Saudi Arabia Defies EM Blues Thanks to IdiosyncrasiesMay7

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Daily Intelligence Briefing – May 7, 2018

FEATURED TOPIC: SAUDI ARABIA DEFIES EMERGING MARKETS BLUES THANKS TO IDIOSYNCRASIES

Saudi Arabia has embarked on a radical transformation of its economy, politics, and even society under the helm of its crown prince Mohammed Bin Salman (“MBS”). In our November 13, 2017 DIBs report, we gave an overview of the kingdom’s politics, economy, and regional complications, including MBS’ unprecedented consolidation of power. In today’s DIBs, we will look at some recent efforts to advance his economic agenda.

KSA Vision 2030 is at the core of MBS’ ambitious strategy to open up the Saudi economy, attract new business to the country, diversify away from oil, ease social restrictions, and establish a legacy for himself. As part of the Vision 2030 program, MBS has planned three giga-projects – Neom, Red Sea Project, and Qiddiya.

Neom, a 25,000 square kilometer (10,000 square miles) megacity extending into Egypt and Jordan, and covering three times the size of NYC, is meant to serve as an economic hub between Europe, Asia and Africa. The plan is for NEOM to be a business and industrial zone, with a focus on tech and manufacturing, which will run entirely on renewable energy.

With two-thirds of the population under age 35, and few local entertainment offerings, many Saudis have to flock to Bahrain or Dubai on weekends. The kingdom wants to secure up to a quarter of the $20 billion spent on entertainment overseas each year, and attract global tourists, hence the plans to launch the Red Sea and Qiddaya projects.

The Red Sea Project aims to transform Saudi Arabia’s Red Sea coastline into a global tourism destination. The project, which includes a nature reserve, diving in coral reefs and heritage sites on about 50 islands, will cover 34,000 square km – an area bigger than Belgium. This initiative could transform Saudi Arabia’s tourism industry which, right now, relies soley on Muslim pilgrims from around the world visiting holy shrines in Mecca and Medina. It is expected to contribute 15 billion riyals ($4 billion) to GDP once fully running. Initial ground breaking is planned for 2019, with first phase to be completed by 2022. 

With the Qiddiya project, Saudi Arabia aims to become an entertainment, cultural and sports destination for local, regional, and international tourists. It is being built on a 334 square km site, making it 2.5 times the size of Disney World. Qiddaya will have theme parks, water parks, motor sports, cultural events, and vacation homes, with a goal to attract 1.5 million visitors annually when the first phase opens in 2022. By 2030, the number of annual visitors to Qiddiya is expected to reach 17 million in the entertainment sector, 12 million in the shopping sector and two million in the hospitality sector.

The idea is for the Saudi Sovereign Wealth Fund and the Public Investment Fund (PIF) to bankroll these projects, supplemented by financing from local and international sources through bonds, direct investment and other means. Saudi Arabia already has commitments from private investors such as Richard Branson, while SoftBank has signed a memorandum of understanding to build a $200B solar power project in the kingdom, calling it the single largest of its kind in the world.

During his meet & greet tour of the United States last month, MBS focused on the three specific areas he has targeted for American investment in his country: Entertainment, Technology, and Defense. He met with leaders in these industries including AMC, Walt Disney, Warner Brothers, and Universal Pictures in the entertainment sector; Google, Apple and Facebook in technology; and Lockheed Martin, Boeing and Raytheon in defense.

His objective was to woo these firms into becoming participants (i.e. investors) in the KSA Vision 2030 program. His selling points to America’s entertainment and technology titans is that they would benefit from the fact that Saudi Arabia is a new, untapped, and under-developed market with a young, highly educated demographic that’s craving entertainment and technological services. They would also share in the spoils of the giga-projects attracting tourists from all over the world.

There is no doubt that MBS’ Vision 2030 is super ambitious, and could fall well short of expectations. As it stands, the country’s private sector has been struggling, hit hard by government austerity steps and a recently imposed 5% value-added-tax to balance the budget. A survey shows that growth in the non-oil private sector slowed to a crawl in April, reaching its lowest level since the survey was launched in August 2009. The Saudi economy, which has been slowing since the oil price crash of 2014, slipped into a recession last year, compounding very weak growth in the non-oil sector in 2016.

But the government remains optimistic, with finance minister Mohammend al-Jadaan saying he expects GDP to rise “north of 2 per cent” in 2018, exceeding the IMF’s 1.7% growth forecast, thanks to the combination of an expansionary budget this year, higher oil prices, and more business friendly laws. He also estimates the budget deficit will fall to 7% of GDP, from almost 13% in 2016.

Investors seem equally optimistic about Saudi Arabia’s prospects, judging from the bond and stock markets.

Last month’s $11 billion bond issue was five times oversubscribed, and 15% of those investors were first-time buyers of Saudi debt. That this latest issuance follows the record breaking $17.5 billion debut sovereign bond in 2016 and $21.5 billion issuance in 2017, shows how strong investor appetite is for Saudi debt. Last month, 45 government-linked securities were launched on the Tadawul financial market in a move aimed at deepening the domestic credit markets. The Ministry of Finance has indicated that Saudi Arabia’s intent is to become the “regional benchmark and safe haven in fixed interest markets.”

Meanwhile, Saudi Arabia is number 2 among all global country stock market ETFs in 2018, boasting a gain of nearly 16% YTD. Egypt’s stock market is the only better performer at 20%. Inflows have been so strong that the Saudi Arabia ETF (KSA) is 14 times larger than at the beginning of 2018. The fund, which tracks a broad-based index of Saudi companies, began the year with $14 million in AUM and now has about $208 million in assets. Its top industry allocations are banks (38%), chemicals (24%), telecoms (7%), food (6.7%), and mining (3.9%). Energy represents less than 1% of the portfolio.

Although sentiment has soured towards emerging markets generally, given rising rates in the United States, idiosyncratic country-specific factors are helping Saudi Arabia stand out in the EM space, including structural reforms by MBS, rising oil prices, an upcoming IPO of Saudi Aramco, and the potential inclusion of Saudi stocks in the FTSE Russell and MSCI emerging markets indexes this year. 

These factors, combined, add up to the type of transformational change that we look for in our quest to identify change-driven thematic investment opportunities. As such, we are adding LONG SAUDI ARABIA to MRP’s list of themes effective today. Investors can gain exposure to Saudi Arabia via the iShares MSCI Saudi Arabia ETF (ticker KSA).

HERE IN THE MEANTIME are some articles relating to this featured topic (the stories are summarized in the ECONOMICS & TRADE section of today’s report):

• KSA – Saudi Arabia expects return to growth this year
• KSA – Saudi Arabia aims to be regional benchmark in global bond markets
• KSA – Saudi Arabia raises export prices for Asian buyers
• KSA – Investors Face Moral Dilemmas With Investments In Saudi Arabia
• KSA – Private Sector Growth Slows to Record Low in Saudi Arabia: Survey
• KSA – Qiddiya — soon to become the world’s largest entertainment city

CHART: KSA vs GULF vs EEM vs SPY: YTD chart and 2-year chart

OTHER DISRUPTIVE CHANGE WE’RE FOLLOWING:

• Markets:
  • Bonds – As US interest rates rise, Chinese bonds might emerge as a winner
  • Cryptocurrencies – Physical Bitcoin Banknotes Launched in Singapore to Drive Adoption
  • FX – Dollar rally cuts across developed and emerging markets
• Economics and Trade: 
  • LATAM – In Venezuela, inflation quadruples to 18,000 percent in two months, with no end in sight
  • LATAM – Venezuela says taking over Banesco for 90 days, arrests 11 top bank execs
  • Trade – China halts all US scrap imports for 1 month in surprise move
  • Trade – U.S.-China Trade Talks End With Key Differences Still Unresolved
• Politics and Policy:
  • MENA – Why Saudi Arabia, Qatar and Turkey Are Battling Over Somalia
• Monetary Policy:
  • Fed – Falling Unemployment Could Pressure Fed to Move Faster on Rates
  • LATAM – Argentina Raises Rates to 40% After Peso Selloff Prompts Third Abrupt Increase
• Finance:
  • Blockchain – 12 Chinese Banks Say They Deployed Blockchain in 2017
• Labor, Education & Demographics:
  • US Labor – Unemployment rate falls to 17-year low as U.S. adds 164,000 new jobs
• Manufacturing and Logistics:
  • Capex – Manufacturing investment plans hit four-year high
  • Defense – US, China and Saudi Arabia top list of military spending
  • Plastic – A scientist says he’s invented a replacement for plastic water bottles that fully decomposes in 3 weeks
• Technology:
  • AR/VR – Combined Asian markets could deliver over half of AR/VR revenue by 2022
  • Quantum – Toshiba Has a Plan to Extend Quantum Security to Record-Breaking Distances
  • Telecoms – White House considers executive action against Chinese telecom companies
• Transportation:
  • Aviation – Rising demand pushes express companies to acquire more aviation assets
  • EVs – Wireless EV Charging Available in 18 Months-2 Years, says QualComm
  • EVs – When Will Electric Cars Take Over The Roads?
• Endnote:
  • Waste – US scrap exports to China

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: A Review of MRP Themes
• Joe Mac’s Market Viewpoint: Beyond the HOUSING HEADWINDS
• Joe Mac’s Market Viewpoint: The Coming Value Rotation
• Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

Dollar Gains After US Jobs Report

The dollar index rose 0.5% to 92.85 in early New York trading on Friday as April’s weaker-than expected wage growth in the US was not enough to derail fears of more aggressive tightening from the Fed. TE

Fitch Revises Argentina Outlook to Stable

Fitch Ratings revised its outlook on Argentina’s “B” rating to stable from positive on May 4th 2018. The decision reflected the country’s high inflation and economic volatility, its “weak, although improved” external liquidity position and large fiscal and current account deficits, which implies a strong reliance on foreign loans.

The agency expects inflation to decline to 23 percent in 2018 and 16.5 percent in 2019, with an additional risk given recent peso devaluation. Standard & Poor’s credit rating for Argentina stands at B+ with stable outlook.

Moody’s credit rating for Argentina was last set at B2 with stable outlook. DBRS’s credit rating for Argentina is B with stable outlook. TE

China Posts 1st Current Account Deficit in 20 Years

China posted a current account deficit of USD 28.2 billion in the first quarter of 2018, the first gap since the series began in 1998, compared with a USD 18.4 billion surplus in the same period of the previous year, preliminary figures showed.

The goods trade surplus was recorded at only USD 53.4 billion, while the service deficit came in at USD 76.2 billion, the primary income deficit at USD 2.8 billion, and the secondary income gap at USD 2.6 billion. TE

Russian Ruble Rally, Turkish Lira Hits New Record Low

USDRUB decreased by 1% to 62.357. TE

The Turkish lira continued to fall Friday morning, hitting a fresh all-time low of 4.2453 against the US dollar, after data released on Thursday showed inflation climbed to almost 11 percent year-on-year in April. The lira already fell some 10% against the dollar this year amid concerns about the central bank’s inability to rein in double-digit inflation. TE

Bonds – As US interest rates rise, Chinese bonds might emerge as a winner

The debate in the US – over how quickly and to what extent the Fed can successfully normalize monetary policy – will continue, but an interesting observation for Asia is that US and Chinese bond yields are starting to converge. Whereas US Treasuries are on the cusp of breaking through the top end of their range, potentially signaling the end of the 35- year bond bull market, Chinese government bonds have been pushed downwards by signs that China’s central bank is easing monetary policy as the economy slows.

One key element supporting the Chinese bond market is the rising participation of foreign investors. Foreign ownership of China’s relatively lower-risk government bond market sector is now approaching close to 6 per cent.

Bloomberg recently announced that it would include yuan-denominated government and policy bank securities in its global aggregate indices from next year, adding over 380 securities by 2020. This means that the 5.49 per cent of eventual index weight for China bonds should translate into over US$110 billion in passive inflows.

Apart from providing exposure to the world’s second-largest economy, yuan-denominated bonds look attractive from a macro as well as a total return perspective, offering highly competitive yields and a low correlation to developed market core rates due to the low foreign ownership. SCMP 

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Cryptocurrencies – Physical Bitcoin Banknotes Launched in Singapore to Drive Adoption

A Singaporean startup, Tangem, developing ‘smart banknotes’ for cryptocurrencies has launched sales of physical bitcoin banknotes. Describing itself as a ‘smart banknote platform’ that manufactures physical notes with denominated values of cryptocurrencies like bitcoin.

The hardware inside each banknote – it isn’t made of paper – is a Samsung Semiconductor S3D350A chip which addresses all known attack vectors on hardware and software levels. The accompanying cold wallet is ‘uncopiable,’ and the hacking of a single banknote would prove ‘uneconomical’ and would only be restricted to a single banknote even in the event of a hack.

Each banknote costs the company $2 to manufacture, with the company making millions of units in a bid to facilitate crypto transactions that are “immediate, free and anonymous”.

Pertinently, transferring ownership of the notes and their value in bitcoin is instant when the banknote swaps hands. each note will be NFC-enabled, allowing a user to instantly verify the validity of the assets contained via a smartphone.

With bases of operation spread in multiple places around the world – its global headquarters is in the Swiss town of Zug, commonly known as ‘Crypto Valley’ – Tangem has plans to distribute its banknotes globally following its launch in Singapore. CCN  

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FX – Dollar rally cuts across developed and emerging markets

The dollar’s rally is cutting a swath through emerging market currencies, but it is also pushing developed market forex to new lows.

Chief among these is the euro, which fell 0.6 per cent to $1.1909 — that marks a new low for the year, beating the $1.1914 set on January 11. Also in the dollar’s crosshairs was the pound, which fell below $1.35 for the first time since January and is now more than 6 per cent lower in the last two trading weeks. The basket of the dollar’s main trading partners, known as the dollar index, also hit a new high for the year of 92.9, underling the extent of the dollar’s rally. The index has risen 4.6 per cent since mid-February.

The dollar’s rally is testing analysts’ 2018 assumptions. Oxford Economics, noting the euro falling below the technical support level of $1.20 earlier this week, expectations of accelerating US growth and slower eurozone in the fourth quarter, asked whether the euro had “any gas left in the tank”.

Eurozone slowdown concerns will ease, it predicted, while the end of quantitative easing by the European Central Bank in 2019 is also likely to boost portfolio flows into the eurozone, and adds upside risks to our forecast.

That end-of-year forecast — $1.30. FT

KSA – Saudi Arabia expects return to growth this year

Saudi Arabia’s finance minister Mohammed al-Jadaan said in an interview with the Financial Times in Riyadh that the government expected to post a rise in gross domestic product “north of 2 per cent,” higher than forecast by the International Monetary Fund, which expected a GDP growth of 1.7 per cent.

The minister said a planned value added tax had been introduced successfully and a $19bn stimulus package to support the struggling private sector had begun to show results, with the government financing projects in healthcare, real estate development and other industries.

Mr Jadaan said a recent anti-corruption crackdown had created a better environment for business in the kingdom, despite concerns among investors about the effects of a purge that targeted some of the country’s wealthiest individuals, led by Crown Prince Mohammed bin Salman and netting more than $100bn for the government from princes and prominent businessmen.

He said budget deficit would fall to 7 per cent of GDP this year, from almost 13 per cent in 2016. The kingdom said in December that the budget deficit would reach SR195bn in 2018, or 7.3 per cent of GDP, down from SR230bn last year.

Another element of the crown prince’s economic overhaul is the planned listing of state energy company Saudi Aramco. Although the kingdom has decided to list domestically, delays in decision-making and concerns about listing abroad — such as in London or New York — have shrouded a foreign flotation in uncertainty. FT

KSA – Saudi Arabia aims to be regional benchmark in global bond markets

Saudi Arabia successfully raised $11 billion on international capital markets last month with an issue that was five times oversubscribed and in which 15% of investors were first time buyers of Saudi debt. The debt raising is the third successive year Saudi Arabia has gone to the markets for multi-billion dollar sums, following the record breaking $17.5 billion debut sovereign bond in 2016 and $21.5 billion last year.

Fahad Al-Saif, the president of the Ministry of Finance debt management office, said the capital raising was achieved without the need for a roadshow, which he took as a sign that the Kingdom was now regarded as a “reliable and credible issuer” by international markets. “The target is to become the regional benchmark and safe haven in fixed interest markets,” he said.

“Saudi Arabia has become one of the biggest issuers in the world and it has a track record of proven quality” said one banker. Last month 45 government-linked securities were launched on the Tadawul financial market in a move aimed at deepening the domestic credit markets.  ArabNews

KSA – Saudi Arabia raises export prices for Asian buyers

Saudi Arabia raised June prices for all of its crude grades to Asia as the supply and demand picture tightens. Aramco raised the official selling prices for its Arab Light crude grade to customers in Asia — its biggest buyer — to a $1.90 a barrel premium compared with the Oman/Dubai contract.

The increase followed an unexpected rise last month for Asian buyers, which prompted some refiners to reduce their imports of Saudi crude.

June prices for Arab Light to Europe, however, fell to a $4.20 a barrel discount to the regional ICE Brent marker, a $1.25 drop compared with the month before. Refineries in the continent are still undergoing maintenance and taking in less crude, creating the comparative weakness.

Yet the global Brent crude benchmark jumped above $75 a barrel earlier this week as Opec-led cuts take effect, demand for oil remains strong and robust production from US shale oilfields is absorbed by the market. Geopolitical concerns, such as tensions between the US and Iran over the nuclear deal with western powers were also in focus.

As prices have risen, questions have mounted about how long producers will need to keep curbing output. Saudi Arabia needs higher oil prices to fund an ambitious social and economic reform program and bolster the valuation of Saudi Aramco ahead of a planned public offering. FT

KSA – Investors Face Moral Dilemmas With Investments In Saudi Arabia

Saudi crown prince Mohammad bin Salman has wrapped up his well-orchestrated and unprecedented two-week April tour of the US with the icons and titans of three primary industries in his effort to diversify the Saudi economy as part of the ambitious Vision 2030 plan. Therein lie tremendous financial opportunities in an underdeveloped Saudi marketplace with a lucrative demographic but which carry moral dilemmas and potential shareholder activism.

A component of the Saudis’ Vision 2030 is to create an indigenous defense industry one that will promote volatility, not stability, in a region on perpetual warfooting. The Saudis’ US tour was a charm offensive to add to the longstanding arms and oil industries for the purposes of economic diversification and to satisfy a potentially restless citizenry. They performed a political double-play by entertaining American private investment while simultaneously encouraging new US government sanctions against arch enemy Iran.

Nevertheless, it was an exceptionally well-timed campaign to win the hearts and minds of American industry leaders and influencers. SA

KSA – Private sector growth slows to record low in Saudi Arabia: Survey

Growth in Saudi Arabia’s non-oil private sector slowed to a crawl in April, a survey of businesses showed on Thursday, reaching its lowest level since the survey was launched in August 2009.

The Emirates NBD Saudi Arabia Purchasing Managers’ Index fell to 51.4 last month from 52.8 in March. A level above 50 means business is expanding and below 50, contracting. Output growth slowed to 56.0 from 58.6 while new orders shrank with a reading of 49.6 — their first drop below 50 in the survey’s history. Employment growth slowed slightly to 51.2. Output prices fell outright in April for the third straight month, but input price inflation rose to 53.4 from 50.7.

Other data in the last few months has also indicated a weak private sector. Bank lending to the private sector shrank 0.5% from a year earlier in March, the 13th straight month of falling bank lending.  ET

KSA – Qiddiya — soon to become the world’s largest entertainment city

Qiddiya, 40 kilometers from the center of Riyadh city, is one of three Saudi giga-projects, in addition to Neom and the Red Sea Project, launched by Crown Prince Mohammed bin Salman. It is expected to be the world’s largest entertainment city by 2030, with a total area of 334 square kilometers, surpassing Walt Disney World in Florida, which is only 110 sq km.

The project includes theme parks; entertainment centers; sports amenities capable of hosting international competitions; training academies; desert and asphalt tracks for motorsport enthusiasts; water- and snow-based recreation; outdoor and adventure activities alongside nature and safari experiences; and an array of historical, cultural and educational activities and events.

By 2030, the number of annual visitors to Qiddiya is expected to reach 17 million in the entertainment sector, 12 million in the shopping sector and two million in the hospitality sector. Qiddiya will help diversify national income sources as it is forecast to contribute to up to SR17 billion of GDP by 2030. ArabNews

LATAM – In Venezuela, inflation quadruples to 18,000 percent in two months, with no end in sight

Venezuela’s inflation rate, already by far the world’s highest, spiked from 4,966 percent to nearly 18,000 percent in just March and April — a trend that, if it continues, could push the country’s annual rate to more than 100,000 percent by year’s end.

The high inflation has been devastating for Venezuelans, whose salaries often are not enough to pay for one meal a day. One kilogram (2.2 lbs) of meat today costs about 2 million bolivares, or about $2.35. But the monthly salary of a surgeon stood at less than 6 million bolivares in mid-April.

Worried by the growing discontent among Venezuelans, the Nicolas Maduro government nearly doubled the minimum salary on Monday, raising it to 2.5 million bolivares per month. That hike is expected to quickly double all salaries in Venezuela, and pour more gasoline on the flames of hyperinflation, according to experts. The salary increase ordered by Maduro will simply put more bolivares in the hands of consumers, who will rush to buy the few products available in stores and thereby drive prices even higher.

If inflation remains steady, Venezuela could end 2018 with an annual rate of 100,000 percent, Ochoa said, using the estimate of 80 percent a day compounded over the year. Miami Herald

LATAM – Venezuela says taking over Banesco for 90 days, arrests 11 top bank execs

Venezuela said on Thursday it would take over the country’s leading private bank Banesco for 90 days and announced the arrest of 11 top executives for “attacks” against the country’s rapidly depreciating bolivar currency. The detentions come on the heels of last month’s shock arrests of two Venezuelan executives working in the country for U.S. oil major Chevron.

Maduro’s foes say he is cracking down on the business sector to try to shore up support and halt price increases ahead of a controversial May 20 presidential election, which key opposition parties have boycotted as a sham.

Venezuela’s opposition said the arrests were another sign of Maduro’s turn to authoritarianism.

Banesco’s President Juan Carlos Escotet, who lives in Spain, earlier blasted the arrests as “disproportionate” and said he was flying to Venezuela to try to free the 11 executives, who include Chief Executive Oscar Doval.

Venezuela maintains exchange controls under which the government is meant to provide hard currency at a steadily weakening official rate VEFFIX=, currently 69,000 bolivars per dollar. But the dollar is fetching around 800,000 bolivars in unofficial trade, which government officials have for years harshly criticized but broadly tolerated. R

Trade – China halts all US scrap imports for 1 month in surprise move

The Chinese government has suspended China Certification and Inspection Group (CCIC) North America for one month, halting inspections and certificate issuance from May 4 through June 4. The Chinese government will continue to accept shipments sent before May 3 that contain CCIC certificates, but without guarantee of entry. Those shipments will be subject to 100% inspection that could include further lab testing, which may cost upward of $20,000.

Because CCIC NA is believed to be the only pre-shipment inspection company to receive an import license since February, this effectively shuts down all scrap exports to the country.

This is the latest, and perhaps most direct, escalation in China’s crackdown on the scrap trade since its initial ban of 24 select categories in July 2017. In the months since, the country’s new 0.5% contamination standard for all materials, and ban on mixed paper and plastics, has roiled recycling markets around the world.

With so many changes at play around tariffs and other trade restrictions, the scrap industry may not be able to escape the mounting political tensions between Washington and Beijing. And now that options have been further limited, more stockpiling, temporary disposal, program changes and processing price increases may be on the horizon for U.S. recyclers in the months ahead. WDive

Trade – U.S.-China Trade Talks End With Key Differences Still Unresolved

Two days of U.S.-China trade discussions ended in Beijing with an agreement to keep on talking, and little else. While a cure-all deal was always a long shot, the discord between the world’s two biggest economies means skittish global markets will continue to face ongoing trade tensions. The immediate question is whether the U.S. got enough wins to delay planned tariffs of up to $150 billion on Chinese imports.

Heading into the talks, both sides outlined a series of tough demands, with the U.S. focused on reducing a deficit in goods it says reached a record $375 billion last year.

The U.S. delegation asked China to reduce support for high-tech industries, allow U.S. companies non-discriminatory access in China and cut the trade deficit by at least $200 billion by the end of 2020 from 2018. It also called on China to avoid any retaliation, drop a pair of World Trade Organization cases and agree to quarterly reviews of its progress in meeting targets.

The Chinese side asked the U.S. to stop its 301 investigation into Chinese intellectual property abuses, drop planned 25 percent extra tariffs on Chinese goods and end discrimination against Chinese companies in national security reviews. China also asked the U.S. to open its e-payment market and approve China International Capital Corp.’s application for a financial license. B

MENA – Why Saudi Arabia, Qatar and Turkey Are Battling Over Somalia

A battle for access to seaports is underway in one of the world’s unlikeliest places: Somalia, now caught up in a regional struggle between Saudi Arabia and the United Arab Emirates on one side, with Qatar backed by Turkey on the other.

Somalia has been at war for decades and until the last few years it has struggled to attract foreign investment. But rivalries in the nearby Arabian peninsula are resulting in serious inflows into Somalia.

A year ago, a company owned by the United Arab Emirates government signed a $336 million contract to expand the port of Bosaso. Less than a year before that, another UAE-owned firm took control of the Berbera port and pledged up to $440 million to develop it. At the same time, Turkey, an ally of UAE rival Qatar, is ramping up a multi-billion dollar investment push in Somalia. A Turkish company has run the Mogadishu port since 2014, while other Turkish firms have built roads, schools, and hospitals. The rivalries have intensified since June, when the most powerful Arab states, led by Saudi Arabia and including the UAE, cut diplomatic ties with Qatar, accusing it of supporting Iran and Islamist militants.

The government hopes new investment, especially in infrastructure, can help the country rebuild. Better tax collection is boosting government revenues, but this only covers public sector salaries. Huge amounts of capital are needed for roads, schools and other basics. However, the money could also destabilise the country further by deepening tensions between the central government, aligned with Turkey and Qatar, and Puntland and Somaliland, which both receive money from the UAE.

For Somalis themselves, this kind of geopolitical game of chess, where Somalia is solely a proxy conflict to the trouble in the Gulf, this is obviously bad news. Haaretz

Fed – Falling Unemployment Could Pressure Fed to Move Faster on Rates

Friday’s jobs report illustrates the challenge the Federal Reserve faces this year as the economy enters a more delicate phase for setting interest-rate policy. It also shows why officials are split over whether to raise rates three or four times this year after raising them three times last year. After several rate increases and with unemployment at an 18-year low, the question is whether joblessness might fall so much that Fed officials should pick up the pace of tightening to prevent the economy from overheating.

The unemployment rate dropped to 3.9% in April after holding at 4.1% for the prior six months, and employers added 164,000 jobs. The last time unemployment stood at a lower level was April 2000.

Most Fed officials haven’t shied away from their fundamental view, that tighter labor markets will drive stronger wage growth and more inflation. Some are worried that this relationship could be nonlinear, meaning inflation pressures grow even stronger after labor markets tighten beyond a certain point. Fed officials want a tight labor market to push inflation up to 2%, which they see as a healthy level for an expanding economy, but don’t want price pressures to surge out of control.

Wall Street forecasters see unemployment falling to 3.5% by year’s end. Fed officials see unemployment falling to 3.8% this year. WSJ

LATAM – Argentina Raises Rates to 40% After Peso Selloff Prompts Third Abrupt Increase

In another surprise move, the central bank on Friday raised the key interest rate by an additional 675 basis points to 40 percent – the highest among major economies — as the Treasury Ministry committed to reducing spending on infrastructure, and to target the country’s primary fiscal deficit at 2.7 percent of GDP, down from 3.2 percent this year.

The peso rebounded following the announcement to close 5.5 percent higher at 21.8 per dollar. It posted its biggest one-day decline since December 2015 on Thursday even after two surprise rate hikes. The currency is still down 15 percent this year against the U.S. dollar and dropped more than 6 percent this week, the worst decline since June 2016.

Behind the peso weakness is growing concern that President Mauricio Macri is dragging his feet on taking the possibly painful steps needed to revamp the economy — and that both inflation and government spending are spiraling dangerously high.

Before the recent rate increases the central bank had been relying on selling dollars in the currency market to try to buoy the peso. This year, they’ve spent $6.9 billion on the efforts, or about 10 percent of the country’s international reserves. On Wednesday night, policy makers seemed to be rethinking that strategy and planning to reduce the amount of dollars they sell. But if the government backslides on the fiscal area to ease people’s pain, the market will keep the pressure on. B  

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Blockchain – 12 Chinese Banks Say They Deployed Blockchain in 2017

Nearly half of the 26 publicly listed banks in China say they deployed blockchain applications in 2017. The 12 institutions include major state-owned commercial banks such as the Bank of China, China Construction Bank and the Agriculture Bank of China, as well as other privately held ones, including China Merchants Bank and other city-level entities.

The applications that have been adopted range from using blockchain technology to issue invoices and cross-border loans to ID authentication processes.

For example, according to the annual filing from the Agriculture Bank of China, the state-owned entity has developed a decentralized network to offer unsecured loans for agricultural e-commerce merchants that it said offers an automatic loan issuance process.

The banks’ en masse move to adopt blockchain comes at a time when the country’s banking regulator has also praised the benefit of applying the technology in the financial sector – especially when it comes to improving the efficiency of loan issuance.

Recent patent applications, as reported by CoinDesk, also indicated that China’s state-owned banks have been exploring ways to use blockchain technology to solve data storage issues and to streamline certificate authentication processes. CoinDesk

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