will the recovery kick in . Difficult to pinpoint but when you expect an Inflection Point . And for the reforms to support more economic activity, rather than pulling the wind out of the sails . Everybody is hoping that the recovery will start very soon, in 2018. From this point and on, the numbers will get even worse. Especially this year. It is important that, if we look at the progress of the ntp program, you will see in the next few months and the end of the year, we will notice the new opportunities the transformation is creating. Through all of the pain the country has gone through, even different industries, we will see some of the industries emerging, including the housing, why, because the regulation is mostly set. The project, the second thing that will come out of this transition. Everything else, in terms of policy, regulation, will take a little bit a while, probably until 2020. Some of the pain will stay with us for a while. When i take a step back and look at this reform program, i cannot help but compare it to what we are seeing in china. We are used to seeing china and saudi, when there is a problem, they spend to solve the problem. We still see that with china now. In your case, do we see more restraint right now and are there checks and balances to make sure that they do not stand to solve problems spend to solve problems . I do not think we will see that kind of behavior again. If you look at the program, it has many reforms that give us a clear signal that it is not going to be happening like it used to be where the government would go on spending happy to solve the problems. The second, if we hear some of the officials official statements in the past few weeks, for example, two people made it clear that subsidies are not coming back. They will accept some of the companies to go bankrupt, or some of the businesses would fail during the transition. Because what they care about is developing the ecosystem, which is what we all of the parties worry about. As you go through the progress, what worries you the most, what is the biggest risk . Oil is always a risk for saudi arabia but what else is on your mind . Just the slow process for the ministry to understand the change in policy and go along with it quickly. That is the only thing i am concerned about. Hopefully, a few months ago, i was talking to you and working for one of the private sector companies. Now, all of the public entities and ministries are looking after candidates from the private sector to expedia transition. From what i see, the ministry of transport, not surprised by the end of the year, things will be picking up quick. Coming up, the oil markets as u. S. Supply search and saudi arabia hinted it would back an extension of africa. Welcome back to the best of Bloomberg Markets middle east. Oil gained on top the saudis for more on that, we spoke to our energy correspondent. Talking about geopolitical risk and we see that but with libby and saudi arabia, a comes down to fundamentals and that is less oil on the market. Libya having problems with the ports. As they get back up to 700,000 barrels a day, they come back down as the ports close and that brings oil off the market. Yesterday, we saw information that saudi arabia was pumping below 10 billion Barrels Per Day in march. That was from a person familiar with their data. That is lower than a lot of the observing agencies or putting them for march, less production than expected, most of us thought they were increasing slightly their production, even though they were below the opec limit. We got there were increasing slightly because they did not want to do all of the heavy lifting they did during the first two months. The data yesterday is contrary, the saudis are picking off the market. Should we put them together . The output level they did in january, the likelihood of the extension or the rolling over of the output cuts. Given the two, what is the likelihood we will see the cuts extended . We have the saudis seeming that they will back a cut for the second part of the year. They want to take some more inventories off of the market. If the cut is extended, that will continue cutting into exports. And taking some of the stockpiles up of the market which will have the impact towards the second half of the year. A lot of factors we see. A lot of sensitivity, the headlines in the market. When we see big numbers out of the u. S. In terms of, whether the stockpiles increasing, or production increasing from the u. S. We see the oil price reacting. We will see that dynamic continue. It is the effort of the saudis and their opec partners to try to counterbalance that by taking the oil off the market. As we have seen from some of the crude pricing, trying to do that smartly, where they can target some of the lighter crudes out of the u. S. And tailor their cut to stay competitive in the market while taking off some of the barrels that would fed west where we have a love the stockpiles. Back to syria, we spoke to the global head of Commodity Research at cit and asked citi and asked how the allout fallout of the strikes is affecting the oil market . As much bearishness as bullish news, on the bullish side, not much that can spill over into the oil arena. On the very side, given the parties involved, it gives rise to thinking about whether the russian government and the saudi government will civ see eye to eye about renewing the Oil Production cut next month. About the Saudi Arabians and russia aligning and now syria is in the middle. What probability the you put out on a deal being extended . And 80 probability. Their interest to keep prices up this year is greater than whatever other chess boards they are playing on. The price today is what the price was before the selloff in march. About the same price last september 28. Prices have been not willing to go up much about that but we will think they will go about that through the Second Quarter with refinery runs globally going up and with the real bike in the production cuts hitting the market. They did not hit the market in the first quarter, this is the time it takes to get oil from the middle east to east asia and the u. S. A call yesterday, the potential on the back half of the are for brett to hit in the 60s, if we do not get a deal, you have a much more bearish case. We do because we will have the compounding of the physical markets getting much looser in the Third Quarter and fourth quarter. We will have the Financial Markets getting more bearish, driving the price down. What is the price . Exhibit 45 without an agreement. We were just there a few weeks ago. We did not quite get there. It was have an impact around the world, even an impact on this current boom we are seeing in the u. S. Where at a minimum, 800,000 Barrels Per Day of Production Growth from the beginning to the end of 2017. Potentially more in 2018 which was slow down the momentum considerably on the u. S. Production side. We did not see that fall off. If shale has proven anything, they can still sustain 26 or 30, not for a long time, but they cant survive in an a lot better place than two years ago. Why do you think shale will be more sensitive to the downside . We have a 50 magic number to induce hedging and get producers to lock in. Producers were running off of a time of remarkable cost deflation and now cost reflation. Particularly on wealth inflation, pump costs are going up and send costs are going up. Labor costs are going up. Up next on the best of Bloomberg Markets middle east, market implications on the current geopolitical tensions. This is bloomberg. Hi yousef welcome back. Geopolitical tensions in syria and north korea have dominated headlines. We spoke to the head of the ficc about the impact on the markets. If you look at the region come asiapacific historically does not have a history of geopolitical risk. That has been consecrated in other parts of the world. We have had a limited history in korea. The best historical example of how markets could behave if the situations were to get worse. The real question is, coming at a time when volatility is very low. Markets are pricing a good outcome and in asia, focus on improving export data. The risk is what would a shortterm reaction look like and will it remain a shortterm reaction as has been the case historically during north korea and south korea tensions, or will the last longer . That is the reason why we have emphasized a balanced asset allocation, rather than one just pro risk. If it does extend, what is the first move . Volatility would come through. Regardless of which region, volatility looks very low. That is where you would expect to see the first reaction. How do you take advantage of that . Position for a jump in volatility, very hard to time. We are in the camp of investing from a longerterm perspective, which means you can use any kind of market pullback to buy assets, which we like longerterm. In asia, more domestically oriented equity markets. These kind of environments, good with the bad, we have been looking and bargainhunting, if we saw volatility spike. What form does bargainhunting come in . I have a chart, i am glad you brought up your preference for china. Everyone likes china. It is very expensive. On a current and projected pe basis, back to levels six years ago, seven years ago. Help square that for us. China equities come index levels, a diverse mix of industries. The first level would be to cut it down the center and say, lets take out the old china and focus more on what we call the new china, technology, consumer driven. And valuations are a bit on the elevated side that vibrations but evaluations spent time at average. We are more focused on which way earnings are going and that trend seems to be quite positive. You mentioned volatility, i put together a chart that says the g7 foreign currency volatility and cross it with yorkie merging market foreign currency volatility. Yes, it has been slumbering but it has been waking up. You can get a better idea. You see the upward slope . In terms of how to trade going forward, what are your top ideas . In the fx face, the top idea is to focus on, in asia, the japanese yen and the Singapore Dollar against the u. S. Dollar. A bit of u. S. Dollar trending sideways. April has historically been a weak month for the u. S. Dollar and we think that could play out against these pairs in the shortterm. We would see any move as an opportunity, particularly if volatility jumped. Usually riskier currencies like the Singapore Dollar weekends and the money flows to a combination of the japanese yen and the u. S. Dollar. That is the way we think about positioning it. Those fares offered good opportunities on their own in the coming weeks. Egypt has declared a state of emergency after to Church Bombing killed more than 40 people on sunday. Their president says the measures are to protect the country. We have issued a number of measures and on top of those is declaring a threemonth state of emergency after fulfilling the legal and constitutional measures needed. We are doing this only to protect our country. The attacks on the christian minority are the biggest since the president was elected in 2014. Strained efforts to stabilize the country and revive the economy. Lets get more on the story. This is a major setback for this government and comes just barely a few months after the last attack in december. We might as well as what is the president aiming to achieve from a state of emergency . At a minimum, appearing resolute in the face of the biggest terrorist attack under his watch. In effect, analysts say what can be achieved on the ground is different from now. If history tells us anything about militancy in egypt, defeating it takes several years. The threat now is whether this is a one off in mainland egypt outside sinai metalico. Outside sinai or are we going to see more attacks that were slacker like in cairo and the ones we saw yesterday which would indicate that the affiliate is increasing its presence and expanding beyond the confines of northern sinai. Then you can worry about targeting major forests tourist targets and the like. When it comes to future Economic Policy, we note that we know that the three months of emergencies being declared. What are the locations . The risks investors and analysts will watch this, does Economic Policy take a backseat . Egypt signed a probably another imf Loan Agreement and there are measures that should be taken under this. They have devalue the pound and raised your prices but more decisions that should be taken. Having this, these attacks, while egyptians are suffering from 33 inflation, the risk is will the government think, lets delay these decisions or cap reforms top reforms tough reforms . If you look at the president in terms of state of emergencys , it does not go down well with foreign capital. What is at stake in terms of egypt economic recovery story in the shortterm . Egypt is reaping the early gains from the imf. Foreign inflows in equities. Foreigners buying debt. The next stage should be fid, m na, if you are watching from the outside, should i approach the country or not . One of the key indicators to start with, it is monday, foreigners are back in the stock market, will they be net buyers or sellers . On the economy side, there is an imf program and things are ok, is it ok to invest . Will foreigners participate this week in local currency debt auctions . That would give us an indication on were sentiment is. And take it from there. Next, it has been a busy year so far or bond sales in the gulf yousef welcome back to the best of Bloomberg Markets middle east. We had two more gulf bond sales hitting the market. We had the abu dhabi sovereign wealth firm seeking 1. 5 billion since merging with itic. Saudi arabia sold their first dollardenominated islamic bond. More from abu dhabi. The bonds. Art with those are coming in a sevenyear and 12year trend. Price guidance tightened reasonably significantly down 15basis points. The order books tells you about demand. 4. 5 billion of orders for a 1. 5 billion bond. Turning to the saudi sukuk, that is a special case. It will be saudi arabias first ever dollardenominated sukuk. There is some talk it could wind up being a jumbo issuance of as much as 10 million. So far, it is about 20 basis points wider than comparable issues last year. Investors demanding a premium for that. One more thing i have to point out on the saudi sukuk that is interesting, there is a disclosure in the perspective saying it will comply with u. S. Risk retention rules for securitizations. Another quirk that might end up knocking demand a little bit. We know a lot of these bond issuances we have seen is a plug deficit in a lot of these countries. What other benefits are there from bond sales . Everyone focuses on the deficit, a big issue, but this is a change for gulf markets. This is a sea change for gulf markets in a number of ways, and one of them is that the big buyers in domestic bond sales used to be local banks. Now we have a liquidity crunch in the region. Foreign gulf governments do not want to suck up liquidity from domestic markets. Instead we see them tapping foreign capital. That has culminated in if you look, for entrance, for instance, at cyborg, its at a level that indicates intrabank borrowing costs coming down. We have seen 27 billion worth 72 billion worth of issuance last year. This quarter we have seen 27 , billion worth of issuance in the first quarter. Now that we have the saudi coming on stream, we expect more coming on stream. We could beat last years record. We have more. We just heard from tracy. Some of the stories showing what is going around. We put this on a chart in terms of this spread between gcc bonds and treasuries. This is the jpmorgan index. Pull it down in your bloomberg. I have highlighted with a red arrow what happened last time the bond sales picked up. You saw tightening of the spread. Look at what is happening. The last three months, you are seeing what could be interpreted as a reversal of the trend. Where is this line going to go, and how confident are you the sovereigns will come to the market with a big appetite . The key story is the development of the regional capital markets. Three years ago, i wrote that sovereigns should be using more of the bond and sukuk market. The use of the market has been underdeveloped. If you look at the debt to gdp, it has been historically low. Now that oil prices have stabilized, i woul