A new excise on tobacco and soft drinks will start from october 1, the first in a series of reforms designed to make up for lost revenue from Lower Oil Prices. Saudi bonds make a splash. Bloombergs mideast finance reporter looked at what is driving demand for the kingdoms debt. Reporter demand is still pretty high from local investors. What we have seen in saudi arabia as a result of the spending cuts the government has done, demand in the private sector has dried up. Banks are looking for decent assets to buy. There is a lot of demand for these issues. If we compare it to last month around 58 there was billion rials on the table, this time it was just over 30. We are seeing demand is perhaps not as high as it was last month. We are starting to see interbank rates come up. What they were doing a year ago was sucking all of the liquidity out of the system. There is very little left for the private sector. Rishaad does this give us any clues about the governments demands when it to investors later this year . Reporter the saudis have said another international issuance is on the card for this year. If we look at the performance of the budget so far, theyve done very well at slashing spending, and very well at raising more money because of the higher oil prices, so this year theyve raised around 17 billion from international and local issuance. We will probably see some more local issuance this year. The question will be, do they come back to International Markets . Will they still need to . That will depend on how much progress they make on measures to stimulate the economy. Most of the money that has been raised so far really is just plugging the spending that has been going on, but nothing they but the thing they need to do is raise the money to do some stimulus measures. I think that will be the big determining factor as to whether we see them in the dollar market again. Guest they are going to start with the tobacco tax and soft drinks and energy drinks. Tobacco will be taxed at around 100 , while the coke is only going to be 50 . Tracy a little bit, but not too bad. David im worried about my red bull, though. Why have they waited so long to impose these taxes . Guest it is tricky for the uae, because the site country that for so long has managed to attract companies and individuals to come and live here with the promise of taxfree living. Companies could come here and base themselves in any of these zones where there are taxfree status for about 50 years. People dont pay income taxes. That attracted a lot of talent to this country and a lot of companies to come base themselves here. The government has been hesitant about coming up with too many taxes and losing that incentive for people to come. So far they are only talking about excise tax, a sin tax which may also include Luxury Products at some point. They are also talking about value added tax sometime next year. So far the government is saying we are not planning at all to tax income on individuals living here. Pledged open ended u. S. Support for afghanistan, saying a hasty withdrawal would leave a vacuum for terrorism. In a speech, trump announced a shift in his policy on the u. S. s longest running conflict. He stressed American Forces will stay in afghanistan for as long as it takes to bring the taliban to the negotiating table. Trump said when he became president he wanted to pull troops out, but changed his mind in order to ensure the u. S. Did not repeat the mistakes made in iraq. Rishaad bloomberg editor jodi schneider. Comments do support defense secretary James Mattiss plan to reduce the military by about 50 possibly. I think the number bandied around by everybody is 4000 troops. Reporter that seems to be taking a page from the defense secretary playbook. Secretary of state tillerson to beanted their advising and offering assistance to the afghani forces. That is the plan. It is actually not all that much of a change from the current policy. It is, however, a big change from the campaign trail when candidate trump came out and said we should get out of there. We spent way too much money. Even some of his more recent comments were supported by steve bannon, who has now left the white house. It seems that the forces within the cabinet have prevailed and won in terms of what the of wanting the president to take this kind of policy. Tracy remind us what the Current Situation is actually like in afghanistan. Reporter it is not a good situation right now. The defense secretary himself said we are not winning the war in afghanistan. The current government controls only about 60 of the country. Theres a lot of insurgents. As the president noted, theres a problem with insurgents coming from pakistan. It is a complicated situation that has bedeviled the other two president s. The u. S. Has been in afghanistan since after 9 11, both president s bush and obama had similar kinds of issues. This is a very tough situation there, and it has been increasingly up and down in recent months. Rishaad this is a wellworn path every year. Reporter the president in his beach speech on one hand backhanded compliment to them, but then said we have to do with insurgents. Pakistan is harboring the insurgents. He made that very clear. He also, in terms of discussing pakistan but also the larger afghanistan situation, said this is not a blank check. We are not going to be there forever. Tracy coming up, bank of America Merrill lynch gives us its outlook for gulf economies and tells us how fiscal reforms across the region could play out. This is bloomberg. Tracy welcome back to the best of Bloomberg Markets middle east. Countries across the region are implementing reforms to make up for falling oil revenue. We asked bank of America Merrill lynch how much the coming measures could boost arab gulf economies. Guest i think this has been a long time coming. There are some very encouraging reforms moving in the right direction. With the fall in oil price and the requirement to diversify the sources of income, we have necessarily seen governments introducing new measures in order to reduce their reliance on oil price, as well as looking at ways of increasing revenues from nonoil sources. A move away from subsidizing the market, a move to look at charging v. A. T. , etc. , theres many Different Things the governments are looking at now, which in our view is a step in the right direction and will help the economy survive post the oil age. Certainly was oil prices looking range bound now in the 45 to 55 range, i think these changes are necessary and incredibly encouraging to see them coming through. Tracy it feels like bank of america has been pretty bullish on the saudi diversification story. You had a note this week saying you thought saudis nonoil revenue could boost. Explain your thinking here. What i hear from other analysts is that we need to be patient. Guest 2018 you will see some exceptional changes coming through. For example, one of them is v. A. T. The second is a change which will see some levies imposed on expat workers in the country. You will also see the reduction of subsidies on the energy side, and they will look at making that up for lower income saudis by giving them benefit handouts and the like. Theres a multitude of new measures being introduced which will contribute in excess of 20 billion for next year. In the first half of this year, the government is doing better at keeping austerity measures in place. Certainly we saw the fiscal deficit coming in below what we were expecting for the first half, and now our economists believe the 7. 8 target for fiscal deficit 7. 8 of gdp that is seems to be achievable this year, and that is in stark contrast to around the 12 deficit we are forecasting. Things are looking much better than expected in the first half the numbers certainly talking there. With the changes coming, we have certainly a level of optimism that things are changing in the right direction and the saudi economy is moving beyond oil. It is going to take a long time for them to be a fairly diversified economy, but certainly they are moving in the right direction. David there has to be an equal and opposite effect when it comes to consumption. Like japan, for example, there was a front loading of spending when they put the sales tax in and then you had a massive drop the following year. Was the net effect of consumption you see from all of these tax increases in saudi . Guest we are looking at about a 5 v. A. T. Level being introduced. We dont foresee a Significant Impact in terms of consumption. We will of course probably some very heavy buying in q4, followed by little bit of easing in the first half of next year. We dont have an assessment of what that actual impact will be. We think the economy will absorb it pretty quickly. I think it is a measure of expectations really recalibrating. Once they do, i think you will see things normalizing again. Maybe a little bit of an impact in the first half, but it is not going to be significant. Tracy the iranian president has won approval for all but one member of his new cabinet, and is the scene as an overwhelming support for his agenda that has been criticized by some at home and threatened by an increasingly confrontational u. S. Bloombergs iran correspondent has more for us now. Walk us through how different this cabinet actually is from the one we saw during the first term. Reporter what is interesting is by and large, the cabinet, about half of it will be the same ministers as the first term. The reason for that, rouhani said he wants people that have been tried and tested. This was not the time for trial and error. Some of the key sanctions had been coming off of the back of the nuclear deal, and he said this is the time for iran to take the lead to go forward and make good use of this opportunity weve been given. For this, we need individuals who have shown what they could do. One of the key points in his cabinet is some of his allies, oil minister, the foreign minister who were key individuals in trying to attract investment into the country. The foreign minister was the person who met the crafting of a new model for an Energy Contract that would have more favorable terms for International Companies in order to attract more foreign investment. Some of these individuals, also the transportation minister who managed to reach multifigure dividend deals with boeing. He kept them in his cabinet and they got voted in. Tracy who is the one minister that didnt get back in . Guest the power minister. The reason why he didnt get in was he actually had been an Energy Minister before, in the late 1990s, early 2000s. He spoke before the parliament. He made the case for why he would be suited. Some of the mps that opposed him said he didnt come up with an Efficient Program regarding managing irans water scarcity and environmental problems. Tracy up next on the best of Bloomberg Markets middle east, why investors are banking on saudi arabias potential despite worrying about the wider economy. This is bloomberg. Tracy welcome back to the best of Bloomberg Markets middle east. Saudi arabias largest lender has become a favorite among analysts and investors. Several big brokerages have upgraded the stock to buy. More on what is driving the interest. Reporter it is quite meaningful for that market because we are talking about the stock with the biggest weight within the index. In the chart we see the price of the stock is getting closer to the target price that we have within the system for the analysts, the predictions come over specialists see the stock price within a year from now. Basically we see that there is a bullish sentiment regarding this. A lot of this is due to internal factors. There is a lot of expectation that the cost is going to be lower than initially expected. The scenario in saudi for bad loans is not nearly as bad as it could be, as people thought it would be a year ago or some time ago. There has been a repricing on the name. Also there is something else, it has become a big topic in saudi at this moment, which is the potential inclusion of the country to the emerging market index. Tracy i wanted to ask you about that because it feels like that is driving a lot of the sentiment. What stocks should be would watching best should we be what stocks should we be watching . Reporter automatically it would have a very big percentage of the index, considering the saudi names. We have a few other banking names in saudi. Ncb, a quite important a name within the saudi markets. Southern financial, a big bank in saudi. All of them would fall within the 10 biggest ways for saudi into the emerging markets. We should see a lot of activity. A few of the other names that can also be active because of the same reason is a huge name within saudi, not a bank, but a very important stock. If you look at saudi markets right now, you should be watching them. Guest certainly we think there will be a number of different technician measures considered, and we know largely from press reports and discussions that weve seen that corporate taxation and other forms of levees have been discussed. But certainly income tax is one of the ones we would expect the government will refrain from over the next four to five years. Beyond that, who knows . We dont think Income Taxation will be the first port of call. Never say never. Anything is possible, but for now we dont seem income tax see income tax being high on the agenda within the uae. I think those other forms of taxation that would come in before that. Tracy lets get to some of the stock market stories. You are one of the houses that upgraded Al Rajhi Bank last week. Im sure you are pleased with that call. How much further does the stock have to go from here . Guest i think what really whet peoples appetite was a number of factors. Secondquarter earnings for Al Rajhi Bank, very strong. The bank had a much lower cost of funding than expected in an environment where they were growing their deposit base quite sharply. Directionally able to reduce their interest expenses, which shows that in an environment where we still expect a number of rate hikes in the u. S. , and i will obviously impact Interest Rates in saudi arabia given the peg, we expect this will lead to expanding margins for the banks. From that perspective, we think earnings momentum is very strong for the bank, certainly in the second half and into 2018. Plus they have done a much better job in a managing the cost base, the provisioning they will probably need to do to account for bad debts is not as much as was initially expected, and as a result we think there is a strong outlook, and probably the street needs to think about upgrading their numbers further. Certainly we are above consensus now we look at our estimates. The street news to play a bit of we thinkthe street news to play a bit of catchup. That will provide some support. The last thing with Al Rajhi Bank is this is one of the most wellcapitalized banks in global emerging markets. Forget just within the region. We have thus seen them coming out with a massively increased dividend than the first half of 2017. From that perspective, this shows that the regulator is very comfortable, allowing them to pay for the dividends, and the bank is very comfortable with their position and outlook. David i just wanted to ask you about the stock divorced from the fundamental story and more to do with all the buying when it comes to expectations of an index inclusion here. Are funds already fully allocated as they can be to the stock, or do you expect more buying to continue regardless of what is happening with the business . Guest if we look at the spike in the shares in june, you saw all the gains that al rahji benefited from, once msci was included in the watchlist, while it is an undoubted catalyst for the shares, i wouldnt base a fundamental call on this. This is a nice to have for us. Fundamentally we think we think al rahjis earnings momentum is improving. I just refer back to the fact that after the watchlist gains, its gave all those games back. Tracy welcome back to the best of Bloomberg Markets middle east. Im tracy alloway. A dubaibased developer invest group is putting more than half 1 billion into the citys residential market. We spoke exclusively to the ceo about his plans and the challenges faced by the emirates real estate sector. Guest we have seen a lot of influx of investments right now in this part of the world, especially in dubai. Dubai has become a safe haven for a lot of investment, especially in real estate of in real estate development. Thats why we see a lot of funds coming from europe and the middle east where we have some trouble areas. I believe the market is here in this part of the world is very stable going forward. Tracy i want to dig into the dubai Property Market in just a little bit. Before i do, im curious, what other challenges you think might be affecting the gulf property sector . Guest pricing is becoming a big challenge. We have what we call the sustainable communities. Dubai is becoming big. Some cities in the middle east are becoming big. To commute from one place to another is becoming a hassle. That is why the trend today is to have a sustainable community. It doesnt have to be a gated community, but when you have the residential and amenity that comes with that residential component, i truly believe the trend in pricing is what we call also payment terms. A lot of people are calling for more aggressive payment terms, but that doesnt really it shouldnt happen at the cost of quality, because we believe in the product. If you perfect the process, i think the product will be great. That is why you dont be excited about having a good payment term and then get a shabby product. What is it . Guest i dont see a lot of foreigners leaving. We see a lot of people coming right now into this area. Dubai is becoming a safe haven for a lot of people. Not only investment. The employment market is up. I would say the competition. We still have ample space in the Real Estate Market in dubai. But the pricing, competition, and the cost of building is getting a little bit lower. Tracy ample space in dubai. Does that mean you see the prospect of expansion in dubai . Guest yeah. We will be hopefully launching a new project. I am supposed to announce this on your channel today. There will be a big tower that is going to be made of