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mashreq Fixed Income Trading Daily Market Update Tuesday, December 08, 2015 Market Update UAE non-oil sector rebounds The UAE's non-oil private sector expansion regained momentum in November after easing to a two-and-a-half year low during October, a survey revealed on Monday. On the back of a marked and sharper rise in output, business conditions improved solidly in November, said the survey by Emirates NBD and produced by Markit. New business and employment in the non-oil private sector also increased, although growth in business was the weakest since April 2012. "Companies saw their pricing power diminish in November. Input costs rose further, but competitive pressures meant that charges fell regardless," said the survey report. (Khaleej Times) Gulf states agree on key issues for implementing VAT, UAE official says Gulf states have agreed on key issues for implementing value-added tax in the region, an official from the United Arab Emirates finance ministry said on Monday, moving the six nations closer to introducing direct taxation for the first time. The agreement was reached at a meeting of representatives from Gulf ministries a few days ago, Younis Haji al-Khouri, undersecretary at the UAE ministry of finance, told reporters on the sidelines of a media event. Introducing VAT would be a major economic reform in the Gulf Cooperation Council states, which have minimal tax systems and no tax on income, although some levy fees such as road tolls. The plunge of oil prices since last year has slashed government incomes, making it more urgent for them to find new revenue. The UAE is expected this year to post its first budget deficit since 2009. Khouri said the target for introducing the tax was three years, and that it would take 18 to 24 months to implement once a final agreement has been reached. "We agreed on key issues to apply zero tax on healthcare, education, social services sectors and exempt 94 food items," Khouri said. In a couple of areas -- including financial services -- agreement was still lacking, he said. To limit smuggling and damage to competitiveness, analysts say, the Gulf countries should introduce VAT regionally rather than individually, at different times. The six states have been discussing the tax for years, but political and economic issues have delayed the project. VAT cannot be implemented unilaterally but has to be part of a Gulf-wide decision, Khouri told Reuters in August, adding that if all GCC states agree on a deadline, then some could implement ahead of the others. No indication of the rate at which VAT will be levied has been given by governments, although the International Monetary Fund has suggested the UAE consider imposing VAT at a 5% rate. (Reuters) Emirates Airline attacks EU attempts to target airline state subsidies Emirates Airline has hit out at European Commission plans to use aviation negotiations with Gulf countries as a way to challenge alleged illegal state subsidies to the Middle East region’s airlines. The commission on Monday announced a package of measures aimed at tackling unfair competition and creating a level-playing field for European airlines. This included a plan to use EU-wide negotiations with particular countries to address competition concerns. But the fast-growing airline, based in the United Arab Emirates, said it did not think significant changes to the existing agreements with European countries would be in the “best interest” of all member states. Gulf carriers have agreements with individual European governments, rather than an EU- wide policy. Emirates said it had spoken to many of these countries and was confident that these agreements would be honored. “Competition-related issues are already covered under existing sovereign bilateral air service agreements, as well as existing EU regulation. Therefore we find it interesting that rather than use these tools to address specific grievances, the European Commission is instead looking at a new EU-level policy,” Emirates said. (FT) N.Y. judge tosses Saudi developer's USD10 billion lawsuit vs Barclays Barclays Plc won the dismissal on Monday of a Saudi real estate company's USD10 billion lawsuit alleging the bank ceased pursuing lease payments due from the Saudi government on military complexes in order to obtain a banking license. New York Supreme Court Justice Charles Ramos ruled from the bench in dismissing the 2014 lawsuit by the company, Jadawel International, a unit of London-based MBI International Holdings Inc, a Barclays spokesman said. The lawsuit sought USD10 billion in damages for what Jadawel claimed was a fraudulent scheme Barclays hatched to secure the rare Saudi banking license, selling out Jadawel in the process. MBI, founded by Sheikh Mohamed Bin Issa Al Jaber, built two compounds and leased them to the Saudi government in 1999 to house U.S. defense contractors, the lawsuit said. The payments should have totaled over USD2 billion through 2017, it said. When Jadawel sought to refinance in 2001, Barclays helped assemble a group of lenders, the lawsuit said. In 2002, the government partially defaulted and Barclays assumed responsibility to collect, it said. As a result, Barclays filed a federal lawsuit seeking damages from the Saudi government. Barclays later caused the lawsuit to be withdrawn, Jadawel's lawsuit said, and sought a bank license from the Saudi Capital Markets Authority, which was considering granting one to a Western financial institution for the first time in decades. Jadawel accused the bank of dropping the lawsuit and compromising the claims for its own benefit, causing it to be deprived hundreds of millions of dollars in lease payments and sell the compounds at a "substantial loss." The bank also was reported to have bribed a Saudi prince and government official to help obtain the license, the lawsuit said. In 2012, Reuters reported that the U.S. government was investigating whether Barclays paid bribes to win a banking license in Saudi Arabia. Barclays has denied doing so. (Reuters) Asset managers see sovereign wealth funds withdraw USD19 billion - FT GCC sovereign wealth funds have withdrawn money from asset managers at a record rate this year as falling oil prices have left gulf economies scrambling to inject cash into their economies, according to a Financial Times report. Data provider eVestment said state investors have removed at least USD19 billion from funds under management, sparking both concerns that profits for investment managers will suffer, as well as further losses to funds under management, the report said. Countries that depend on the sale of oil and gas, which has seen a price drop of more than 50% since June 2014, have been forced to raid their investment portfolios the report said. The report highlighted asset managers Aberdeen Asset Management PLC , Northern Trust Corp , Franklin Resources Inc among others have each admitted that government clients have withdrawn funds this year. The report cited Morgan Stanley as saying sovereign funds have also pulled money from Invesco Ltd. as well as the asset management units of several US banks including Goldman Sachs Group Inc , Bank of New York Mellon Corp , State Street Corp , and JPMorgan Chase & Co . The Saudi Arabian Monetary Agency is one of the sovereign wealth funds that has made withdrawals from its asset managers the report said, adding that the fund, with more than USD650 billion in assets has withdrawn around USD70 billion. (Reuters) Investors keep pulling cash out of Turkey Foreign investors look set to keep pulling their money out of Turkey after dumping a record amount of stocks and bonds this year. Investors from abroad withdrew USD7.6 billion from assets in 2015, including USD1.4 billion in outflows last month as the party that President Recep Tayyip Erdogan helped found swept back into power, initially triggering a rally in the nation’s assets. Declines resumed as the war in neighboring Syria and Russian sanctions threatened the country’s USD720 billion economy. (Bloomberg) Yuan set for weakest close since 2011 as exports fall for fifth month and forex reserves suffer third largest monthly decline China’s yuan headed for the weakest close in four years after the central bank cut its reference rate and both exports and foreign-exchange reserves dropped more than estimated. Overseas shipments fell for a fifth month in November and imports extended a record run of declines, according to official data on Tuesday, after figures Monday showed the nation’s foreign-currency stockpile shrank to USD3.44 trillion as the central bank sold dollars to prop up the yuan. The People’s Bank of China lowered the onshore yuan’s reference rate by 0.15% to 6.4078 against the greenback, the weakest since August 27th. The yuan fell 0.15% to 6.4180 a dollar, set for the lowest close since August 2011. China’s foreign exchange reserves posted their third-largest monthly decline on record last month; central bank data showed on Monday, renewing worries Page 1 mashreq Fixed Income Trading Daily Market Update Tuesday, December 08, 2015 about capital outflows after reserves had appeared to stabilize. Forex reserves fell USD87billion in November, near the record USD94billion decline suffered in August — the same month that the central bank surprised global markets by allowing the renminbi to depreciate by 3% in three days. China’s reserves have fallen for nine of 11 months this year and stand at USD3.43trillion, as investors sell renminbi assets to protect themselves against depreciation and the central bank sells dollars from its reserves to curb renminbi weakness. Falling interest rates in China and expectations of an imminent rate hike by the US Federal Reserve have also fueled outflows. Reserves rebounded mildly in October, suggesting outflows had diminished.