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 a grand four plus 39. Estimated cost of building is over 600 million. We have an estimation of investing in the dubai market between now and the end of 2018 of up to 2 billion dirham. Tracy how are you raising that sort of money . Guest my group is an assessor company. We sustain our financial capability. We dont go into make a project we cannot handle. We just get the money from projects and reinvest them in new projects. We really believe in the market of dubai. That is why we have a major part of our investment in this market. Tracy 2 billion dirhams is a significant sum of money. Walk us through where and how you plan to deploy that. Guest we believe that the approach for 2020 is approaching, as a matter of fact. That makes the market under the eyes of the world. This has pushed our company to look for another investment in the area. That is why we have chosen certain locations here in dubai. We have chosen jlt, a very family oriented area with a lot of parks and lakes, and we have the business area where a lot of young hundred ignores are living and would like to be young entrepreneurs are living. Tracy coming up, qatar restores diplomatic relations with iran. Are the saudis also looking to mend ties with tehran . This is bloomberg. Welcome back to the best of Bloomberg Markets middle east. Gulf tensions took another dramatic turn this week after qatar announced full announced the resumption of full diplomatic relations with iran. The new gulf crisis has seen saudi demand qatar and all ties with iran and relations between iran and saudi arabia may also be improving after tehran said the two were discussing an exchange of diplomats that could come in september. We spoke to the oma investment fund. Guest we have to take a step back and look at what has happened since 2011 and that arab spring. We are closing that cycle. The arab spring changed the government and sometimes hopes of a better politics and economics better politics and a better politics and economics in the region. It is essentially over. In that season, many of the countries in the region, and certainly the main regional powers, have tried to take advantage of the situation, supporting various groups that we are fighting for power. Now situation is stabilizing. So this detente between saudi arabia and iran comes as a result of the closing of this season. We are going to see a more peaceful attitude. On what can happen in palestine, i am less optimistic. I dont think that unless the u. S. Has a real diplomatic weight behind its initiative, i dont think we can see any progress. Shery lets talk about what they did in egypt. They are now withholding almost 300 million of military and economic aid over human rights issues. How big an issue will that be for the egyptian economy . Guest the egyptian economy is always fragile. Theyve been relying on aid and support from various parts of the world the u. S. , saudi arabia, and gulf monarchies in particular. Any threat of withdrawing an amount of money is certainly not a welcome development. The issue of civil rights and Political Freedom is a hotspot in egypt because there has been this incident with an italian student found dead in mysterious circumstances, to put it mildly. There is pressure on the Egyptian Government to have more liberal attitudes on these issues. Tracy you can look at the truck behind me and see some nervousness is really starting feed into credit default swaps on u. S. Government debt. I doubt anyone really expects the u. S. Government to default, but a little bit of nervousness. I put the bloomberg u. S. Financials index down there because we used to say that these two were pretty late, but were pretty much linked, but it seems like they are diverging slightly. From a emerging market or regional perspective, how significant is what is going on in the u. S. Debt ceiling debate . Guest the debate is different from the others we have seen in the past, because in the past, it was the congress that used the debt ceiling as a threat against the president. Now it is the president using that threat against congress. Tracy against his own party. Guest his own party, but it is an empty threat. In budgetary matters, the bucks doesnt stop at the president s desk. It stops with the congress. There is a reason why it is called the executive branch. Because they execute what the legislative branch decides. It is, in a sense, much less worrisome than what happened in the past. Certainly some nervousness will be present in the market, but ultimately this is not going to go anywhere. Shery there is, as you mentioned, some nervousness in the market. It seems as though there is a new positioning, especially when it comes to the euro and dollar. This chart on the bloomberg, 2491, showing you the position of Hedge Funds Holding the largest net loan positions on the euro and the largest net short on the dollar in four years. Last week, we saw that retreat a little bit. Depending on what comes out of jackson hole, where do you expect the eurodollar to go from here, given these changing scenarios of tightening in europe and the u. S. . Guest this positioning is counterintuitive, because what we are expecting in terms of Monetary Policy is a tightening in the u. S. We see euro lagging behind the u. S. In terms of monetary tightening. Yet, the dollar is weakening. So this conundrum has caught the attention of the governing council. What i expect is not a fundamental change or a big signaling from mario draghi on these matters because he has to sing from the script written by the governing council. He cannot buy his own initiative change course. He will probably be more specific, add some comments on what is meant by the governing council, and he will try to contain this nervousness on foreign currency markets that have been fueled by the media. Tracy competition heating up in the private jet charter space, and the arab gulf is one of the drivers of growth. Just ahead, we asked the founder and chairman how they are taking on rivals. This is bloomberg. Tracy welcome back to the best of Bloomberg Markets middle east. Private jet company vistajet was founded 13 years ago with just three planes. Now it is valued at more than 2. 5 million. Here is our interview with the founder and chairman. Guest the starting capital was me. I saw an opportunity to build a private jet company and a global fleet of aircraft around the world. The company grew out of its own cash flow generation. With this announcement, it is really the first time we have a marker into place in terms of valuation of a private jet company. Tracy we love announcements. Walk us through what you are announcing. That we are announcing weve had investment of 200 million in the company at a valuation of 2. 65 billion. That makes us a clear Industry Leader around the world. We are very proud of that achievement. It is a confirmation of our strategy. Everything weve done over the last five years or so in terms of Global Expansion was the right strategy. David i want to get a rough idea of what you plan to do with that money. Guest it goes as cash on the Balance Sheet, so we are strengthening the Balance Sheet. What we see over the years to come is consolidation in the marketplace. I think we are extremely wellpositioned. As you know, we have industryleading technology infrastructure. We own all our aircrafts and can give our clients exactly what they want anywhere in the world, anytime. I think those opportunities will be a focus over the years to come. David im glad you brought it up, because a common practice in your part of the industry is that players dont usually on dont usually own the aircraft. You do. The downside to that is these assets would be on your Balance Sheet and you have to recognize depreciation. What is the wisdom and handling your own aircraft, and what is that risk to your income . Guest the real opportunity in this business which i saw was to build a global brand and offer an alternative to ownership. Theres fractional and full ownership of aircraft, and plans and clients and corporations are just tired. They can never be as efficient as some who by 72 as somebody who buys 72 aircraft and manages that fleet 24 7, 365 days a year. We can control the quality. Our clients are the smartest and most wealthy people around the world. Everything they do is they like brands. We are offering this everywhere around the globe. Tracy talk to us about your clients in the middle east. You are obviously in dubai as a region. You are viewing it as a growth market, but a lot of people would say in the face of Lower Oil Prices that demand for private plane travel might be waning. Guest demand in the middle east is great. It was really after europe in the mid2000s. What we see is a massive shift away from ownership, and that is also here in the middle east. We saw close to 30 growth over the last 12 months as a result here, not only in terms of takeoffs and landings, but also of revenue. The shift away from ownership is also happening here, and Companies Just dont want a 50 million jet on the Balance Sheet. Thats where we come in, with exactly the service they get. That is the opportunity to further expand in the police. David are you looking to purchase any of your rivals . You talked about consolidation earlier. Guest we are not looking at this right now at all. We see opportunities coming eventually. I think what we want to do now is really further expand our global footprint, our Service Offering around the world. As opportunities arise, definitely we will look at that. We believe this has to be further consolidated as there are too many small players in a fragmented industry. We are an Industry Leader with this valuation. That is really what we will be looking at going forward. Tracy that is it for this best of Bloomberg Markets middle east. We will be here from the start of the trading week in the gulf sunday morning at 8 a. M. In the uae on bloomberg television. Im tracy alloway. This is bloomberg. Julie coming up on bloomberg best, the stories that shaped the week in business around the world. President trump is investors plenty to think about. Our support is not a blank check. I dont think this is going to have a big effect on financial markets. Julie and perhaps to worry about. If we have to close down our government, we are building that wall. Plenty of investors are concerned President Trump has termed the way things are going. Thee a big deal rocked energy sector. Samsung gets a good deal of attention and carl icahn deals a big
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