Bloomberg Businessweek Middle East :The Year Ahead 2017

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1-15 December, 2017

Biotech Brexit Democrats China Saudi Arabia Cybersecurity Central Banking Electric Vehicles Streaming Space Travel Renewables Microchips Congress Shale Trump Organic Food

The

Year

Ahead 2018

Algeria…..…..…........DZD 215 Bahrain….......................BHD 1

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Egypt……............…...... EGP 18 Iraq……...…..…...... IQD 3200

Jordan....….........….......JOD 2 Kuwait….......…......KWD 0.75

Lebanon..............LBP 4000 Libya…........................LYD 3.5

Oman…….................…..OMR 1 Qatar……….................…QR 10

Saudi Arabia.........…SAR 10 Syria............................SYP 200

UAE...…....…..…........…AED 10 Yemen…..................YER 600

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Contents The European Central Bank, which bought debt issued by the operator of Italy’s A12 motorway, will taper off its bond purchases ▶ p14

PHOTOGRAPH BY LUCA LOCATELLI FOR BLOOMBERG BUSINESSWEEK

1

Here’s what we think will—and won’t—happen in 2018

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The Year Ahead 2018

Contents

Contents

Economics

Introduction The world economy should grow nicely again in 2018

7

Central Banking p16 p18 Elections Reform p20 p22 Hot Seat: Jacinda Ardern Brexit p24 Interview: Jim Coulter p26

2

Technology

Retail

Silicon Valley p30 Cybersecurity p32 Internet p34 Aerospace p36 5G p38 Interview: George Yancopoulos p40

Electric Vehicles Hot Seat: Michael O’Leary Online Shopping Travel Streaming Organic Food Interview: Jeff Koons

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p46 p47 p48 p50 p52 p54 p55

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The Year Ahead 2018

Contents

Energy

Politics

Pipelines p58 Liquefied Natural Gas p59 Cars p60 p61 Chemicals p62 Renewables Aramco p62 p63 New Fields Shale Oil p64 Interview: Jack Fusco p65

Farm Bill Trump Democrats Hot Seat: Mitch McConnell Interview: David Petraeus

Middle East

p68 p70 p70 p72 p73

Scoreboard

ECONOMICS: VCG/GETTY IMAGES; ENERGY: COURTESY EXXONMOBIL; POLITICS: EDWIN REMSBERG/VWPICS/REDUX; TECHNOLOGY: COURTESY SPACEX; RETAIL: SPENCER LOWELL/TRUNK ARCHIVE; 50 COMPANIES: GETTY IMAGES (5)

What we got right and wrong about 2017 p84

Middle East Economic outlook Interview: Sameer Lakhani Interview: Nabil Habayeb

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p76 p80 p81

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Introduction

The world economy should grow nicely again in 2018. (Unless someone does something dumb.)

After several disappointing years, all the major economies are expanding at the same time

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7

By Peter Coy

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Introduction

Nations to Watch in 2018 Canada

U.K.

Canadians haven’t given up on a new North American Free Trade Agreement with the U.S., but they’re also pur­ suing a trade deal with China.

Britain’s exit from the European Union must happen by March 2019. The battle over terms of disengagement will get even more fractious in 2018.

Italy

U.S. The Trump ­administration is likely to keep the world guessing on issues including trade, fiscal stimulus, and military alliances.

8

Mexico

Divisions on the right are increasing the chance that a populist, euroskeptic government could take power after general elections, which are set for May or earlier.

Leftist nationalist Andrés Manuel López Obrador is leading in the polls and could be elected to a sixyear term as president in July.

Nigeria

Brazil

GDP per capita, 2018 forecast by International Monetary Fund

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No data $0–2k $2–10k $10–40k $40k+

Oil output is rebounding after ­touching a 27-year low in 2016, when militants attacked pipelines. An overvalued currency could deter foreign investment.

The economy climbed out of ­recession this year, but the ­political ­scandals that threaten to envelop President Michel Temer ­jeopardise growth.

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Germany

Russia

Germany continues to export way more than it imports, annoying its neighbors. In 2018 its current account surplus seems likely to remain above the 6 percent ceiling prescribed by the EU.

Domestic oil producers appear to be abiding by an agreement with OPEC to cut ­production. The biggest risk for the economy in 2018 is a sharp fall in oil prices.

Introduction

South Korea Improving global demand has fueled a comeback in exports.

Despite the threat of attack from North Korea, businesses keep investing, and consumers keep spending.

Japan Fresh off reelection in October, Prime Minister Shinzo Abe will redouble efforts to restructure the economy—the third arrow in his quiver after fiscal and monetary policy.

China

Saudi Arabia The government is scheduled to sell shares in Saudi Aramco, the oil giant, but there are reports it may delay the international portion of the sale until at least 2019.

Having been elected to a second five-year term in October, President Xi Jinping may use 2018 to push essential but ­unpopular ­measures, such as closing ­inefficient plants.

9

India Growth slowed earlier this year.

But with inflation finally under control, the Reserve Bank of India is likely to cut interest rates, fueling a rebound.

Australia The government will continue to fight a debt-­ fueled bubble in home prices in 2018. Almost 40 percent of such loans are ­interest-only, and 85 percent have ­variable rates.

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Introduction

Healthy growth makes it easier to deal with the next downturn

10

Everyone in the world—plus the two SpaceX ­customers who technically won’t be in the world when they do figure eights around the Earth and the moon for two weeks this coming year—can look forward to another year of healthy growth in 2018.

We’ve become so used to complaining about ­sluggishness that it’s a shock to realise the global economy has quietly accelerated to a respectable and sustainable cruising speed. Market volatility is historically low. Even the skeptical Germans sound happy. “The data we get and the indicators we see are very positive,” says Clemens Fuest, president of the IFO Institute at the University of Munich.

“There is no obvious obstacle.”

The big story for 2018 is likely to be how to manage the continued expansion. A turning point may come at the end of September, when the European Central Bank might stop or curtail monthly bond purchases (page 22). The central banks bought bonds to drive down long-term interest rates; while the Japanese will keep buying, the Americans and soon the Europeans are betting that the patient, the economy, is finally well enough to get along without life support.

The International Monetary Fund, which has reported subpar growth for years, now says “the global upswing in economic activity is strengthening.” In its World Economic Outlook, published in October, the IMF says now would be a good time to deal with issues that went unaddressed during the convalescence from the 2007-09 financial crisis, including sometimes-unpopular measures such as raising retirement ages and making it easier for companies to hire and fire.

Bloomberg economists predict the U.S. will grow 2.5 percent in 2018; China, 6.4 percent; Japan, 0.9 percent; and Germany, 1.6 percent. In most cases those numbers are in line with the growth expected for 2017, which has turned out to be a better year than many forecasters expected.

The upswing hasn’t benefited everyone. The IMF points out that prospects are “lackluster” in many nations of sub-Saharan Africa, the Middle East, and Latin America. Even in wealthy nations, those at the bottom are hurting. In the U.S., wage growth remains anemic despite an unemployment rate in the low 4s.

Still, brisk growth that’s not shared by all is better than no growth at all. One reason for optimism about the outlook is that the global expansion seems to be based on strong fundamentals, not froth. In a virtuous spiral, confident consumers are spending, which allows employers to hire and invest, which leads to more consumer spending, and so on. Global spending by companies on plants and equipment is “in high gear with room to run” in the coming year, economists at

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JPMorgan Chase & Co. wrote on Oct. 25. The synchronised expansion reflects “a self-reinforcing turn in the global profit cycle that has boosted business confidence and spending in all corners of the world,” the economists said in an earlier note. To put it another way: “The expansion is not dependent on just one region or one sector,” says Richard Turnill, global chief investment strategist for BlackRock Inc. in London.

Healthy growth puts the world in a better position to deal with the next downturn, whenever it comes. Governments fight recessions by lowering interest rates, cutting taxes, and raising spending.

Those tools are blunted if interest rates are already low and government debt is so high that governments can’t get away with bigger budget deficits.

Policymakers’ goal for now is to normalise interest rates and repair their countries’ finances, gaining altitude so the next downdraft can’t plunge them into a hillside.

It’s also possible that we’re already headed for a crash. Economists are lousy at picking turning points. After Queen Elizabeth II questioned the failure to foresee the financial crisis last decade, a group of British economists wrote her a letter saying it “was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”

A key question for 2018 is whether consumers and businesspeople will continue to shrug off some pretty scary geopolitical threats. So far they’ve been nonchalant. The best example is South Korea, which has been rocked by threats of nuclear attack from the north, corporate scandals, and even a warning from President Donald Trump that its free-trade agreement with the U.S. might not survive. Despite all that, people are still shopping, and stocks are at or near record highs. The Bank of Korea is confident enough in the outlook that it’s signaling another interest rate hike on the horizon.

(Economists expect it to happen next year.)

Similarly, on the other side of the planet, the economy of the U.K. has trundled along at a ­better-than-expected clip given the uncertainty over Britain’s exit from the European Union, which must take place by the end of March 2019.

This is all the more remarkable considering the cack-handed way the government of Prime Minister Theresa May has conducted the talks.

The headwinds of Brexit will “continue to stiffen as the clock winds down to March 2019,” Paul Sheard, chief economist of S&P Global Inc., wrote in October.

Or how about Spain, which could lose a fifth of its economy if Catalonia secedes? In the fraught leadup to Catalonia’s unauthorised September

Will consumers and businesses continue to shrug off geopolitical threats?

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Bloomberg Businessweek Middle East

The Year Ahead 2018

GDP growth projections for large economies

Introduction

Central bank net asset purchases

India

12-month rolling flow

2017

7.1%

2018

7.0%

G3 total

U.S.

Japan

Euro zone

Forecast $1.5t

China 1.0

6.8% 6.4%

0.5

Spain 3.1%

0

2.5% U.S.

-0.5

2.1% 2.5%

6/30/06 12/31/18

Mexico 2.3%

The Federal Reserve is already letting its bond portfolio shrink, and the European Central Bank may stop adding bonds in 2018.

2.3% Canada 3.0%

DATA: BLACKROCK INVESTMENT INSTITUTE

1.9% Russia 1.9%

Global economic and trade volume growth

1.9% France 1.7%

Year-over-year change

1.7%

◼ World GDP

Brazil 0.5% 1.7% Germany 2.1% 1.6% U.K. 1.5% 1.4% Italy 1.5% 1.2% Japan 1.5% 0.9%

These estimates, from Bloomberg’s own economists, are strong, although 2017 has turned out to be a tough act to follow.

The economists see above-trend growth of 2.5 percent for the No. 1 economy, the U.S. DATA: BLOOMBERG ECONOMICS

Probability of a U.S. recession within one year

World trade volume

Forecast 12%

11

6 0 -6 -12 1981 2018 DATA: WORLD TRADE ORGANIZATION

Impact of financial conditions on global economic growth GDP growth impact from the Goldman Sachs Financial Conditions Index, quarter-on-quarter, annualised Forecast

Median of economists surveyed by Bloomberg

4% 100%

2 0

50 -2 0 1Q ’06

4Q ’18 DATA: BLOOMBERG ECONOMICS

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-4 1Q ’06

4Q ’18 DATA: GOLDMAN SACHS GROUP

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referendum on independence, Spain somehow managed to post the fastest growth of the big four Continental economies. Spanish i­ mperturbabilidad will be tested in the months ahead.

One of the big stories to watch in 2018 will be how the EU reimagines itself in light of Brexit, the crisis in Catalonia, and the differing Euro-visions of French President Emmanuel Macron and German Chancellor Angela Merkel. Macron wants more fiscal integration than most Germans are comfortable with. “There is a window of opportunity” in the first half of 2018 for the French and Germans to come to some kind of compromise on governance, says IFO’s Fuest. After that, he says, Europe will be distracted by the approach of Brexit, European Parliament elections, and the choice of a new European Central Bank president in 2019. S&P Global’s Sheard agrees that “2018 is shaping up to be a defining year for the EU.” Of all the world’s hot spots, it’s the U.S. that has the most potential to rock the global boat, at least according to one analysis. Dun & Bradstreet Inc. prepares a quarterly “global risk matrix,” and in the third quarter, 4 of the top 10 causes of concern were American. The biggest risk emanating from the U.S., D&B said, is that politics will “impede pro-growth economic policies,” which in turn will make businesses curtail hiring and spending, “sapping global momentum.” D&B’s three other American risks: The Federal Reserve raises rates too quickly; tax reform falls short of expectations; and U.S. productivity growth fails to accelerate.

Much of the rest of the world does look at the U.S. with a tinge of alarm. Trump pulled out of talks on the 12-nation Trans-Pacific Partnership as one of his first acts in office and repeatedly ­threatens to end talks with Mexico and Canada to renegotiate the North American Free Trade Agreement. “There is a risk that we do after all blunder into serious trade conflicts, with the U.S. leading the jump off the precipice,” says Willem Buiter, the chief global economist at Citigroup Inc. “I’m feeling more optimistic about things outside the United States right now than inside,” says Michael Froman, who was the U.S. trade representative under President Obama.

Constitution Avenue, home of the Federal Reserve, will be as important as Pennsylvania Avenue, home of the president. In 2013 the mere hint that the Fed would end its unprecedented emergency measures caused bond investors to throw a “taper tantrum” that walloped emerging markets. The markets seem to be taking the actual tightening in stride. But that could change abruptly, warns Erik Weisman, chief economist of MFS Investment Management in Boston. “We’ve never done this before,” he says. “It’s completely uncharted territory.”

China’s economic growth is predicted to slip slightly in 2018 as President Xi Jinping, beginning his second five-year term, pushes for changes that

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The Year Ahead 2018

Introduction

are good for productivity growth but disruptive, such as shutting down weak companies. Xi didn’t attempt such reforms in 2017 because he didn’t want to risk slowing the economy before the 19th National Congress of the Communist Party in October.

In Japan, 2018 could be the year the Financial Services Agency presses Japanese nonfinancial corporations to put to work more of the 250 trillion yen ($2.2 trillion) in cash on their balance sheets. More investment in plants and equipment would help fight disinflationary forces. A big question for 2018 is whether Prime Minister Shinzo Abe will reappoint Haruhiko Kuroda as governor of the Bank of Japan to an unprecedented second term (page 23).

One concern for the global economy as a whole is that the recovery has been built on too much debt, which companies will be hard-pressed to service when growth inevitably weakens.

Marathon Asset Management LP, a firm that scoops up the bonds of distressed issuers after their prices fall, is looking at raising a new pool of investable funds in 2018. “When is our next default cycle? It’s not this year or next year, but possibly in 2019,” Chief Executive Officer Bruce Richards said at a September conference.

Even if the global economy does well in 2018, financial markets might not. Prices of stocks and bonds are so high that it wouldn’t take much of a jolt to send investors rushing for the exits.

Investors Intelligence says newsletter writers with bullish outlooks outnumber ones with bearish views by the biggest margin since early 1987— months before the worst one-day stock crash ever. Bullishness is just as strong on the debt side, where even Tajikistan, six levels below investment grade, was able to issue bonds yielding barely more than 7 percent in September, note strategists at Eaton Vance Corp.

Some policymakers are invoking Hyman Minsky, the late American economist who said that stability creates its own instability by breeding overconfidence and bubbles. In October, People’s Bank of China Governor Zhou Xiaochuan said, “If we’re too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment. That’s what we should particularly defend against.”

Politicians can’t relax, either. Economic improvement hasn’t healed political divisions or reduced “long-term fragilities,” wrote Bloomberg View columnist Mohamed A. El-Erian, chief economic adviser at Allianz SE, in October. Another way to say that is that a lot of ordinary workers remain angry about their situations and doubtful about their prospects. “It is way too early to declare ‘mission accomplished,’ ” El-Erian wrote.

So there’s plenty of reason for caution. For now, though, enjoy the ride, like those space tourists who will blast off in 2018. Says MFS’s Weisman: “This is about as good as it gets.” <BW>

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The Year Ahead 2018

Economics Central Banking Elections Reform Brexit

p16

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Hot Seat

Jacinda Ardern

p22

Interview

Jim Coulter

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Section

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Edited by Cristina Lindblad

Italian toll road operator Autostrade per l’Italia was one of the beneficiaries of the European Central Bank’s bond-­buying spree

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The Year Ahead 2018

Economics

Central Banking The tide of easy money is finally turning Although experts disagree about how effective the stimulus was in stoking broad-based economic growth, two c­onclusions are in little dispute: The deluge of cash staved off a global financial ­collapse, and it helped propel stocks and bonds to record levels.

Now policymakers believe their economies are strong enough to thrive with

less stimulus. The U.S. Federal Reserve made the first move in October when it started allowing a portion of bonds on its $4.5 trillion balance sheet to mature without replacing them. The European Central Bank is still buying government and corporate bonds, though it recently delineated a plan for tapering off those purchases starting in January. China’s

European Central Bank

The Federal Reserve

European Central Bank President Mario Draghi vowed five years ago he’d do “whatever it takes” to save the euro.

So far it’s taken more than €2 trillion ($2.3 trillion). That’s the amount by which he’s expanded the balance sheet.

On Oct. 26 the ECB announced that its bond buying will continue through September 2018, albeit at €30 billion a month starting in January, or half the current pace. The institution also stressed that it will reinvest proceeds from maturing debt for an extended period.

European policymakers have been among the most ­forceful in their campaign to push down borrowing costs.

They championed negative interest rates, which leave investors who choose to stash their money in government bonds with less than they started with. And unlike the Fed, which has confined its purchases to government and mortgage bonds, the ECB has also been buying corporate debt.

In doing so, it’s extended a lifeline to European ­businesses that might have otherwise been forced to retrench.

That aggressiveness has never sat well with German officials, who’ve traditionally favored tighter controls to keep inflation down. Draghi’s term runs through October 2019. Any German candidate could have an inside track for the job, given that Europe’s largest economy has never had one of its own at the helm of the region’s central bank.

Draghi

The Federal Reserve pumped about $3.6 trillion into the U.S. economy from 2008 to 2014. The link between monetary stimulus and markets was remarkably tight: More than half the gains in the S&P 500 from 2008 until the Fed started raising interest rates at the end of 2015 came on days the Fed announced policy decisions. That’s why, despite Chair Janet Yellen’s assurances that reducing the balance sheet will be a nonevent—“like watching paint dry,” she said—it’s impossible to rule out a sharp ­reaction in the markets.

The Fed stopped replacing some maturing bonds in October and has effectively put the process of s ­ hrinking its balance sheet on autopilot, with the rundown in assets accelerating in stages; $50 billion a month will be taken out of the nation’s bond markets by October of next year.

Yellen’s four-year term as chair is up in February.

President Donald Trump is set to name Jerome Powell, a former private equity executive who’s been a Fed ­governor since 2012, to succeed her. Powell has voted in lockstep with Yellen in gradually ­removing stimulus and is expected to ­maintain continuity in monetary policy.

A Republican appointed by President Barack Obama, he’s earned a r­ eputation as ­nonideological and pragmatic. He sympathises with White House calls to Yellen ease financial regulations.

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After a decade of flooding economies with money, key central banks next year will finally start turning off the tap.

Since the financial crisis, they’ve kept interest rates near zero and some have bought trillions of dollars in government and corporate bonds. The idea was that low rates would encourage spending by ­businesses and consumers.

By Christopher Anstey

Bloomberg Businessweek Middle East

policymakers are expected to tamp down on credit growth next year, as President Xi Jinping focuses on ­defusing financial risks.

The Bank of Japan will probably keep printing money, but that won’t be enough to offset a global decline in central bank stimulus, which ­economists see starting sometime in mid-to-late 2018. “It will worry a lot of investors, because no one’s really ­prepared for it,” says Nader Naeimi, a fund manager at AMP Capital Investors Ltd. in Sydney who’s boosted his cash allocation to 30 percent in anticipation of pain in bonds and stocks. “It will hurt—you want it to hurt, otherwise

The Year Ahead 2018

financial conditions will be too loose.”

In surveys, global investors ­identify a shift to monetary tightening as the single most likely cause of the next ­recession. History shows such transitions are fraught with risk. When the Fed started boosting rates in 1994, it set off the worst c­ orporate bond slide in two decades. It also helped trigger a sudden devaluation of the Mexican peso and the ensuing Tequila Crisis.

Adding to the uncertainty: Three of the world’s four most important central bank chiefs are nearing the end of their terms and may be replaced. The same factors are likely to propel their successors toward r­ educing monetary s­ timulus.

PREVIOUS SPREAD: PHOTOGRAPH BY LUCA LOCATELLI FOR BLOOMBERG BUSINESSWEEK; THIS SPREAD: ECB: ULRICH BAUMGARTEN/GETTY IMAGES; DRAGHI: ALEX KRAUS/BLOOMBERG; ECCLES BUILDING: BROOKS KRAFT/ GETTY IMAGES; YELLEN: ANDREW HARRER/BLOOMBERG; BOJ: KURODA: DAVID PAUL MORRIS/BLOOMBERG; PBOC: ZHANG PENG/BLOOMBERG; ZHOU: LINTAO ZHANG/GETTY IMAGES

Bank of Japan

Economics

Most economies are posting solid growth.

Job markets have returned to what policymakers deem full employment. American household incomes are at a record high.

Crisis-wracked European countries such as Spain have recouped economic losses.

China has shaken off fears of a debt crisis.

Even Japan has pulled out of a long cycle of mini-recessions.

True, central bankers haven’t been hitting their ­inflation targets; the failure of prices to rise is one sign that growth is still subpar. But policy­ makers are setting that concern aside as they increasingly focus on curbing the ­financial excesses that could set the stage for another crash.

People's Bank of China

17

Bank of Japan Governor Haruhiko Kuroda and his board have pledged to keep stimulus going until inflation climbs above 2 percent, a level practically no economist sees on the horizon for years to come. Still, the rate of money creation will slow. One reason is that the BOJ has built up such a huge stock of government bonds—more than 40 percent of the market—that it doesn’t have to buy as much anymore to keep 10-year yields around zero, the target it adopted last year.

Kuroda’s five-year term ends in April. When he was nominated in 2013, his three-decade-plus tenure at the staid Finance Ministry and his optimistic, almost avuncular personality helped ensure his confirmation. Since then, he’s shaken up an institution that had long been criticised for doing too little to lift Japan out of stagnation.

Now it’s fiscal conservatives who are peeved: They say Kuroda’s easy money policies have allowed Prime Minister Shinzo Abe’s government to avoid wrestling down the largest public debt load in the world.

Their calls for a more centrist policy are likely to go unheeded in the wake of Oct. 22 legislative elections that solidified the ruling party’s hold on power. Market watchers believe that Abe, who’s said he has “complete trust” in Kuroda’s abilities, will reward him with an unprecedented Kuroda second full term.

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China’s central bank is more opaque than its peers. Still, there’s a clear consensus among China watchers that ­officials in 2018 are likely to intensify efforts to whittle down a record buildup of debt in the financial system since the global crisis.

At the October gathering of the Communist Party ­leadership, President Xi Jinping ­reiterated that defusing financial risks is one of his top priorities. A sign of that ­commitment was the promotion of Liu He to the 25-member Politburo. A longtime Xi adviser on economic matters, he’s been an advocate of debt reduction.

Despite layers of capital controls, the People’s Bank of China’s actions can still roil markets around the globe.

A surprise move in August 2015 to devalue the Chinese ­currency proved so unsettling that the Fed shelved a widely anticipated rate hike the following month.

Governor Zhou Xioachuan has held the job for almost 15 years. The question of who will replace him became more urgent after he hinted at the recent party ­congress that he’s ready to retire. Even though the central bank takes instructions directly from the government, the pick for the top job still matters. Zhou’s successor will have to craft a monetary policy that balances concern about the nation’s debt load with support for an economy that’s shifted into a slower growth track.

Zhou

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Economics

Elections

18

Latin America’s two largest economies will hold presidential elections in 2018. That’s a ­n erve-racking prospect for investors who’ve become used to decades of policy continuity and could see Mexico and Brazil take radical turns.

After 36 years of free-market technocrats, Mexicans could anoint a leftist firebrand who’s threatened to take on Donald Trump. In Brazil, where the populist Workers’ Party held sway for 13 years until 2016, a scandal-fatigued electorate is flirting with a former army captain nostalgic for military rule.

“You will have a lot of investor angst” during the elections, says Daniel Kerner, an analyst at risk consulting firm Eurasia Group Ltd. “You will have in both cases capital flight, pressures on the currency from investors getting scared—in Mexico’s case that there will be a reversal of reforms, and in Brazil’s case, low commitment to reforms.”

What’s driving voters’ yearning for change?

For starters, neither President Enrique Peña Nieto in Mexico nor his counterpart in Brazil, Michel Temer, will stand for reelection, and their approval ratings are so dismal that their ­endorsements would hardly help a handpicked successor. Their administrations have been dogged by endless ­corruption allegations, and neither has been able to spur the economy to grow fast enough to satisfy the middle class.

In Mexico, Trump himself may effectively hand the presidency to Andrés Manuel López Obrador, who’s sought the job twice before. The U.S. president has antagonised Mexico by demanding the nation pay for a border wall and by threatening to rip up the North American Free Trade Agreement.

That’s added to the appeal of López Obrador, a former Mexico City mayor who claims he was robbed of the presidency in 2006 in a rigged election. Supporters of Amlo, as he’s popularly known, see his brash style as the best way to meet Trump’s hostility head-on. If the U.S. walks away from Nafta or if haggling over the deal inches closer to the July 2018 vote, that would lift López Obrador further. “Mexico could have a rather intense shift in political ­orientation,” says Mario Mesquita, chief economist at Itaú Unibanco Holding SA. “Economists are rightly concerned with a possible end of Nafta, with Mexican e ­ lections, and how that could bring about a López Obrador victory.”

Amlo has promised to boost the minimum wage and increase social spending to help the 50 percent of the population that lives in poverty. Investors are most concerned about the candidate’s pledge to review and possibly reverse hard-fought reforms that

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By Nacha Cattan and David Biller

opened the petroleum and electricity industries to private competition. Chevron, Exxon Mobil, Total, and China National Offshore Oil Corp. are among the almost 70 companies that have signed oil contracts expected to bring in as much as $80 billion over the life of the agreements, according to the energy ­ministry. Companies can at least take comfort from the prospect that Amlo’s Morena party is unlikely to capture a majority in Congress.

One recent poll shows Amlo with as much as an eight-point lead on a large field of candidates.

Mexico is allowing independents to run on the

national ticket for the first time, and more than 70 have signed up. Among them is Margarita Zavala, a lawyer and the wife of former President Felipe Calderón. She broke away from the right-of-center PAN to run on her own ticket. The ruling PRI has yet to unite behind a candidate. At the moment, the top contenders for the party’s nomination are Finance Secretary José Meade and Secretary of the Interior Miguel Osorio.

In Brazil, three years of investigations into government graft have voters pining for what may be an extinct species: clean politicians. In a survey released in October, 87 percent of respondents said it was “very important” candidates not be tainted by corruption. That sentiment may be an obstacle to former President Luiz Inácio Lula da Silva’s hopes of clinching a third term in next October’s elections. He’s appealing a conviction on charges of graft and money laundering.

The desire for an honest candidate has boosted the appeal of Jair Bolsonaro, a seven-term congressman from Rio de Janeiro who calls himself “a

Mexico’s front-­runner, López Obrador

PHOTOGRAPH: CARLOS JASSO/REUTERS

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threat to the stubbornly corrupt.” The onetime ­ ilitary officer also is tough on crime: He’s said m he’ll allow all Brazilians to get guns if elected, a ­controversial stance in a nation where seven people are m ­ urdered every hour.

Improving the security situation, Bolsonaro said, will help attract much needed investment to ­consolidate an incipient recovery following eight quarters of contraction. However, he’s the first to admit he has only a superficial understanding of economics. His policy proposals, to the extent he’s elucidated them, are mostly inclined toward resource nationalism, particularly concerns over China snapping up mining assets. He does support privatisation of nonstrategic assets, which he says would include Petróleo Brasileiro SA, the state-run

The Year Ahead 2018

Economics

oil giant that had been a source of national pride until prosecutors showed it to be the center of a vast network of patronage and graft.

Bolsonaro’s penchant for inflammatory statements, which have caused critics to brand him as homophobic, misogynistic, and racist, doesn’t seem to deter his supporters, who see him as a Brazilian Trump (minus the fortune). His social media following is bigger than that of any other ­contender—of whom there are many. The field includes former Acre state Senator Marina Silva; São Paulo b ­ usinessman-cum-mayor João Doria Jr.; and São Paulo state Governor Geraldo Alckmin.

Finance Minister Henrique Meirelles is a favorite among investors, but so far he’s denied reports that he’ll run. <BW>

Reform

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and it has great implications for the world,” Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said at the Bloomberg Global Business Forum in New York in September. While there should be urgency, there’s also a case for caution so the change needed for “stability in the long run doesn’t produce ­instability in the short run,” he said.

Already, there are signs that MbS may be moving too fast. “The people reject women driving” was the top-trending Arabic hashtag on Twitter after the government announced on Sept. 26 that women will have the right to drive. A rare attack on Oct. 7 on a palace in Jeddah used by the royal family killed two security personnel and injured three others, suggesting the ruling Al Saud family is once again the target of militant groups such as Islamic State or al-Qaeda.

To preempt a backlash against its policies, the government launched the most severe crackdown on dissent in years, detaining prominent clerics and activists. It also arrested princes, billionaires, ministers and former top officials on October 4 as part of an anti-corruption crackdown. “The regime has made enough o ­ pposition-quashing moves for it to be confident—more so than it might have been earlier—that it can make this sort of controversial policy change stick,” says Paul Pillar, a professor at Georgetown University in Washington and a former CIA officer, referring to the decision to allow women to drive.

Cutbacks in government spending have reverberated through the economy. Companies that supply medical devices have seen sales plunge

Growth in the non-oil economy in the second quarter of 2017

Prince Mohammed

PHOTOGRAPH: DMITRY AZAROV/GETTY IMAGES

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Crown Prince Mohammed bin Salman hasn’t wasted any time implementing his vision for Saudi Arabia’s future. Since leapfrogging other senior royals on the line of succession to the throne, the prince has granted women the right to drive, curbed the power of the religious police and cracked down on corruption. Music plays in restaurants, and many women are swapping their black abayas for colourful ones, sharp contrasts in a country that’s been guided by an austere brand of Islam for decades.

The prince’s proposals for the economy are even more ambitious and are detailed in a plan called Vision 2030. The blueprint aims to reduce the ­country’s overwhelming dependence on oil revenue by promoting the development of new industries such as tourism and entertainment. To fund that effort, he wants to sell shares in the stateowned giant Saudi Arabian Oil Co. (page 60) as well as privatise state assets, including flour mills, soccer clubs, and the stock exchange. Proceeds from the sales would be channeled into what would be the world’s largest sovereign wealth fund. The plan also calls for austerity measures to wipe out a budget deficit that by last year had ballooned to more than 15 percent of gross domestic product because of the drop in the price of crude oil.

But the 32-year-old prince, who’s known ­c asually as MbS, will have to balance his impatient demands for change with the population’s willingness to adapt. It’s also unclear if the private sector has the ability to become the engine of economic growth after decades of government largesse. “This is a huge challenge for the country,

By Glen Carey

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The Year Ahead 2018

as health-care purchasing was curtailed. Petrochemical companies are having to pay higher prices for feedstock, because state subsidies have been reduced. Construction, with its reliance on government contracts, has been particularly hard hit. Official data show growth in non-oil GDP came in below 1 percent in each of the first two quarters of 2017, down from a peak of almost 10 percent when oil was above $100 a barrel.

Efforts to impose austerity on the massive civil-sector workforce have faltered. After widespread grumbling, the government reinstated allowances and bonuses to state employees, who make up one-third of the population.

Ali Alireza, managing director of Haji Husein Alireza & Co., a Saudi firm that sells everything from dump trucks to Aston Martins, agrees the economy needs to change but worries that it’s too much, too soon. “The time frame in which these things are going to be addressed, this is the problem,” he says.

It’s not only local businesses that are sounding the alarm. The International Monetary Fund has warned Saudi ­policymakers that the rush to reform could cripple the economy. While in Washington for the fund’s annual meeting in October, Saudi Finance Minister Mohammed al-Jadaan told reporters that the government has some breathing room because it’s on track to reduce the budget deficit to below 10 percent of GDP this year. Authorities don’t see the need “to go from 10 percent to zero in two years,” he said.

The government’s commitment to overhauling the economy could weaken Women were in 2018 if prices for Saudi crude exports granted the right to drive on Sept. 26 head higher. When countries “kick-start

Economics

reform p ­ rograms when oil prices are low, sometimes the ­enthusiasm wanes when commodity prices move higher,” James McCormack, global head of sovereign ratings at Fitch Ratings Ltd., said at an event in Riyadh in October. A delay in selling a stake in Aramco or a disastrous turn in the war in Yemen, where Saudi-backed forces have been unable to corral Shiite rebels after more than two years of fighting, could also damage the prince’s reputation, hampering his ability to press ahead with changes.

Alternately, the prince would see his hand strengthened if his father, King Salman, were to abdicate the throne. This would allow MbS to personally steer the economy’s transition, while quashing dissent from other powerful royal family members, Eurasia Group Ltd. said in a report in September.

Either way, it’s clear the future of Vision 2030 hangs on one man. At the end of the day, Prince Mohammed understands that the reforms aren’t “something he can pass on to somebody else,” says Emily Hawthorne, Middle East and North Africa analyst at Texas-based advisory firm Stratfor Enterprises LLC. Economic change “is his problem.”

Hot Seat New Zealand Prime Minister Jacinda Ardern The South Pacific nation’s youngest prime minister since 1856, Ardern, 37, heads a cabinet heavy on ­neophytes with little governing ­experience. Delivering on her promise of economic reform will be a ­challenge, not least because her Labour Party must rule in partnership with two other parties.

Items on Ardern’s to-do list include repealing planned tax cuts and replacing them with a broad spending package to help low-income families, as well as making the first year of tertiary e ­ ducation free as of January. Labour also wants New Zealand’s central bank, whose sole mandate is price stability, to add full employment to its objectives, similar to the U.S. Federal Reserve. “The new coalition government is likely to be more interventionist in the economy than any government New Zealand has seen in decades,” says Dominick Stephens, chief New Zealand economist at Westpac Banking Corp.

Growth slowed to 2.5 percent in the second quarter, from 3.5 percent in the same period a year earlier. Business and consumer confidence have declined, which could result in a lackluster second half of the year. “The key is how they communicate to the wider community,” says Philip Borkin, senior economist at ANZ Bank New Zealand Ltd. “They need to get buy-in, ­otherwise they will get a backlash.” �Tracy Withers

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The Year Ahead 2018

Economics

Brexit Three ways it could be undone

By Emma Ross-Thomas and Flavia Krause-Jackson

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A shock referendum, a nation on edge, a leader on the ropes. The U.K. stars in a real-life drama about leaving the European Union, while the daily intrigue in London and the brinkmanship in Brussels have audiences guessing if the country will fall off a cliff.

A year ago, Theresa May looked all-powerful while rival Jeremy Corbyn was seen as unelectable. An ill-­advised snap election later, the Conservatives are on the back foot while a radical new Labour Party is on the rise.

The reversal has observers wondering whether there could be more twists on the road to March 2019, the deadline for the U.K.’s exit from the EU. Here are three hypothetical scenarios for how things could take a turn for the unexpected.

They all start with May’s own exit from the scene.

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What if Prime Minister Theresa May quits or is pushed out by her own party?

① Labour wins in a snap election A three-month leadership battle tears the Conservatives apart.

A pro-Brexit candidate emerges, but the party remains divided.

② Conservatives rally behind a Remainer As Conservatives fight one another for control of the party, Brexit talks are suspended.

③ A new p ­ ro-Europe party emerges Conservatives unite behind a hard-line Brexit backer.

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The country holds its second election in less than a year. Corbyn’s Labour wins.

The pound tanks, forcing the Bank of England to raise rates.

The Year Ahead 2018

Brussels embraces the new Labour government, but talks bog down over nitty-gritty.

The U.K. economy decelerates and is close to tipping into a recession.

The Conservative Party is divided over whether it should push on with life outside the EU or apply to rejoin, even under worse terms.

Talks with the EU bog down, and the March 2019 deadline arrives without any kind of deal to soften the blow.

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Younger Europhile Conservatives split off and form an alliance with the Liberal Democrats.

The unions that provide Labour with most of its funding press the party to reverse its Brexit policy.

Businesses relocate operations to the Continent.

Job losses mount.

Frightened by the dire headlines, Conservatives unite behind a Remainer.

The U.K. holds elections, and the new party wins on a platform of returning the U.K. to Europe.

Economics

With the parliamentary arithmetic now clearly proremain, Labour announces a second referendum.

Anti-Brexit Conservatives join forces with Liberal Democrat and Labour lawmakers to push for a second referendum.

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The new government lobbies the EU for a longer transition period to allow more time for talks, offering a bigger divorce settlement.

Brussels agrees.

Without putting the question to a referendum first, a new government opens talks with Brussels to rejoin the EU.

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The Year Ahead 2018

Economics

Interview Jim Coulter The co-CEO of private equity firm TPG Capital LP feels good about the global economy, but wonders, Where’s the inflation?

Party congress this year, we think the economy may well see a pickup going forward—although the numbers have not been bad—as politics move more into the rearview mirror. Across the rest of Asia, it’s been a pretty good year in our portfolio and a pretty good year for the economies. We don’t see that changing in the near term.

TPG recently broadened its ambitions to include Africa. Why?

We’re early in that process yet, but we’re highly interested in the demographic trends and certain sectors that are emerging, most notably health care, financial services, and agriculture.

What’s a tech trend that you’re watching closely from your perch in San Francisco?

With 200-plus companies, we have front-row seats for the world of business. And right now the show seems to be progressing pretty well. If ­anything, my concerns are that the market seems not to have ­concerns in a world that is geopolitically and socially at an interesting point. I’m also still ­scratching my head on the state of inflation, where on one hand we have asset inflation in many parts of the economy while the general inflation measures reflect average levels of consumer price inflation. Those seem at odds.

How did the major elections across Europe this year affect your outlook for the continent?

Europe has, in our view, outperformed over the past few years. And the recent elections, which have swung a bit more toward stability after the swing away from stability at Brexit, have been encouraging. Catalonia at the moment is an ­interesting question, but elsewhere on the continent, the outlook seems positive.

TPG was an early mover into Asia. What are the opportunities and challenges there now?

In China, a number of years ago people thought the story was going to be about transitioning the stateowned enterprises. Instead, much of the activity has been around building new companies, new industries. Because of the focus on the Communist

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One trend that interests me is the change in ­spending habits from things to experiences, which has accelerated over the past few years. That’s really driven by three points: Experiences are easier to buy when you can digitally pre-shop for them; experiences are more valuable to people if they can be shared—so the ability to instantly share that moment in a concert has somehow made concerts more valuable; and while we used to spend money to brand ourselves with the things we wore or used, today people are branding themselves with the experiences they have that they can immediately broadcast to their friends. It’s a ­technologically enabled change in behaviors, which creates i­ nvestment opportunities.

More businesses are choosing to remain privately funded. Is this development ­temporary or permanent?

We might be entering a new era of the private markets. While the stock market is up in value, the number of publicly listed companies in the U.S. is down more than 40 percent over the last 20 years. In particular, the new technology companies we watch closely at TPG are increasingly choosing to stay in the private markets longer. I was struck that when James Freeman [the founder] of Blue Bottle Coffee was asked recently why he sold to Nestlé as opposed to going public, he said that, from his point of view, going public was like living in hell without dying. That’s very different than the ­traditional view that going public is a celebrated rite of passage. �Devin Banerjee

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What is your portfolio telling you about the state of economies around the world?

“The ability to instantly share that moment in a concert has somehow made concerts more valuable”

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The Year Ahead 2018

Silicon Valley Big U.S. tech companies are about to spend a lot of time in court

By Peter Coy and Gerrit De Vynck

A year ago the big U.S. tech companies were facing threats from regulators in Europe and to some extent in China, but they were still golden at home. President Obama’s chief digital officer was a Google veteran, and the month before Election Day, the White House staged a tech-infused South by South Lawn festival that Obama called the “first annual.” Lobbyists for Google, Apple, Facebook, and Amazon.com got respectful congressional audiences for their priorities: more visas for high-tech workers, a crackdown on patent trolls, and extended tax credits for R&D. Heading into 2018, the same companies find themselves almost as pressured in the U.S. as they are in other parts of the world. Their stock prices are still sky-high; their reputations

less so. Various tech companies stand accused of capturing or suffocating potential competitors, shirking taxes, invading privacy, and providing a venue for sex traffickers. (They deny the accusations.)

While all big, successful companies have their share of critics, few are battling on as many fronts as Google, Apple, Facebook, or Amazon. Many of the challenges, from court cases to legislation, will come to a head in 2018. “There’s just so many things that have happened recently,” says Albert Wenger, a partner at New York venture capital firm Union Square Ventures, an early investor in Twitter and Etsy Inc. “People are starting to ask, ‘Wait, what’s going on here?’ ”

● Challenges ▶ Prospects

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● European regulators fined Google €2.4 billion ($2.8 billion) in June for favoring its own shopping service in search engine results.

They’re considering two more cases against Google, one involving its Android software and another focusing on its AdSense advertising service. ▶ Google plans to make its shopping service a standalone business unit that won’t get special treatment in its search results.

“Google abused its market dominance,” says Margrethe Vestager, the European Union’s commissioner for competition. ● Germany’s competition authority is investigating whether Facebook abused its power as the dominant social network by forcing customers to agree to unfair terms on how their data are used. ▶ The regulator has begun issuing white papers on social Vestager

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networking to strengthen its credibility as a leading voice on consumer protection.

European Commission is also pushing companies to be more proactive in taking down offensive content.

The case “falls into a gray zone between competition and privacy,” Vestager told Bloomberg TV in September.

Immigration

Blocking

● The Trump administration doesn’t share Silicon Valley’s enthusiasm for more open borders.

● China is shutting down virtual private networks (VPNs) that people have used to circumvent censorship and reach Facebook, Google’s YouTube, and other sites.

Xi

▶ President Xi Jinping may further tighten government control of China’s internet in 2018.

Hate speech ● A German law that took effect in October requires social platforms to remove hate speech within 24 hours or within seven days in complex cases.

Tech companies have said this would be so onerous that it would force them to enact broad censorship. ▶ This could be just the start. The

▶ Congress may cut back on H-1B visas, which disproportionately go to tech workers, in 2018.

“Congress, get ready to do your job DACA!” President Trump tweeted on Sept. 5.

Net neutrality ● The Federal Communications Commission is expected to kill Obama-era net neutrality rules, which

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Antitrust

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Technology

prevent internet providers from charging different rates to different customers (from Netflix down to individual homes) or giving certain data sources preferential treatment. That will likely raise costs for tech giants. ▶ The FCC is on track to undo the net neutrality rules by early 2018.

FCC Chairman Ajit Pai says the net Pai neutrality framework was “originally designed in the 1930s for the Ma Bell telephone monopoly.”

Political advertising ● The Honest Ads Act, introduced in the U.S. Senate in October with bipartisan sponsorship, would require internet companies to reveal who’s buying political ads and archive them for review.

Russian influence ● Two congressional committees and special counsel Robert Mueller are investigating whether Russian agents influenced the 2016 presidential election through inflammatory ads placed on Facebook, Google, and Twitter. British Prime Minister Theresa May has floated the idea of treating the three companies like news organisations, making them responsible for content appearing on their platforms. ▶ This could lead to regulation of American online advertising by countries that are considered adversaries of the U.S. Facebook says Russian posts landed in the news feeds of 126 million people. Twitter just banned ads from Russia-backed news services RT and Sputnik.

Mueller

Sex trafficking and pornography

▶ Congress has been slow to take action on the bill, which, if passed, would take effect on Jan. 1.

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“Election security is national security,” says co-sponsor Senator Amy Klobuchar (D-Minn.).

Privacy ● A European rule called the General Data Protection Regulation calls for fines of as much as 4 percent of worldwide annual revenue on companies if they don’t adequately protect customer data. ▶ The regulation takes effect on May 25.

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● The U.S. Senate’s Stop Enabling Sex Traffickers Act (Sesta) would expose internet companies such as Facebook and Google to civil lawsuits over content created by customers. There’s a similar bill in the House. Opponents such as the Electronic Frontier Foundation say it would undercut free speech and innovation.

Taxation ● The EC wants to close loopholes that U.S. tech giants use to reduce their tax bills. As an interim solution, it’s considering an “equalization” tax on digital companies’ revenues instead of on their profits. ▶ In September the commission suggested “a possible proposal by spring 2018.”

The European Union says the average international company with a digital consumer business pays an EU tax rate of 10.1 percent, vs.

23.2 percent if the company has a traditional business model. ● In 2016 the EC ordered Ireland to collect up to €13 billion in back taxes from Apple. The Irish government, which uses low tax rates to attract business, has appealed. ▶ The EU’s General Court is expected to hear the case in late 2018.

▶ Introduced by Senator Rob Portman, an Ohio Republican, the bill has 30 cosponsors from both parties. It has a good chance of passage in 2018.

Tech companies find themselves on the same side of the debate as sex traffickers.

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Cook

Apple CEO Tim Cook called the order “total political crap.”

● By December 2017, many merchants who sell on Amazon are expected to begin collecting state sales taxes in exchange for amnesty from back taxes in about half of U.S. states. ▶ Higher prices could reduce sales through Amazon’s marketplace.

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The Year Ahead 2018

Technology

Cybersecurity

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When a serious cyberattack against the U.S. begins, at first you’ll blame the weather, or an accident, or corporate incompetence. It’ll be a power outage that lasts a few hours at most. But things will start to get more unsettling when reports trickle out that the blackout is the work of hackers, most likely connected to the Russian government.

This isn’t science fiction—it happened in western Ukraine two years ago. That attack, the first known to take out an electrical grid, used malicious software known as a Trojan to briefly black out several hundred thousand people. The hack forced Ukrainians to start taking their country’s conflict with Russia much more seriously, says John Hultquist, director of intelligence analysis at security company FireEye Inc. The power outage, and another that followed in the capital in 2016, “took the front from the east to Kiev,” he says. “You can’t ignore it when the lights go out.”

So far, most Americans and Europeans haven’t been forced to reckon with the dangers of a largescale cybersecurity breach, even as such attacks have become routine. Although close to half of the U.S. population had their Social Security numbers, addresses, and birthdates stolen from credit-­ monitoring company Equifax Inc. earlier this year, the usual round of press outrage and congressional finger-wagging didn’t yield any serious changes.

Equifax Chief Executive Officer Rick Smith resigned and lost his 2017 bonus, but he got a retirement package worth at least $18 million.

But the kind of attack that companies will finally take seriously, something like the one in Ukraine, is coming. Security experts call such a hack cyberphysical, meaning it spills into the real world, causing property damage and perhaps deaths. Experts have already found evidence that the hackers responsible for Ukraine’s outages have been quietly rolling into the systems that run U.S. energy grids. On Oct. 20, the FBI and Department of Homeland Security issued an alert warning of a “multistage intrusion campaign” aimed at industrial control systems in critical infrastructure, including in “the energy, water, aviation, nuclear, and manufacturing sectors.”

Attacks on infrastructure are extremely tough to pull off. Most power grids include a tangle of interconnected systems, some online, some offline, and some decades old. Intelligence analysts say only five countries can hack them: the U.S., China, Russia, North Korea, and Iran. None, as far as we know, have successfully disabled physical assets beyond computers on American soil.

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By Max Chafkin and Dune Lawrence

Even so, U.S. companies are woefully unprepared. Industrial control systems have been connected to the internet in recent years, with little thought given to securing them. Many software systems patch security holes daily; at power plants, well-known vulnerabilities may not be fixed for years, partly because there still isn’t a consensus on whether the manufacturer, installer, or utility operator bears responsibility for updating the software, says Marina Krotofil, a Ukrainian-born FireEye analyst. “There was no security in the past, because there was no need,” she says. Many critical infrastructure systems, including natural gas pipelines and storage, are almost entirely unregulated in the digital realm.

Russian hackers, meanwhile, continue to innovate. Krotofil says many low- and midlevel hackers have moved on from hijacking Windows PCs and are writing malware designed to take over power grids. “You see so many exploits, because so many people got into this field,” she says.

So far, Ukraine has been Russia’s primary target.

The Kremlin-backed group that caused the blackouts, identified by cybersecurity researchers as Sandworm, has also been tied to a large-scale hack that briefly crippled Ukraine this summer. The group used a well-known ransomware program, Petya, that normally attacks a target’s computer, encrypts the data, then offers to decrypt it for a ransom. But the hackers came up with a variation, NotPetya, that simply destroyed the data.

The hackers spread the virus by targeting the main application that Ukrainians use to file their taxes, and in doing so, they took down the system Ukrainian pharmacies use to keep track of rare prescription drugs and the radiation monitoring system at Chernobyl. Banks, airports, and government offices were also affected. “It was like nothing we’d ever seen before,” says Krotofil. “The entire country was paralyzed.”

There’s evidence to suggest the blackouts and NotPetya were just warmups for a hack in the U.S. Sandworm’s code has been found on computers run by American electrical operators, according to FireEye. And in July security groups reported that another group, believed by U.S. intelligence agencies to be Russian, had accessed computers at a dozen U.S. power plants, including Wolf Creek, a nuclear plant in Kansas. Russian hackers haven’t done anything malicious to these systems, but such stories are troubling, especially when combined with their meddling in the 2016 U.S. presidential election and

In Ukraine, hackers have proved that ransomware can be more destructive than it sounds

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The next hack will turn your lights off

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their smaller-scale attacks in Europe, such as the disabling of a French television network.

The same thing that’s kept the nuclear peace between the U.S. and Russia has also stopped Russia from launching a cyberphysical attack in America. The U.S. could respond to a Russian strike with its own crippling cyberattack along the lines of Stuxnet, a worm said to have been developed by the U.S. National Security Agency and Israeli intelligence that sabotaged Iranian nuclear centrifuges starting in 2009. (Iran has been active in the U.S. as well. In 2016, the Department of Justice announced that it was bringing hacking charges against seven Iranians for crimes that included accessing a control system for a dam in the New York City suburbs.) Martin Libicki, a visiting professor at the U.S. Naval Academy and the author of

The Year Ahead 2018

Cyberspace in Peace and War, says he worries that a serious hack could escalate into outright war. “My No. 1 fear is not the direct consequences of a cyberattack,” he says. “It’s if we get into a conflict with another country and there’s a cyberattack, we will overreact, or they will overreact.”

How long can fear of retaliation hold off a “cyber Pearl Harbor,” as security researchers sometimes call it? Peter Singer, a fellow at the Washington think tank New America, says the phrase is so overused it’s basically fodder for a drinking game, but the past few years have been sobering. “We’ve seen a series of lines crossed that we thought were no-go areas,” he says. “The Russians have crossed lines and, more importantly, done so without punishment. That sends a signal, not just to them but to everyone else, that, ‘Hey, you can get away with this.’ ” <BW>

Technology

“The Russians have crossed lines and, more importantly, done so without punishment”

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In late October, as he pushed to cement his grip on China’s ruling Communist Party for another five years, President Xi Jinping made it clear that with him in charge, the country’s internet wouldn’t be getting more liberal.

At the twice-a-decade National Congress of the Communist Party, during a three-and-a-half-hour speech extolling the virtues of China’s version of socialism, Xi said officials need to engage with the public and pledged to do it on specific terms.

“We will provide more and better online content and put in place a system for integrated internet management to ensure a clean cyberspace,” he told more than 2,000 party delegates as he kicked off the weeklong assembly. “We will distinguish between matters of political principle, issues of understanding and thinking, and academic viewpoints, but we must oppose and resist various erroneous views with a clear stand.”

Those goals may sound appealing in the era of fake news, but Xi’s first five years have been marked by the biggest crackdown on freedom of expression in the internet age. Foreign companies complain of restrictions that hamstring operations and favor homegrown players. Police are shutting businesses and arresting civilians on message groups as Beijing plugs more holes in its “Great Firewall,” a blockade of blacklisted sites.

Google and Facebook Inc. are trying to figure out how to nose their way back into the world’s biggest market—about a decade after exiting China because of privacy concerns (Google) and being blocked from it (Facebook). They have to weigh

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By Bloomberg News

the benefits of a billion potential users against the implicit support for a repressive regime that works in opposition to their stated priorities. “China has become far bolder and more strategic in its approach to a very old and familiar objective, which is to shore up political control through controls on information,” says David Bandurski, co-director of the China Media Project and a Richard von Weizsäcker​fellow of the Robert Bosch Academy in Berlin. “The party feels it must centralise and double down on control.”

China has corralled Tencent Holdings, Alibaba Group Holding, Baidu, and other leading internet

The National Congress of the Communist Party

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China’s crackdowns are getting serious

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Technology

Aerospace Commercial spaceflight gets real

By Michael Belfiore

Blue Origin’s New Shepard suborbital craft in July at the annual gathering of the Experimental Aircraft Association in Oshkosh, Wis.

Next year will mark the 50th anniversary of the first manned lunar mission, during which three Apollo 8 astronauts orbited the moon and gave the U.S. a decisive lead in its space race against the Soviet Union. These days, with NASA’s ­milestones receding in the national memory, Russian spaceships are the ones ferrying American astronauts to and from the International Space Station (ISS). If all goes well, that will change in 2018.

This moment is a big one for the handful of companies that have spent much more than a decade working toward commercial spaceflight.

Boeing Co. and Elon Musk’s Space Exploration Technologies Corp. are preparing to bring NASA scientists to the ISS by this time next year, not long after five teams race unmanned landers to the moon to win the $20 million Google Lunar XPrize. Richard Branson’s Virgin Galactic LLC and Jeff Bezos’ Blue Origin LLC have suborbital flights scheduled. Rocket Lab USA Inc. and Virgin Orbit, Virgin Galactic’s satellite arm, expect to begin launching satellites. And SpaceX plans to use its own astronauts to reprise 1968’s history-­ making flight.

NASA, for one, is counting on commercial efforts to succeed next year. Even unmanned tests of spaceships from SpaceX and Boeing “would be a major milestone in getting the U.S. back into launching its own astronauts into space,” says Douglas Messier, managing editor of Parabolic Arc, a commercial-space blog. NASA hasn’t had that capability since it retired the Space Shuttle in 2011.

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companies to join the effort. Officials say guarding the electronic frontier is necessary to preserve the stability of a vast country undergoing rapid economic and social changes. In June, Weibo Corp., the Chinese equivalent of Twitter Inc., was one of three companies fined and banned by regulators from broadcasting certain types of content without a license. “They want to shut people up and to tighten self-censorship,” says Qiao Mu, a former journalism professor at Beijing Foreign Studies University. “They want to avoid mass incidents and prevent crises before they emerge.”

Away from the glare of rules and legislation, censorship in China has become increasingly granular, down to what can be shown on streaming sites. Previous regimes periodically blocked virtual private networks, the technology long used to circumvent web filters, but Xi’s government is shutting them down for good.

China’s online watchdog has also slapped fines on news services run by Tencent, Baidu, and Weibo.

Internet regulators say they closed 3,918 websites in the second quarter for spreading information that was violent, pornographic, or a danger to national security. Even Winnie the Pooh was kicked off temporarily after images of the bear started popping up as an online proxy for the stout Xi. “At this rate, there will not be much left for the next leader to censor,” says the co-founder of GreatFire.org, a group that finds ways around government restrictions, who goes by the name Charlie Smith to avoid reprisals. “He is the first Chinese leader to truly understand the power of the internet, and hence we are seeing an unprecedented crackdown on dissenting information.”

Tencent’s WeChat, with almost 1 billion users, has become adept at preventing sensitive messages from ever reaching their destination, such as when it blocked a flood of photos of the late dissident and Nobel laureate Liu Xiaobo this summer. Baidu is building a system to allow cybercops to spot and fix “online rumors,” letting police agencies insert themselves directly into everything, including its search results and discussion forums.

Services that rely on free-flowing information, such as Google and Facebook, would struggle to exist in such a regime, though they remain intent on finding a way in. Facebook-owned WhatsApp, which operated unfettered for years, began experiencing intermittent disruptions in July that industry experts blame on the government’s increased use of surveillance technology in the runup to the party congress.

Other companies have made concessions to Xi. LinkedIn censors its local subscribers’ posts.

Microsoft Corp. set up software centers where government officials can peruse source code under careful scrutiny. Apple Inc. started deleting apps that bypass China’s internet restrictions from its local App Store. Fight it or not, China is simply too big to ignore. <BW>

The Year Ahead 2018

COURTESY BLUE ORIGIN

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The Year Ahead 2018

NASA’s Commercial Crew Program is targeting April for the SpaceX Dragon 2’s first test flight and August for a manned flight. Boeing is slated to testfly its CST-100 Starliner unmanned in August and crew it in November. In addition to a combined $7.9 billion in development money from NASA, the two companies have received a total of $6.8 billion in launch contracts to transport astronauts.

Sometime after its manned flight in August, SpaceX says, the Dragon 2 will make its moon-­ orbiting flyby with two paying passengers. The company won’t say how much those tickets cost, but the price is likely to be far more than the $40 million the last private astronaut, Canadian billionaire Guy Laliberté, paid the Russians to reach the ISS almost a decade ago.

Suborbital spaceflights, which breach the atmos­phere but don’t go fast enough to reach

Technology

the continuous free fall of orbit, will be almost as important in 2018, says Charles Lurio, who publishes the Lurio Report, an industry newsletter.

Blue Origin and Virgin Galactic are both testing suborbital craft (Blue Origin’s unmanned, Virgin’s with test pilots) and say they’re aiming to reach manned zero-gravity flights in 2018. Those trips, Lurio says, “will start to give the first tangible idea of the potential market for suborbital flight.”

Satellite launches are a different story. Rocket Lab, which flew a suborbital test flight of its Electron rocket in May, says it plans to make its first flight to orbit in December and begin charging customers to put their satellites in space next year. Virgin Orbit has a similar timetable, and its cargo room is long gone, says Will Pomerantz, vice president for special projects. “Our manifest for 2018 is already fully sold,” he says, “as is much of 2019 and 2020.” <BW>

The parabolic arc of rocketry 2000

Jeff Bezos founds Blue Origin in Kent, Wash.

2002

Elon Musk co-founds SpaceX in El Segundo, Calif.

2004

2006

After Scaled Composites’ SpaceShipOne flies the first commercial astronauts to suborbital space, Richard Branson’s Virgin Galactic funds development of SpaceShipTwo

2011

2016 2012

An equipment explosion kills three men working on Virgin Galactic’s SpaceShipTwo

ILLUSTRATIONS BY CHRIS PHILPOT

COURTESY BLUE ORIGIN

2008

SpaceX’s third launch fails, but a fourth one gets a payload into orbit

2009

SpaceX executes a second orbital launch, the last use of a Falcon 1 rocket

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SpaceX sends its new Falcon 9 into orbit and recovers it intact

After two more failed landings, SpaceX lands a Falcon 9 on an unmanned ship. But another launchpad rocket explosion destroys a pricey Facebook communications satellite

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Virgin Galactic begins glide-testing its VSS Unity spaceplane

Blue Origin test-flies a vertical takeoff and landing rocket at low altitude

SpaceX’s second launch fails

2010

Blue Origin flies New Shepard to space in three more unmanned tests

An unmanned SpaceX Dragon capsule becomes the first commercial craft to dock with the International Space Station

SpaceX’s first launch fails

2007

A Blue Origin test rocket ascends to 45,000 feet and breaks the sound barrier, then crashes

2014

NASA awards SpaceX and Boeing launch contracts worth a combined $6.8 billion to fly astronauts in competing ships to the ISS

SpaceX sends a satellite into orbit on a used Falcon 9, executes its 19th successful rocket landing, and outlines new designs for a Mars colonization craft

Blue Origin announces a partnership with United Launch Alliance to develop an engine

Bezos says he’s funding Blue Origin at the rate of $1 billion a year from sales of his Amazon stock

Virgin Galactic’s VSS Enterprise spaceplane crashes during a test flight, killing its pilot

Branson says he intends to travel to space in Virgin Galactic’s VSS Unity in 2018

Blue Origin successfully flies its New Shepard suborbital rocket and capsule in two unmanned tests and says it’s developing an orbital craft

2017

2015

SpaceX crashes two rockets trying to land them on a floating ocean platform.

A third lands successfully, but a cargo flight to the ISS explodes after launch

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The Year Ahead 2018

Technology

5G Digging deep to find the future of mobile

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mobile services for consumers while dramatically lowering the power needed for devices. That won’t fulfill some of the more futuristic promises of the technology, but “enhancing mobile broadband isn’t a bad place to start,” says Daryl Schoolar, an analyst at researcher Ovum Ltd. “You build a foundation.”

The three leading equipment makers have suffered from slumping demand as 4G networks are largely complete in key markets. Ericsson is more troubled than the others, because it was less prepared for the downturn; its shares plunged 30 percent after a profit warning last year. Even as Chief Executive Officer Borje Ekholm seeks to cut annual operating costs by more than $1 billion to boost profits, he’s pledged to continue investing in 5G—keeping “one foot on the gas pedal and one foot on the brakes,” he told Bloomberg Television.

At Kankberg, Ericsson has built a network of about three dozen antennas to cover more than a mile of tunnels, using equipment that adheres to proposed standards, even though the first set won’t be completed until next summer. Truckmaker Volvo AB has developed a r­ emote-control front-loader for transporting rock. ABB Ltd. is

How 5G could work 4G

5G

● Signals broadcast in all directions ● All data are sent to and from the network

● Focused signals ● Small base stations extend reach and directly handle some exchanges ● Device-to-device communication

providing wireless devices to monitor air quality.

And researchers at Sweden’s Lulea University have created sensors that track seismic activity in the rock. Mikael Staffas, head of mining operations at Boliden AB, the owner of the mine, says 5G will let the company and its suppliers create sophisticated equipment that engineers can’t yet envision. “We get a very capable infrastructure, and we need to think about how to use it,” he says. “It’s a bit uncertain, because no one has really started building applications for the higher speeds.” <BW>

5G GRAPHIC BY BLOOMBERG GRAPHICS; DATA: INSTITUTE OF ELECTRICAL AND ELECTRONICS ENGINEERS

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In a gold mine hundreds of feet below the boreal forests of northern Sweden, Ericsson AB is seeking the answer to an existential question: Does anyone really want 5G wireless service? The troubled telecommunications equipment maker, suffering as sales of 4G technology falter, has bet its future on the fifth generation of mobile, which is expected to link billions of devices to the internet with connections fast enough to transfer a feature film in less than a second. But even with initial 5G standards poised to be determined next year, no one is sure what applications and services will make customers hand over the billions of dollars the systems will cost to construct. “We need to explore this to understand what we’ll use it for,” says Peter de Bruin, an Ericsson engineer who designed the prototype 5G network the company built in the Kankberg mine, 500 miles north of Stockholm. “The benefits of such fast download speeds aren’t really obvious.”

The 50-year-old mine is one of dozens of locations globally where Ericsson and its primary rivals, Nokia Oyj and Huawei Technologies Co., are testing equipment for 5G, which will likely see its first large-scale commercial deployments in 2020. Nokia has worked with China Mobile Ltd. to show how ambulances can use 5G to stream patient X-rays to emergency rooms as they race toward hospitals. Huawei has showcased a remotely driven car. Ericsson, which has devoted the bulk of its 24,000 engineers to 5G, is involved in about 20 projects, including the h ­ ighest-profile test, in February at the Winter Olympics in Pyeongchang, South Korea. There, the company is working with KT Corp. and Intel Corp. on a network that will guide self-driving buses through the athletes village and allow fans to e ­ xperience the action live from tiny cameras embedded in the helmets of bobsledders.

“We have talked for a long time about 50 billion connected devices, but we need to understand what they are,” De Bruin says.

Ericsson, Nokia, and Huawei are developing 5G radio components; chipmakers Intel and Qualcomm Inc. have showcased modems; and programming houses are writing much of the code that will make the systems tick. Even tiny bits of software or equipment that become part of the global standard could bring riches to those who create them.

The 5G Forum, an industry group, predicts the 5G services and equipment market will reach $1.9 trillion in 2026.

Those numbers will depend on industries from health care to manufacturing finding ways to use the technology. Until that happens, 5G’s benefits will be more mundane: improving the speed and quality of

By Niclas Rolander

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Biometric border control

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The Year Ahead 2018

Technology

Interview George Yancopoulos The co-president and chief scientific officer of Regeneron Pharmaceuticals Inc. says new medical technologies and drugs won’t keep coming unless we spend on basic science Social media has maybe destroyed the minds of the next generation. We’ve shown how interventions can so easily go awry. But it’s so hard to fix things.

Crispr is still at the earliest stages, and it’s going to be years before we see large-scale interventions.

The industry has been arguing that it’s not recognised for this hard work. Everyone from President Trump on down accuses drugmakers of price gouging. Where’s the price conversation going to go next year?

The biotech industry has seen a boom of new technologies and drugs in the past few years.

What technologies are you most excited about?

It’s all about genetics and DNA. Regeneron has now sequenced a quarter of a million people and has their health records. This is a resource that’s never been possible or available before. It used to take 10 to 15 years to do the genetics testing, and then you’d start the drug development, which takes another 10 to 15 years. Now we’ve cut out those first 15.

Are there ethical issues or other drawbacks to increasing the accessibility of these technologies? One guy recently injected his arm muscles with the gene-editing tool Crispr to see if he could make himself more buff.

Well, I don’t think it’ll work for that guy. At most, he’ll get injection-site inflammation and some soreness. Biology is one of the most complicated things we’ve tried to tackle as humanity. The danger of unintended consequences is so high. We have to go by the rulebook of Hippocrates: Do no harm. We’ve had older gene-editing technology for decades and could have edited human embryos, but we haven’t for that reason. It’s so easy to screw things up.

We’ve screwed up our health, our environment.

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What advice do you have for the current administration?

I don’t think any administration, including the current one, understands where discoveries really come from. It can take 10, 20, 30, even 40 years.

That’s where their horizons should be, not the next election or earnings cycle. I think there are ways we could be changing corporate tax structures and introducing incentives to encourage those longterm horizons. We say at Regeneron, in biology you get what you select for. That’s the case in politics, too. Climate change can’t be fixed in the next quarter. We have to fundamentally change our thinking. �Caroline Chen

“Society really needs to invest in future epidemics.

If we don’t deal with them, then the cost of drug prices today will be rounding errors compared to the price of obesity and diabetes and Alzheimer’s”

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As an industry, we all have to be more responsible. We know the egregious examples of [Martin] Shkreli and Valeant [Pharmaceuticals International Inc.]. Even more respectable companies sometimes, when they want better earnings per share, do double-­digit increases of a drug price for a product they’ve had on the market for years.

But I don’t want the pricing conversation to dominate to the point that it distracts from the more fundamental issues here. Society really needs to invest in future epidemics. If we don’t deal with them, then the cost of drug prices today will be rounding errors compared to the price of obesity and diabetes and Alzheimer’s. It’s astounding that out of the trillions of dollars we spend on health care, we’re only giving $30 billion to the National Institutes of Health to try and somehow fix these future problems. That’s irrational. People mock the work on worms and fruit flies that the NIH does, but that’s where discovery comes from. We should be increasing the NIH funding tenfold.

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Retail Electric Vehicles Online Shopping Travel Streaming Organic Food

The Year Ahead 2018

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Michael Oâ&#x20AC;&#x2122;Leary

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Edited by James E. Ellis and David Rocks A balloon dog sculpture by artist Jeff Koons towers over Jay-Z at a performance in August

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The Year Ahead 2018

Retail

Electric Vehicles EVs from Tesla and GM may start losing their tax credits

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according to IHS. Those various models count as a single car under the tax credit system. Nissan had sold 112,000 of its all-electric Leaf.

The program doesn’t end abruptly when a ­c armaker reaches 200,000 in sales. Once a ­manufacturer gets to that number, new buyers receive ever-diminishing credits over the next five quarters, at which point the subsidy is completely gone (chart).

Brands with reduced or used-up credits would be at a financial disadvantage against ­competitors that are coming out with models eligible for the full incentive. Between now and 2022, global ­carmakers plan to sell 50 new electric car models, with many of them headed for dealer lots in the U.S. GM alone has 20 coming by 2023.

How the tax credit works Buyers of a manufacturer’s first 200,000 electric and alternative-fuel vehicles can claim the full credit, which is $7,500 for EVs such as those shown below; plug-in hybrids get less. After sales exceed the threshold, the full credit is available for the rest of that quarter and the following three months. Purchasers in the next two quarters qualify for half the credit; in the six months after that, new buyers get 25 percent.

2017 Tesla Model 3 $35,000

2017 Nissan Leaf $30,680

2017 Chevrolet Bolt $36,360

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Electric vehicles have caught the eye of many American consumers. But it’s not only the cars’ green cred that seals the deal. Another big lure: a federal tax credit of up to $7,500 per vehicle.

Now that lucrative incentive may be fading away for two reasons. First, buyers of vehicles from leading EV makers such as Tesla Inc. and General Motors Co. could soon use up the maximum value of tax credits for their brands. (They’re capped for each manufacturer.) But worse for the entire industry, all EV credit provisions in the U.S. tax code are at risk of being eliminated as part of the horse trading under way over a tax cut bill.

To understand what could happen to electric car sales if Republicans phase out federal EV incentives, look at what happened in Georgia. Electric car sales there were growing briskly until the state cut its $5,000 electric vehicle tax credit in June 2015.

Sales crashed from as many as 1,400 electric cars a month statewide to fewer than 100 the month after the incentive was axed.

Automakers fear a similar sales plunge if the federal tax credit goes away. Losing the credit would crush sales of electric cars just as most major automakers are beefing up to sell a slew of EVs over the next five years. “The credits matter a lot,” says Eric Noble, president of the CarLab, a consulting company in Orange, Calif. “In states without EV mandates or incentives, you’ll see sales crater.”

Electric cars have always been a tough sell to Americans, who are hooked on big SUVs and cheap gasoline. But the tax credits have helped juice sales, especially for lower-priced EVs and plug-in hybrids, Noble says. Even if Congress doesn’t do away with the credits, each m ­ anufacturer—under the existing IRS program—would see the incentive start to phase out once it sells 200,000 EVs or plug-in hybrids. Tesla, Nissan Motor Co., and GM would be the first to see their credits dwindle, because they’ve sold the most EVs. If the government keeps the system in place but lets it run its course, Tesla will probably reach the limit first. The company had sold 127,000 of the Model S sedan and Model X SUV through August, according to researcher IHS Markit. With plans to produce as many as 10,000 a week of its smaller, $35,000 Model 3 sedans at some point next year, Tesla could max out sometime in 2018.

GM would probably be next. The carmaker had sold 126,000 of its Chevrolet Volt plug-in hybrids through August, along with 12,000 of the Chevy Bolt EV and 7,000 of the tiny Chevy Spark EV,

By David Welch

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Bloomberg Businessweek Middle East

The industry lacks the flexibility simply to pull back from making alternative-fuel cars because California—the biggest automobile market in the U.S.—mandates that a certain share of all ­automakers’ sales in the state must be zero-­ emission vehicles. If they don’t reach that percentage, they must buy credits from companies with bigger green footprints (and thus extra emission credits), such as Nissan and Tesla, to make up their numbers.

There are big financial implications. If states continue mandating EV sales but the tax incentives disappear, carmakers will have to lower prices to get the sales volume required by state governments, Noble says. “Right now the EV market isn’t driven by natural demand,” he says.

“If you remove the tax credit, then either the manufacturer eats it or sells fewer vehicles.”

Electric cars are already big producers of red ink. GM loses $9,000 on every Bolt it sells, people familiar with the matter told Bloomberg earlier this year. And Tesla has burned through $10 billion en route to becoming a leader in electric car sales. Analysts don’t expect it to turn a profit for years.

For now, states are helping to bolster manufacturers’ sales by providing tax breaks for green-car buyers. Eleven states have some kind of ­alternative-fuel-vehicle incentive, and more are considering following suit. The tax breaks typically range from $1,000 to $5,000. New York started a $2,000 tax credit in April, and Texas began its $2,500 credit in July.

For next year, Tesla should be just fine. Both the carmaker’s Model S sedan and its Model X SUV can easily cost more than $100,000 when equipped with a longer-range battery and luxury options. Some affluent buyers of those models don’t even bother to cash in the tax credit, and most of them don’t need it to buy the car, says Rebecca Lindland, an analyst with Kelley Blue Book, an auto pricing website. But buyers of the much cheaper Model 3, Tesla’s attempt to offer a mass-market ride, may be more price-­conscious, she says.

Tesla Chief Executive Officer Elon Musk said in August that, given the more than 400,000 ­deposits customers have put down for the recently introduced Model 3, his first year of production will likely be sold out. After that, he could have a tougher time, Lindland says.

Fears of a negative response from buyers could explain why GM and other car­makers are spending more lobbying time trying to make sure the tax credit is renewed and making the case that the industry has truly committed to electric cars, thanks to federal incentives and sales mandates in both California and China, say two people familiar with the matter.

GM spokesman Pat Morrissey says the credits “are still necessary to help grow the EV

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The Year Ahead 2018

Retail

market,” adding that the company is working with the Trump administration and Congress.

Detroit and its rivals should have an unusual ally in the green lobby as they fight to keep the incentives alive. But with President Trump threatening to water down fuel economy standards for conventional cars, EV credits aren’t a top priority for some environmentalists, who instead are focusing on improving the gasoline-powered cars still purchased by 99 percent of buyers.

“It helps to have EV tax credits, but fuel economy standards are more important,” says Daniel Becker, director of the Safe Climate Campaign, which lobbies governments and automakers to support clean-car technologies that combat global warming. “If we’re going to make progress in the long term, it will be by making sure we have efficient gasoline engines.” <BW>

“If you remove the tax credit, then either the manufacturer eats it or sells fewer vehicles”

Hot Seat Michael O’Leary CEO, Ryanair Holdings Plc Botched planning left the Irish budget carrier without enough pilots at the end of its summer schedule, forcing it to scrap thousands of flights and bump 700,000 passengers. A backlash among officials across Europe followed, along with a cut to its growth forecast, which translates into 6 million fewer passengers over two years. As a result, Chief Executive Officer Michael O’Leary faces one of his biggest crises in the more than two decades he’s spent building Ryanair into Europe’s most valuable airline.

Beyond the reputational damage and lost revenue, the fiasco risks emboldening the c ­ arrier’s pilots, who are trying to unionise. Ryanair is reacting by offering unprecedented wage increases and promising changes to working conditions and career options to stave off poachers such as Norwegian Air Shuttle ASA. While some of Ryanair’s 86 bases, where pilots are stationed, have accepted the peace offering, others—like the carrier’s biggest hub at London’s Stansted Airport—have rejected the deal.

Buoyed by pledges of financial support from cockpit unions at American Airlines Group Inc. and Southwest Airlines Co., O’Leary’s pilots are demanding unified bargaining and an end to a contractor model that’s helped make Ryanair the industry’s European profit leader. That could put at risk a barebones business model, which makes even pilots pay for their onboard coffee. �Benjamin Katz

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The Year Ahead 2018

Retail

Online Shopping Reducing returns is the next big thing All in the timing Some merchants craft return policies to get merchandise back quickly enough to resell at a good price before it goes out of style or is superseded by a later model.

But electronics kingpin Best Buy Co. also is using longer return windows as a selling point for its best customers. While regular shoppers get only 15 days to return most items, members of its My Best Buy loyalty program who gain Elite status—those who spend $1,500 in a calendar year—get double that period. Elite Plus members— who must spend $3,500 in a year—get 45 days.

A discount one-way ticket

Staying close to home Amazon.com Inc. allows free returns to the lockers it’s installed in many areas.

They’re often in locations that keep long hours, such as convenience stores or gyms.

Consumers process the return online, pick an available locker location, and receive a code to open the locker door.

Re-boxing is the new normal A full 75 percent of online shoppers returned merchandise this year by shipping goods back to the merchant, according to the UPS study.

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Jet.com, the online seller bought by Wal-Mart Stores Inc. in 2016, gives a lower price for an item if a buyer agrees to opt out of its usual free-return policy. Change your mind? Pay a fee of $5.99 plus 5 percent of the item price.

It’s a keeper!

Retailers are providing more sizing information and photos of goods—obviating the need for many returns. Dockers.com gives the size in inches of thigh and leg openings for its eight clothing fits for men. E-tailer ModCloth lets customers upload photos of themselves wearing its clothes—helping others envision how the styles look on bodies that aren’t a model’s.

Easier returns—at a cost Bestbuy.com lets customers print a prepaid return label that can be slapped on a box and dropped off at a UPS location. Easy peasy—but the shipping fee is deducted from your refund.

Why in-store returns are preferred About 58 percent of consumers prefer being able to return goods to a physical store, according to a UPS study of online shopping habits. And merchants have good reason to want returns handled this way: UPS says 66 percent of respondents who bring back online orders to a physical store make a new purchase during that visit.

You’ve got a friend Some e-tailers let partners help with returns. Kohl’s Corp. will start accepting free returns of Amazon merchandise at 82 Kohl’s stores in Los Angeles and Chicago.

And startup Happy Returns accepts returns for several online retailers including Tradesy Inc. and Everlane at counters inside malls or at neighborhood boutiques.

ILLUSTRATIONS BY CHRIS PHILPOT. DATA: 2017 UPS PULSE OF THE ONLINE SHOPPER STUDY, COMSCORE, BUSINESS 2 COMMUNITY, COMPANY REPORTS

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Online sales are growing at about three times the rate of those from brick-and-mortar stores, in part because of the popularity of free shipping. But that’s led to a big problem: an explosion of online returns. Almost a third of web orders end up being sent back, vs. 9 percent of purchases at physical stores. The expense of processing and shipping boomeranged items can range from 20 percent to 65 percent of an e-tailer’s cost of goods sold, says United Parcel Service Inc. So web merchants are seeking ways to make returns less costly.

By James E. Ellis

26/11/2017 22:00

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ADS_December1.indd 49

27/11/2017 06:07

Bloomberg Businessweek Middle East

The Year Ahead 2018

Retail

Travel Just in from China— young tourists

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When Ronnie Hou finished her master’s degree last spring, her parents gave her a trip to Seattle—a city that has fascinated Hou since her teen years in the central Chinese province of Henan, when she got hooked on Grey’s Anatomy. “I love travelling!” says the 24-year-old, who’s planning a Christmas trip to New York City and after that, “Europe, Australia, Japan, Korea.”

Hou is part of an army of Chinese ­millennials that’s reshaping global travel.

Chinese age 18-34 made 82 million trips abroad in 2016, accounting for 60 percent of the country’s foreign travel and spending more than $150 billion, Bloomberg Intelligence estimates. By comparison, Americans of all ages made 75 million journeys abroad last year. As more young people travel, Chinese outbound tourism is expected to grow 8.5 percent annually through 2021, more than double the global rate, Mastercard Inc. predicts.

Venturing far beyond traditional ­destinations such as Hong Kong and Macau, younger Chinese sand-surf in Dubai, snowmobile in Finland, and sample U.S. nightlife at spots such as the Seattle sports bar Hou says was a highlight of her trip. They’re less interested in group tours and cruises than their elders are, and they spend less on shopping but more on hotels, meals, and experiences.

“Seeing the northern lights is the No. 1 wish” for young people from China, says Silvia Wong, a former exchange student to Finland who co-founded an agency that organises tours above the Arctic Circle for Chinese tourists. “They want to stay in an igloo, go on an icebreaker, go

By Carol Matlack

on animal safaris” to see reindeer.

The young travellers rely heavily on services such as mobile messaging app WeChat and microblogging site Weibo to research and book trips—and tell their friends about their adventures. Zhang Jinpeng, a travel blogger from Yunnan province who’s visited scores of countries, says the younger generation is constantly seeking “something special, new, something their friends didn’t get, that they can share online.” That, Zhang says, sets them apart from previous generations who “dreamed of travelling the world, but it was too difficult.”

Tourist destinations are using those same internet tools to attract Chinese visitors. Two years ago, Edinburgh launched a Mandarin-language social media campaign, with accounts on Weibo and WeChat, hiring a Chinese-speaking coordinator to run them and flying in a halfdozen Chinese bloggers for its Hogmanay celebration at New Year’s. The Scottish capital has seen visits from China jump more than a third this year, with a “dramatic shift” to younger, independent travellers rather than busloads of sightseers tagging along behind umbrella-­ wielding guides. “We’re much less keen to have large group tours that can create a negative experience for other visitors,” says Margaret McNeil of the Edinburgh Tourism Action Group.

Across the Atlantic, Las Vegas has benefited from a surge in Chinese tourism, with arrivals more than doubling from 2010, to 233,000 in 2016.

Hainan Airlines began direct flights last December and now brings about Hong Kong 20.9m Macau 10.3m

Top 15 destinations of outbound Chinese tourists, first half of 2017 ◼ Increase of more than 10 percent since 2016 ◼ Increase of 10 percent or less since 2016 ◼ Decrease since 2016

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Thailand 4.7m

Malaysia Indonesia 1.1m 1.1m

Taiwan 1.3m

Increasing distance from Beijing

South Korea 2.3m

Japan 3.3m

Vietnam 1.9m

Singapore 1.6m

26/11/2017 22:00

Bloomberg Businessweek Middle East

The Year Ahead 2018

Retail A couple gazes up at the northern lights from a mobile cabin on Finlandâ&#x20AC;&#x2122;s Lake Inari

Australia 674k Germany 701k

nesia

France 970k U.S. 1.4m

Italy 958k

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COURTESY LAKE INARI MOBILE CABINS; DATA: CHINA OUTBOUND TOURISM RESEARCH INSTITUTE

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Bloomberg Businessweek Middle East

2,000 passengers a month to the desert gambling hot spot. Affluent young Chinese rank Las Vegas as one of their top U.S. destinations, according to research firm YWS Design & Architecture. But unlike older visitors from China, they’re more interested in clubs, shows, and restaurants than in long nights at the baccarat tables.

Not all tour operators have benefited from the surge. After introducing ships sailing from China with millennial-­ oriented amenities such as virtual-­reality

The Year Ahead 2018

game rooms, cruise lines have pulled back amid weaker­-than-expected demand. Carnival, Royal Caribbean Cruises, and MSC Cruises have all said they’ll remove ships from Chinese ports next year. One problem: China in March banned stopovers in South Korea in a dispute over that country’s deployment of a ­missile-defense system.

Such concerns haven’t stopped luxury tour companies from beefing up their offerings aimed at the wealthiest Chinese. Zanadu, a Beijing travel

Retail

agency, sells a 12-day trip to Argentina and Antarctica for almost $30,000 a person and an “electronic-­music getaway” to a resort on the Thai island of Phuket where guests can mingle with 20 of the world’s top DJs. “Most people have already been to Paris with a tour group, stayed in a two-star hotel, and spent all their money on a Vuitton handbag,” says Zanadu co-founder Dirk Eschenbacher. Now, he says, they want “a kind of edge in their experience.” <BW> �With Christopher Palmeri

Streaming

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for Premier League matches, says Dan Reed, the company’s head of global sports partnerships, who notes that there are 300,000 groups on the social network devoted to the Real Madrid soccer squad. “We can drive great benefit to broadcasters, leagues, rights holders, and teams because they can access this huge fan base,” Reed said at a media industry conference in April. “You can market to those people in a variety of ways.”

Traditional media companies are watching the new arrivals warily. Sky says the latest 70 percent increase in the cost of Premier League matches—it has the rights to 126 games a year— caused a 6.2 percent drop in operating profit. In the U.S., ESPN Inc. has seen rights for the NFL rise to $1.9 billion annually from $600 million two decades ago, spurring it to cut staff and launch a digital push as its subscriber numbers decline.

Fox, CBS, and NBC each pay about $1 billion annually to show NFL games, about double what they paid two decades ago, researcher IHS Markit says.

Although the U.S. networks have multiyear pacts for major sports, the tech players have been signing shorter-term digital agreements—­something the NFL is encouraging, in hopes they might bid against the incumbents when current deals begin to expire in 2021. While the networks have some breathing room—MLB rights are locked up until 2022, and the National Basketball Association’s contracts end in 2025—the rise of digital players threatens the all-you-can-eat packages of sporting events that provide fat profits for the likes of Sky, Comcast, and AT&T. “If you’re a pay-TV platform, you are very worried about the ability of a whole host of people to bid,” says Mostyn Goodwin, a partner at OC&C Strategy Consultants in London. “Sport is key to retaining subscribers.” <BW>

The amount Amazon paid for the rights to livestream 10 Thursday night NFL games this season

ALAMY

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In the past 25 years the cost of broadcast rights for English Premier League soccer has surged thirtyfold as deep-pocketed media companies have grown to depend on live sports to win subscribers and keep them from defecting to online rivals. Next year an even richer bunch—those same internet giants that are wooing TV viewers—will likely show up at rights auctions, pushing prices even higher.

“Live sports attracts a passionate fan base,” Greg Hart, video chief at Amazon.com Inc., said in August after signing a deal to offer Association of Tennis Professionals matches on Prime Video.

The biggest prize will be the Premier League auction this winter. Since the league’s inception in 1992, pay-TV broadcasters have bid up prices dramatically, with Sky Plc and BT Group agreeing to lay out a combined £1.7 billion ($2.2 billion) a year at the last auction, in 2015, up from £1.1 billion in 2012. The top leagues in Spain and France will also be up for grabs, and the U.S. National Football League will sell streaming rights for its games. Tech giants “are going to become serious players” in sports, says John Enser, an attorney at CMS Cameron McKenna Nabarro Olswang who has helped negotiate rights deals.

In 2016, Twitter Inc. paid $10 million to l­ ivestream 10 Thursday night NFL games on a nonexclusive basis. This year, Amazon elbowed Twitter out of the way, offering $50 million for the same package.

In May, Facebook Inc. signed a deal for one live Major League Baseball game per week, in tandem with traditional broadcasters, though it didn’t disclose the cost. And in September, Facebook offered $600 million for digital rights to cricket matches in India, but it was trumped by Star India Private Ltd.’s $2.5 billion bid for digital and conventional broadcast rights. Facebook is considering a bid

By Joe Mayes

$50m

The next frontier: Live sports

26/11/2017 22:00

Is Telehealth Right for Your Company?

The world is on the verge of a digital health transformation and Altibbi is on the forefront of this transformation in the Middle East and North Africa region by providing businesses and individuals with a cost-saving and wellness-improving solution for employees One of the main challenges that companies in the MENA region face is finding the right balance between controlling employee healthcare costs and enhancing their health and wellness programs. According to Willis Towers Watson reports, the costs of employee healthcare benefits in the MENA are trending higher than the global average due to the rising costs of hospital and inpatient services, prevalence of chronic disease, and the overuse of medical services. One proven solution to this problem is offering employees the option of remote healthcare, or telehealth.

Altibbi is the first and largest digital health platform in the Middle East that specializes in this type of remote healthcare, by connecting patients to verified, on-demand doctors 24/7 through its mobile and web applications. Patients can consult with a doctor about anything from a sore throat or allergies to managing their chronic conditions, by sending a request through the app and receiving a call back from a local doctor in less than a minute. Patients can also upload images, lab results, medical device readings, etc. to help the doctor better diagnose their condition. Perhaps best of all, is the ability for the patient and the doctor to rate the consultation when it’s over, which allows the company to ascertain the highest quality of its service and doctors.

Why should companies in the MENA adopt a telehealth strategy? With health insurance premiums increasing year over year, telehealth has proven to be an effective, cost-saving tool that employees can use as an alternative to expensive and time-consuming visits to the doctor or emergency room. According to the American Medical Association, 70% of ER,

urgent care, and doctor office visits canbe safely handled over the phone. If companies introduce the right telehealth program to handle these cases, they can enjoy consistent redirection savings every year.

74% of Altibbi’s patients say that the service replaced an in-person visit to the doctor.

Moreover, workplace productivity can significantly increase through telehealth.

Wait times at the doctor’s office in Arab countries can easily take 2-3 hours (compared to an average 20 mins in the US), add to that long travel times due to poor infrastructure and worsening traffic congestion. Employees typically have to request an entire sick day for one doctor’s appointment. This can be reduced if they had the option to consult with a doctor over the phone.

Last but certainly not least, telehealth can be the ideal solution for companies that are trying to provide competitive employee benefits packages that can differentiate them from others in their industry.

The working population in the region is

becoming younger, more tech-savvy, and always on the hunt for solutions that make life easier. A doctor who is one-click away can make a world of difference for these employees.

Altibbi partnered with Uber earlier this year to provide drivers and their families in Egypt, Saudi Arabia, and Jordan with unlimited access to its network of doctors.

“Drivers are at the core of what we do and we believe in building a better experience for all drivers, and riders, not only through our technology, but through partnerships with organisations that can bring on added benefits. Of course, health is extremely important and we share the same vision as Altibbi when it comes to providing a reliable service at all hours of the day.

For that reason, we want to provide drivers more accessibility when it comes to their health, in the same way they are providing that service to riders every day”, says Nader Museitif, Uber’s Head of Business in MENA. If you could give your employees an easier way to see the doctor while also see tangible costs savings and higher levels of employee productivity, wouldn't you?

www.altibbi.com

ADS_December1v2.indd 53

27/11/2017 20:01

Bloomberg Businessweek Middle East

The Year Ahead 2018

Retail

$4.57 in 2016 113 percent premium over nonorganic

$4.39 37 percent

$4.88 89 percent

$0.78 42 percent

Organic Food The business gets bigger, but the margins may not Organic food growers—many of whom take pride in tending tiny apple orchards or chicken flocks— will have to sharpen their big-business negotiating skills in the months ahead as consolidation creates a shorter list of major customers. Amazon.com Inc.’s $13.6 billion acquisition of Whole Foods Market Inc. is unlikely to be the last giant deal as others in the retail and food manufacturing industries try to profit from consumers’ changing tastes. Already, sales of organic goods are moving away from mom and pop outfits toward huge retailers such as Costco Wholesale, Wal-Mart Stores, and Kroger.

The shift worries farmers such as Doug Crabtree, who grows organic crops including grains, pulses, and flaxseed in Montana and also sits on the Organic Trade Association board. “We need more smaller entities, not fewer bigger entities,” says Crabtree. “It makes me nervous at best.”

That’s because the bigger the buyer, the more difficult it is for farmers to set up an equitable relationship, Crabtree says. His prices already are down for many crops, including a more than 36 percent drop for organic red winter wheat, and he’s seeing some unwillingness of buyers to enter

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By Shruti Date Singh

into long-term contracts. He fears future consolidation in organics will exacerbate both problems.

Growth in demand for organic foods has been robust for years, and premiums paid to farmers have held up for four decades, says John Reganold, a professor at Washington State University who’s studied sustainability and pricing. The value of organic produce sales for the 52 weeks through Sept. 30, for instance, increased 9 percent from the same period a year earlier, while conventional produce rose just 2 percent. And organic chicken breasts last year cost $7.62 a pound, vs. $2.79 for their regular counterparts, according to researcher Nielsen Co. Yet Amazon and Whole Foods have pledged to make organic food more affordable and quickly followed that up with price cuts on bananas, baby kale, and rotisserie chicken after the deal closed in August. It’s likely some price cuts will get passed on to farmers, says Euromonitor International analyst Dewey Warner. “A lot of these producers are at risk for feeling some pain,” he says. And organic producers would be wise to remember one of Amazon Chief Executive Officer Jeff Bezos’ most cited quotes: “Your margin is my opportunity.” <BW>

“A lot of these producers are at risk for feeling some pain”

GETTY IMAGES (3); ALAMY. DATA: NIELSEN. EGGS PER DOZEN, COMPARED WITH NONORGANIC WHITE EGGS; PACKAGED SALAD, PER INDIVIDUAL UNIT; MILK, PER GALLON; BANANAS, PER POUND

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The Year Ahead 2018

Retail

Interview Jeff Koons The creator of some of the world’s priciest art talks about ­satisfying his public and how excitement affects value can both communicate that what you really care about is them.

That’s obviously a very different approach than the traditional “art for art’s sake.”

What you never want to do is let the viewer down.

You never want someone to be disappointed. In life, you have these opportunities to communicate with other people—to show a sense of equality, importance, and trust. [Making art] is an opportunity to show respect.

There’s a certain irony to this, given that you create some of the world’s most expensive art.

When the opportunity to work with Louis Vuitton came about, I thought, This is the perfect company: It has tremendous resources, it understands ­aesthetics, and it’s used to communicating to people through materialism.

As in, people who buy purses are materialistic?

When I say that I mean through materials— being able to adjust the textures of leather or to enhance colour and dyes through different colouring techniques.

Playing with surfaces has been a preoccupation in your art for years.

What art is, for me, is the possibility that when someone views something, they’re able to pick up on the essence of their own potential: It’s a vehicle—something that stimulates their own excitement.

In your mind, is there a creative difference between making a mass-market purse for Louis Vuitton and a $5 million sculpture?

It’s not like I collaborate with people where there’s differences, or tension, or the possibility of an outcome that’s different from what I intended. I try to choose collaborations where we both really believe in a commitment to the viewer—where you

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Surely you acknowledge that someone spent $58 million on one of your sculptures for reasons other than just life perspective.

I hope that the works are desirable! Desire is a very interesting sensation. I try to embed desire into the art through the use of reflectivity, as a means of a kind of excitement.

“When you look at a Van Gogh, the value isn’t in the brushstroke”

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Do you follow your work on the market?

So as far as what’s happening in the marketplace, I’m not naive about what’s going on. The only thing an artist can do to help the value of their work, though, is to make the best work they can.

Are you tapped in to the extent that you actively regulate the number of works based on demand?

I mean yes, there are kind of basics of trying to be coordinated, and be in the service of your work so that you’re trying to give it the best platform possible. But at the same time, the way we really communicate value to people—even within this abstracted area of economics—is by the reaction they have when they see an artwork and how they interpret the past and present and essence of their future. When you look at a Van Gogh, the value isn’t in the brushstroke. �James Tarmy

This $4,000 bag is part of the Masters collection Koons developed in collaboration with retailer Louis Vuitton

JOE SCHILDHORN/BFA.COM; COURTESY LOUIS VUITTON

GETTY IMAGES (3); ALAMY. DATA: NIELSEN. EGGS PER DOZEN, COMPARED WITH NONORGANIC WHITE EGGS; PACKAGED SALAD, PER INDIVIDUAL UNIT; MILK, PER GALLON; BANANAS, PER POUND

Your recent collaboration with Louis Vuitton is going gangbusters.

The true value of art has nothing to do with its monetary value, which to me in a way is abstract: Society will put these values on something, taking into account how it’s viewed in a particular moment in time or relevance. But its real value is how it excites people and stimulates them and lets them be aware of a vaster life.

26/11/2017 22:00

Bloomberg Businessweek Middle East

The Year Ahead 2018

Section

Energy Pipelines Liquefied Natural Gas Cars Chemicals Renewables Aramco New Fields Shale Oil

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Jack Fusco

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CREDITS CREDITS CREDITS

Interview

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Edited by Matthew Philips and Pat Regnier A chemical plant near Lake Charles, La., owned by South Africaâ&#x20AC;&#x2122;s Sasol

CREDITS CREDITS CREDITS

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Energy

Pipelines Appalachian gas is set to deliver on its bonanza

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Installing a natural gas pipeline for Rover near Moundsville, W.Va.

OPENING SPREAD: WILLIAM WIDMER/REDUX; THIS SPREAD, FROM LEFT: PETER SMITH/POST-GAZETTE; THE YOMIURI SHIMBUN/AP PHOTO

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David Rheinlander used to dream of building a cabin in the woods behind his house in ­s outhwestern Pennsylvania. Now when the 57-year-old looks across his backyard, he sees a line of cut trees, piles of dirt, and stacks of steel pipe where he once envisioned a tiny cabin. For the past six months, construction crews carved their way through the back of his property. The roughly 100-foot-wide path they’re cutting through the rolling hills extends about 700 miles to the west, running through neighboring Ohio and all the way up into Michigan.

The pathway is for a pipeline that will bring huge amounts of natural gas out of sparsely ­populated Appalachia and into big cities across the Midwest. The pipeline, called Rover, is being built by Energy Transfer Partners LP, of Dallas, which has spent three years and a total $4.2 billion on the painstaking process of winning permits, clearing miles of rugged terrain, and fighting a pitched legal battle against environmental groups and landowners.

Rover is scheduled to begin shipping as much as 3.25 billion cubic feet of natural gas a day in early 2018. When fed through a natural gas-fired power plant, that’s enough to power about 30 million homes. Rover is one of a handful of pipelines set to open next year that will begin moving natural gas from the massive Marcellus and Utica shale formations that lie beneath parts of Ohio, West Virginia, Pennsylvania, and New York.

Rheinlander isn’t exactly thrilled to have Rover in his backyard, but he supports efforts to build up the region’s economy. “I’ve got no issue with them developing gas,” he says, eyeing the pipeline pieces scattered atop the dirt. “My overall feeling is that we’ve got to develop as much energy in this country as we can.”

A relative latecomer to America’s shale ­revolution, the Marcellus and Utica regions are booming. In the past 10 years, natural gas production there, driven by advances in horizontal drilling, has multiplied by a factor of 10, to about 25 billion cubic feet a day, or roughly a third of U.S. output. Despite the increase in production, the energy companies that drill the wells to produce the gas complain they’ve been bogged down by a thicket of political and regulatory hurdles, as well as opposition from environmentalists and some landowners. These obstacles have prevented the region’s energy industry from reaching its full potential, they argue.

By Tim Loh and Ryan Collins

26/11/2017 22:08

Bloomberg Businessweek Middle East

Sometimes dubbed the Saudi Arabia of natural gas, the Marcellus is thought to hold a ­century’s worth of reserves. But after an initial boost of investment and optimism by drilling ­companies, activity started to stall, mostly because there weren’t enough pipelines to deliver the gas to large markets. Companies kept drilling wells but left many of them uncompleted, waiting for the day when pipelines would be finished. Now, with a slate of projects opening in 2018, the number of drilled but uncompleted wells in the Marcellus has fallen 28 percent since February 2014. With Donald Trump in the White House pushing to cut regulatory red tape to unleash America’s energy supply, a lot of companies have a sense of ­expectation. “The only thing holding back the Marcellus Shale is lack of energy i­ nfrastructure,” says Rob Thummel,­managing partner at Tortoise Capital Advisors. “Natural gas production volumes have exceeded available pipeline capacity for several years.”

Fifty miles west of Rheinlander’s home, in

The Year Ahead 2018

eastern Ohio, Enbridge Inc.’s Nexus transmission line will soon begin its own 250-mile path up and around Lake Erie into Michigan. That project, scheduled to open around the middle of 2018, will be able to ship 1.5 billion cu. ft. of gas a day.

And in northeast Pennsylvania, Williams Cos.’ Atlantic Sunrise project will soon be connecting that region’s gas producers to the Transco pipeline, a gas superhighway that runs from the Gulf of Mexico up the East Coast to New York City. Tracing a similar path, the $1 billion Penn East pipeline project is nearing final regulatory clearance to begin construction.

Taken together, these projects should allow Marcellus and Utica gas producers to ship an ­additional 7.5 billion cu. ft. of gas a day, increasing the region’s pipeline capacity by about a third, says Darren Horowitz, an analyst for Raymond James.

“It is sorely needed as a long-term solution to free up highly economic Marcellus and Utica acreage,” Horowitz wrote in a late-­September note. “Can producers fill these pipes? Is the pope Catholic?” <BW>

Energy

NY

PA

WV

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Shale Formations ◼ Utica formation ◼ Marcellus formation ◼ Utica underlying Marcellus

Liquefied Natural Gas OPENING SPREAD: WILLIAM WIDMER/REDUX; THIS SPREAD, FROM LEFT: PETER SMITH/POST-GAZETTE; THE YOMIURI SHIMBUN/AP PHOTO

A global LNG shuffle starts as long-term contracts expire The $90 billion global market for liquefied natural gas will be reshaped in 2018 as a number of large, long-term contracts start to expire. Growing supplies from the U.S., higher demand in Europe and Asia, and geopolitical tension surrounding Russia and Qatar, the world’s two biggest gas suppliers, promise to shift long-established trading patterns.

For decades the majority of LNG bought and sold around the world has been governed by longterm contracts of up to 20 years. A fifth of those will expire from 2018 to 2020. Over the next decade, contracts governing 80 percent of all global LNG trade will be rewritten. For now, the LNG market is in the midst of an enormous supply glut, in part because of the advent of U.S. exports in the past two years. That glut is likely to persist until at least 2020, keeping prices low.

Most contracts expiring next year involve buyers in Europe, where countries are trying to reduce their reliance on Russian natural gas, which is shipped via pipeline without being liquefied. Negotiations are already under way as utilities in France, Spain, and the U.K. look for new suppliers. Lithuania and Poland recently built LNG import terminals so that they aren’t locked into buying Russian gas. Croatia got backing from the European Union to do the same.

And Russia is facing competition in conventional

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By Naureen S. Malik and Anna Shiryaevskaya

“Stability and security of supply are important factors”

natural gas: Starting in 2020, Azerbaijan, a former Soviet republic, will begin piping gas from its giant Shah Deniz field into southern Europe, including Bulgaria and Greece.

Europe has no choice but to increase gas imports.

Production from some of its biggest gas fields in the North Sea and the Netherlands is falling, yet demand is forecast to remain strong as countries transition from coal- to gas-fired power generation. Russia is moving to defend market share. Over the past few years the state-owned gas giant Gazprom has cut prices for gas sent to Europe. It’s also pushing ahead with two pipeline projects, one across the Black Sea and another across the Baltic Sea. Europe’s need for more LNG could offer an opening for U.S. exporters. Yet in the current lowprice environment, they can’t win new business just by undercutting competitors. “U.S. LNG ­continues to be promoted as an attractive diversification away from Russian gas but currently lacks the economic justification to secure a sizable market,” says Claudio Steuer, director of SyEnergy Ltd., a U.K.based energy consultant. And the world’s top LNG exporter, the tiny Gulf nation of Qatar, is looking to expand market share in Europe. It recently announced plans to boost LNG production by 30 percent over the next several years. Nigeria

26/11/2017 22:08

Bloomberg Businessweek Middle East

By Mark Chediak

$15/MMBtu

10

5

0 1/2014 10/2017 DATA: COMPILED BY BLOOMBERG

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In 2012, Governor Jerry Brown set a goal of putting 1.5 million electric vehicles on California roads by 2025. As of September, the state had 334,393 EVs. To get to 1.5 million, it needs to give drivers a lot more places to charge up. The state, however, wants utilities to play a big role in the buildout of charging stations. The power companies are eager to invest, seeing a growth opportunity, but before that can happen, officials need to sort out who will pay for it.

In 2018, state regulators will weigh proposals from ­investor-owned public utilities Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric to bill customers more than $1 billion to electrify California’s transportation sector. Utilities plan to install more than 100,000 charging locations at apartment houses, in businesses, and along highways. As of October, there were about 13,822 public charging spots in the state.

Consumer advocates have pushed back against the proposals, questioning whether low-income customers should pay for equipment that will likely be used—at least initially—by those who already can afford a pricey electric car. “The utilities see this as their new cash cow,” says Elise Torres, an attorney at the Utility Reform Network, a consumer advocacy group.

For now, the most immediate need for charging is on highways, says Pasquale Romano, chief executive officer of ChargePoint Inc., which operates the world’s biggest charging network. Consumers won’t go electric if they don’t think they can find a way to charge on a road trip from San Francisco to Los Angeles. <BW>

While California utilities await approval for their charging station buildout, Tesla is busy installing Supercharger stations in cities. By the end of next year it plans to have more than 1,000 in California, like this one in San Diego

26/11/2017 22:08

FROM LEFT: MIKE BLAKE/REUTERS; AARON GRAUBART/TRUNK ARCHIVE

Henry Hub Index

says. “Price is not the only factor.” One of the key advantages for the U.S. is its vast shale reserves, along with a pipeline network that will allow exporters to bring gas from all over the country to export facilities being developed along the Gulf Coast, ensuring a steady supply.

And while most LNG contracts come with strict destination clauses, mandating the physical delivery point for cargoes, U.S. exporters are offering their customers the ability to ship anywhere in the world. That could make a big difference to Asian buyers, particularly Japanese utilities including Tokyo Gas, Osaka Gas, and Chubu Electric Power, which have trading operations and want to be able to shift where they send the gas depending on market conditions.

U.S. LNG companies hope to sign big deals in 2018. That would please the Trump administration. Selling more LNG to Asia could shave billions of dollars off the U.S. trade deficit with Japan, South Korea, and China. “LNG contract rolloff is a huge opportunity,” says Kathleen Eisbrenner, CEO of NextDecade Corp., which is seeking to build an export ­terminal in Texas and install an offshore import facility in Ireland. Next year “is going to be a pivotal year.” <BW>

C

To hit its electric vehicle targets, California needs charging stations

A supply glut has helped drive LNG prices down since 2014

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Energy

Cars

and other LNG exporters also face a battle over expiring LNG contracts, and Algeria says it’s preparing a strategy on how to export its gas amid oversupply.

Price aside, there are benefits to signing deals with U.S. suppliers, says Meg Gentle, chief executive officer of Houston-based LNG producer Tellurian Inc. “I think that stability and security of supply are important factors,” she

Northeast Asia Spot Index

The Year Ahead 2018

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Energy

Chemicals

FROM LEFT: MIKE BLAKE/REUTERS; AARON GRAUBART/TRUNK ARCHIVE

U.S. chemical companies are making the most of a rebound A decade ago, chemicals were just another fading U.S. manufacturing business. Companies were reluctant to invest in new factories because of soaring prices for the oil and natural gas that serve as both raw materials and power sources.

Dow Chemical and others were closing plants and moving production to the Middle East to save money. “The conventional wisdom was we are not going to produce a lot of petrochemicals here,” says Kevin Swift, chief economist at the American Chemistry Council, an industry group.

Today, Dow, Exxon Mobil Corp., and Chevron Phillips Chemical Co. are putting the fi ­ nishing touches on multibillion-dollar factories along the Texas Gulf Coast. The plants are part of $185 billion in proposed and recently completed investments, according to the chemistry council. “The U.S. is punching above its weight at the moment,” says Kevin McCarthy, a chemical industry analyst at Vertical Research Partners. Credit the rise of ­fracking. A torrent of cheap U.S. natural gas has made the country among the most profitable places to produce chemicals, beating out the Middle East in attracting projects. U.S. exports of polyethylene plastic to Asia will rise more than fivefold by 2020, with China as the primary destination, according to research company IHS Markit Ltd. Almost 20 factories are being built or expanded to convert gas liquids such as ethane and propane into ethylene, the most used petrochemical and the main ingredient in polyethylene plastic. The largest is an $11 billion complex being built near Lake Charles, La., by South Africa’s Sasol Ltd. It’s scheduled to begin producing polyethylene next year. Much of the investment is coming from abroad. Along with Sasol, foreign companies putting money into U.S. facilities include France’s Total, South Korea’s Lotte Chemical, and Taiwan’s Formosa Plastics.

The largest plants are going up in Texas and Louisiana, where chemical makers can tie into existing infrastructure. “Houston has always been the hemispheric centre of the plastics business, but this just cements it for decades to come,” says Bill Gilmer, director of the University of Houston’s Bauer Institute for Regional Forecasting.

For oil-driven Houston, the spending splurge on chemical plants has softened the blow from job cuts in the energy sector. Most of the new jobs aren’t permanent: Construction on a typical ethylene plant peaks with about 2,500 workers on-site. A completed plant requires only about

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By Jack Kaskey

80 employees to operate, Gilmer says. Still, those longterm jobs pay better than most. Laura Marshall, 31, was working as a beautician before enrolling in a two-year community college program that won her an operations job at one of Chevron Phillips’s new Houston area plants.

Now she’s making more than $100,000 a year, saving for retirement, and shopping for a house. “It was an extremely large change in my life,” Cheap plastic—brought to you by the Marshall says. “I’m no longer fracking boom living paycheck to paycheck.”

The anticipated strain on the Houston area’s “The cost export infrastructure has some producers gearing advantage up to send plastic pellets by rail to ports in Long Beach, Calif., and Charleston, S.C. Meanwhile, is … durable companies that convert raw plastics to finished enough that products are expanding to take advantage of the people are abundant material. going to put More investment is coming across the country.

“The cost advantage is strong enough and durable money in enough that people are going to put money in the the ground ground for a second wave,” says John Roberts, a for a second chemical industry analyst with UBS Securities. wave” Royal Dutch Shell Plc, the U.K. oil and chemicals conglomerate, has started building an ethylene complex outside Pittsburgh that will begin production in the early 2020s. Shell sees an advantage in being closer to Appalachian shale gas deposits as well as to the customers who turn plastic pellets into products such as packaging, trash bags, and bottles. Even Saudi Arabia wants a piece of the action. State-owned Saudi Basic Industries Corp. formed a joint venture with ExxonMobil to build an ethylene plant in Corpus Christi, Texas, by early in the next decade.

Fertilisers are another major target of capital investment: More than 20 U.S. plants are being built or expanded to convert gas into ammonia, a key ingredient.

This boom relies on gas remaining relatively cheap, but also on continued economic growth worldwide. In India and China, an expanding middle class increasingly buys goods wrapped in plastic and appliances produced with chemicals.

“If for some reason the world slows, that will be trouble,” Roberts says. <BW>

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Energy

Renewables Trump policies could do major damage to wind and solar

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The Trump administration is plotting a series of moves in 2018 that could end up harming the wind and solar industries.

That includes asking regulators to rewrite power market rules, revamping the tax code, and imposing tariffs on f­ oreign-made solar panels. One of the most closely watched moves will likely involve Suniva Inc., a bankrupt solar panel manufacturer based in Georgia that filed a trade complaint in April. The company, which says it was hurt by cheap Asian imports, has asked Trump for tariffs on foreign panels. The administration has until mid-January to decide.

Import duties protecting domestic solar panel manufacturers would appear to be good for clean energy. But cheap foreign panels are the lifeblood of the U.S. solar industry, helping drive a sixfold rise in photovoltaic generation since

By Joe Ryan and Brian Eckhouse

2012. Most of the solar industry opposes Suniva’s push, saying growth will slow if panel prices rise. The threat of tariffs has prompted developers to hoard panels and put projects on ice.

In September, U.S. Energy Secretary Rick Perry asked federal regulators to help coal and nuclear plants compete in wholesale power markets. The request ostensibly is designed to promote national security by rewarding plants capable of storing long-term supplies of fuel on-site. The proposal may help keep plants open even if they’re not economical to run.

That could devastate clean energy, since electricity demand has stagnated in much of the U.S. If aging power plants don’t close, there will be little room for more wind and solar farms.

The biggest threat to wind and solar may come from Trump’s proposed tax cuts.

Slashing corporate rates may reduce the availability of a key, albeit esoteric, source of clean-energy financing called tax equity. And broad reform would probably make debt pricier for new power plants and reduce ­developers’ savings from depreciation.

The worst-case scenario would be if Congress ends clean-energy tax credits early, which Environmental Protection Agency chief Scott Pruitt called for in October. The credits have strong bipartisan support.

Analysts say the odds of their being eliminated are slim, but Republicans will be hard-pressed to find a way to pay for Trump’s proposed tax cuts. “They’re going to look under every rock for revenue,” says Gregory Jenner, an attorney who s­ pecialises in tax law at Stoel Rives LLP. “Even the possibility of that will have a chilling effect.” <BW>

If nuclear and coal plants are kept from closing, there may be less demand for green energy

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Aramco If it wasn’t a sales pitch, it really sounded like one. “Aramco is by far the lowest-cost producer,” said Khalid al-Falih, the Saudi oil minister, at the Future Investment Initiative in Riyadh. The October gathering, dubbed “Davos in the desert,” brought together a who’s who of business and finance, including the bosses of Blackstone Group LP and Credit Suisse Group AG. Al-Falih was talking up Saudi Arabian Oil Co., also known as Aramco, the state-owned oil company the kingdom is planning to sell shares of.

Aramco is the world’s largest energy company. With a monopoly on exploiting a good quarter of the planet’s oil reserves, it pumps more crude than Exxon Mobil, Chevron, and Royal Dutch Shell combined. Regardless of the rise of electric vehicles and the fight against climate change, “Saudi

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By Javier Blas

Aramco is going to be the supplier of last resort,” al-­Falih said.

“I am certain the last barrel that gets produced globally is going to be here in Saudi Arabia.”

It’s a hugely valuable business—the question is, just how huge? The Saudis say the company is worth at least $2 trillion. Analysts question that figure, and oil executives, speaking privately, say that something closer to $1 trillion sounds about right. To put that in context, the valuation gap is larger than the total value of Apple Inc., the world’s most valuable public company, at about $870 billion.

Whatever the final valuation, Aramco’s initial public offering is likely to be the biggest in history, even though it’s selling only a sliver of itself. If it floats a 5 percent stake, it could snag at least $50 billion, twice the record set by Alibaba Group

JG PHOTOGRAPHY/ALAMY

The $1 trillion question

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Holding Ltd. in 2014. Saudi officials say the sale is “on track” for 2018, but that calendar looks tight.

The problem isn’t Aramco, but the Saudi ­government—or, more precisely, the young crown prince, Mohammed bin Salman, who controls most of the levers of political, security, and economic power in the kingdom. For months he’s delayed the decision about where to list Aramco’s shares beyond the local Riyadh stock market, known as Tadawul.

On the table are three main candidates: New York, London, and Hong Kong. Each has advantages and problems. New York offers the biggest pool of money and potentially the highest valuation, but listing there could also leave it more exposed to litigation in the U.S. London is more friendly legally, but it’s unclear that British regulators would allow the IPO in its current form. Hong Kong offers few regulatory obstacles, but its smaller capital pool means a lower valuation, too.

The indecision about where to place the international portion of the IPO will have a cascade effect. If Aramco ultimately goes to New York, it will need to present its balance sheet under the U.S. accounting system, which is different from the one used by Saudis and Europeans. Accountants and auditors can shift numbers around to comply

with American rules, but that will take time.

Recently, people familiar with the situation have said the international portion of the IPO may be delayed until at least 2019. Saudi officials have hedged their answers to questions about timing, making a distinction between the preparatory work, which they said would be completed on schedule, and the decision to sell the shares.

When asked if both the local and international pieces of the IPO would happen in 2018, Aramco Chief Executive Officer Amin Nasser gave a guarded answer. “The shareholder will make the decision regarding the venues,” he said. The shareholder, of course, is the government.

The Aramco IPO is the cornerstone of a much wider Saudi program to retool the economy and make it less dependent on oil. Professor Paul Stevens, a distinguished fellow specialising in energy at Chatham House, a London think tank, says the reputation of the crown prince himself is on the line. “Clearly, there are many serious problems with Saudi Aramco’s privatisation,” he says. How the kingdom resolves them could mean a difference of tens of billions of dollars when the world’s investors are finally able to put a price on the company’s shares. <BW>

New Fields

63 Crude output, barrels per day 3m

By Joe Carroll, Sabrina Valle, and Adam Williams

Venezuela Brazil

Offshore exploration areas

Mexico

In 2015, Exxon made a giant oil find off the coast of Guyana. The new fields could contain almost 3 billion barrels of crude.

JG PHOTOGRAPHY/ALAMY

Venezuela In January, Mexico will hold its biggest auction of drilling rights to date, leasing access to offshore areas as well as opportunities to work with stateowned Pemex in the 500 million-barrel equivalent Nobilis-Maximino field.

As many as three additional auctions also are expected next year. But presidential candidate Andrés Manuel López Obrador has vowed that if he wins, he’ll review contracts awarded to producers including Chevron, Exxon Mobil, and Royal Dutch Shell.

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“I am certain the last barrel that gets produced globally is going to be here in Saudi Arabia”

Guyana

Brazil

0 1990 2016

Venezuela’s oncemighty oil industry is in free fall after the regimes of Hugo Chávez and successor Nicolás Maduro drained the state-owned oil production company of cash. Output has fallen in 9 of the past 10 years, cratering last year to the lowest level since 1990.

Brazil has some of the world’s top oil engineering talent, but it needs capital.

The government plans several auctions of drilling rights by 2019. The wild card: Ongoing corruption scandals make it an unreliable partner.

GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: BP, OPEC, MEXICO NATIONAL HYDROCARBON COMMISSION, EXXON MOBIL, BRAZILIAN NATIONAL AGENCY OF PETROLEUM, NATURAL GAS AND BIOFUELS

Opening up oil in the Americas

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Energy

Shale Oil analyst, in a Sept. 5 note. Shale producers traditionally market themselves as growth companies. With few exceptions, they eschew paying ­dividends and buying back shares, and instead plow their money into more drilling.

Many are still outspending their cash flow. But their shares haven’t cooperated with this strategy: While the stock market has reached record highs this year, an S&P index of oil and gas explorers and producers has plunged about 17 percent.

“I think people are disappointed for all the right reasons,” says Tom Driscoll, a Barclays Plc energy analyst.

Executive pay incentives for exploration and production companies are under scrutiny from investors, too.

“The ­c ompensation plans laid out

by E&P corporate boards encourage these ­companies to grow production at almost any cost,” says Kevin Holt, chief investment officer for value equities at Invesco Ltd. For example, pay may be tied to sales volumes or additions to reserves, rather than measures of cash flow. The strategy “builds the personal net worth of the CEOs but does nothing for the shareholders for whom

Fracking and horizontal drilling made it easier to unlock oil trapped in shale

A torrent of U.S. production has held down oil prices

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they are legally fiduciaries,” says Holt.

Drillers also face technical questions about the shale boom’s sustainability. Pioneer Natural Resources Co. and Parsley Energy Inc. reported higher-­thanexpected natural gas output from their wells in August. That sent shares tumbling, because traders took it as a sign that oil flows, which are more lucrative, might peak more quickly than the industry expected. (As wells age, they tend to produce more gas and less oil.) The companies said their oil production hadn’t diminished, while analysts dismissed the worries as overblown.

Still, the market’s anxiety attack came amid other warning signs. In July, London-based investment manager Horseman Capital Management Ltd. noted government data that showed U.S. shale wells were petering out at a quickening rate and questioned whether it was the result of increasingly intense drilling. Later, industry consultant Wood Mackenzie Ltd. warned breakneck development could be “testing the geologic limits” of U.S. shale’s crown jewel, the ­prolific Permian Basin, which straddles the border of Texas and New Mexico.

“If you look at what the industry is set up to do in the next three years in the Permian, they are going to push on the rock harder than we’ve ever pushed on a shale play before,” says Robert Clarke, a research director at Wood Mackenzie.

A shortfall there could ultimately affect world oil prices.

For some producers, that will be good news—if they can keep their own wells pumping as overall output growth slows, letting prices rise. “U.S. production is not nearly the Big Bad Wolf that everybody thinks,” Mark Papa, chief executive officer of Centennial Resource Development Inc., said at an investor conference in New York in September.

But oil consumers could be in for a shock.

“If the world keeps believing we’ve got surplus oil as far as the eye can see— which I don’t believe—then the reality is going to smack everybody in the face,” Century Management’s Brilliant says.

“And it will be hard to catch up.” <BW>

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Crude prices bouncing around $50 to $60 a barrel have kept U.S. shale producers stuck on the edge of profitability. That hasn’t been enough to shut down the oil boom in places such as North Dakota, Texas, and New Mexico—at least not yet. Drillers are heading into 2018 on the defensive as they face skepticism from shareholders who want to see less investment and more profit. They may also be finding that much of the easy oil has already been pumped.

“There’s a complacency that shale is going to continue to produce at the kind of volumes that we had in the past,” says Jim Brilliant, a portfolio manager for Century Management Investment Advisors in Austin, whose investments include shares in energy-related companies. Output has recently failed to meet expectations. As of June, the U.S. Energy Information Administration expected an average of about 9.3 million barrels a day, more than 220,000 barrels a day higher than companies reported.

Investors are demanding that com­ panies sell off weaker holdings, pare spending, and pay down their debt, wrote Paul Sankey, a Wolfe Research LLC

E.R. DEGGINER/SCIENCE SOURCE

By Alex Nussbaum and David Wethe

The fracking boom hits middle age

Bloomberg Businessweek Middle East

The Year Ahead 2018

Energy

Interview Jack Fusco The CEO of Cheniere Energy Inc. talks about the rise of U.S. liquefied natural gas exports and surging demand from China combined-cycle power plants. They’re building 40-year assets, and they need 40 years’ worth of reliable LNG. They could go from 30 million tons this year to 100 million tons by 2025 if they’re successful with their ­electrification plans.

What about other Asian nations?

When we talk to our customers in Taiwan, they’re looking at retiring older nuclear plants and utilising combined-cycle natural gas plants instead of coal plants. When we talk to our customers in South Korea, it’s the same thing. They want to retire their coal plants and burn more natural gas. Those are secular shifts.

Is all the action in Asia?

What sets Cheniere apart from other companies that liquefy natural gas?

The beauty of the Cheniere model vs. just about any other LNG facility under construction today in the U.S. is that we are a full-service model. So if you are a utility and not a big conglomerate and you really don’t want to worry about procuring gas in America and shipping it to your facility, you come to Cheniere and we’ll deliver. If you want it delivered by ship to your [regasification] terminal in Asia, we are happy to do that. If you want it f.o.b.

Louisiana, we are happy to do that.

What will drive LNG demand growth next year?

What I see with Asia, whether it’s India, China, or Taiwan or South Korea or Vietnam, is we could easily double the size of the company. It could be a phenomenal shift. In China alone, it’s more than 45 percent year-over-year in LNG demand growth, and no one anticipated that level of growth.

COURTESY CHENIERE ENERGY

E.R. DEGGINER/SCIENCE SOURCE

Is that kind of growth in China sustainable?

The part that’s extremely exciting to me is it’s a secular shift. It’s not just because of a tsunami or that it’s cold. In China today there are 16 regas terminals in operation. There’s four under construction, at least a dozen more in the planning stages. They want to shift from coal-fired generation in the main metropolitan areas to natural gas

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It’s global. We had large central offices. So a year and a half ago, we had Houston, London, Singapore. Now we have Houston, London, Singapore, Japan, Beijing, and Santiago. We’re establishing offices that are closer to our ­customers with smaller numbers of Cheniere ­employees so we can be present in those markets and not spend a lot of time flying around the world.

How does geopolitics affect your business?

I try not to think about it at all, to be real honest with you. All the transactions with the U.S. LNG ­counterparties, including Cheniere, are between willing buyers and willing sellers.

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“We could easily double the size of the company.

It could be a phenomenal shift”

Does it help or hurt when the White House talks about using LNG to shift trade imbalances?

For Cheniere, having the president or the p ­ resident’s administration talk about our project and be willing to help us engage with different c­ ounterparties around the world is absolutely p ­ ositive for our business. We are part of the s­ olution for the trade imbalances. Our financials and our revenues are all from counterparties that are offshore.

Is your next buyer going to be from China?

We are talking to everybody right now. We have a dozen executives traveling around the world.

I can’t tell you who the next contract is going to be with, but I would welcome an Asian counterparty. �Naureen S. Malik

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Politics Farm Bill Trump Democrats

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Edited by Matthew Philips Lunchtime in Boulder: The trillion-dollar bill that funds all things USDA is coming up for reauthorisation

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Politics

Farm Bill Agreeing on a $1 trillion law is a key test for Congress

Fault Line #1 Nutrition Advocates vs. Welfare Skeptics Key to passing the bill is the coalition of farm state Republicans who back subsidies and urban Democrats who want to protect the Supplemental Nutrition Assistance Program—food stamps.

Republicans

Food Stamp Community

House Freedom Caucus members have backed deep cuts to SNAP, as well as work requirements and other means of tightening access, all billed as ways to ensure that federal aid is targeted to the most deserving. That may strain the coalition.

Farm state Republicans

Food stamp backers themselves are divided. Dietary restrictions are favored by nutritionists but not by corporate SNAP supporters because they cut into sales.

House Freedom Caucus

Anti-regulatory food corporations

Nutritionists

Democrats Some Democrats are more adamant about food stamps than others.

Pragmatists, including the ranking Democrats on both the House and Senate agriculture committees, will tolerate some changes to get a bill through. Others resist any cuts. This undoes their united front.

Absolutists

Pragmatists

Absolutists could vote no with members of the Freedom Caucus Pragmatic Democrats could align with farm state Republicans

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that has helped pass ­the previous versions.

Rural Republicans who depend on the billions of federal dollars it pumps into their communities are at odds with budget cutters in their own party. Urban Democrats wanting to preserve food stamps may clash with rural Democrats willing to cut a deal with Republicans. Farm groups that want more environmental spending—because they get paid for their Earth-friendly efforts—may battle their own impulses to reject regulation.

Failure to pass it would mean a reversion to the bill’s underlying language, written in 1949. This would remove billions in subsidies and create wild swings in commodity prices. Milk, for example, could potentially double in price as a result. It would also send a larger message in an election year: that once again, Washington can’t deliver.

The thing about the Federal Agriculture Reform and Risk Management Act, also known as the Farm Bill, is that it has something for everyone.

That’s by design, of course. Every five years or so, Congress has to r­ eauthorise the measure that funds every aspect of the U.S. Department of Agriculture. To ensure bipartisan support, the bill includes money for everything from cleanair and -water programs to broadband subsidies for rural areas to nutritional programs for poor people. And lots of subsidies for farmers.

Maintaining broad support for the bill will be crucial next year. The current legislation, a $955 billion bill passed in 2014, expires on Sept. 30, 2018. Reauthorising it gives Congress a rare chance to prove it can still get things done, though it may have trouble forming the coalition

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By Alan Bjerga

Bloomberg Businessweek Middle East

The Year Ahead 2018

Politics

Fault Line #2

Fault Line #3

Environmentalists vs. Deregulators

Divided ‘AgVocates’

When the last Farm Bill passed in 2014, farmers were enjoying record profits driven by high crop prices. Prices and profits have plunged since. That’s made environmental programs attractive because they channel money to farmers who adopt sustainable practices and in some cases pay them not to plant crops. But there are government strings attached, which farmers typically resist.

The AgVocates—farm and rural lobbyists who support higher levels of agriculture spending—are the rural part of the urban-rural coalition. The commodity groups they represent fight over how to allocate money to corn, soybeans, and other crops. They tend to be fiscal conservatives, too—just not when it comes to farmers.

The AgVocates may have a hard time agreeing on the distribution of subsidies. Budget constraints mean there’s no extra cash for crop insurance and price supports.

Conservation Reserve Program ◼ Per-acre payment ◼ Per-acre profit for wheat $ 100

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50 Dairy producers and cotton growers both believe they were shortchanged in the last Farm Bill.

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Republican-leaning organizations such as the American Farm Bureau Federation will probably push for as little government oversight as possible.

Democratic-leaning groups such as the National Farmers Union are more open to government oversight.

Government-subsidised insurance for crop losses has become the main form of farm support in the past 15 years; that makes it a target for budget cutters. Defending crop insurance may be the top priority of AgVocates. The last Farm Bill stated that money cut from one part of the crop insurance program has to shift to another. The industry will fight to keep that requirement intact.

Net farm income $ 130b

Farmers are likely to unite over finding ways to increase income.

Wheat harvest, North Dakota

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Without agreement, any deal could die before it even gets through the Agriculture Committee.

2016

Environmental issues split the farm groups that provide key firepower to pass the bill.

Corn, soybean, and wheat farmers are largely happy with current programs.

Wheat farmers, for example, have struggled to make money as production costs have risen, and they may find programs that pay them to idle land lucrative. Key ­arbiters: outdoors groups, such as Pheasants Forever and Ducks Unlimited, that want to preserve wildlife habitat.

Farm income has plunged since the last Farm Bill passed in 2014 90

50 2013

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The Year Ahead 2018

Trump

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Politics

Democrats

Year One was bad.

Year Two could be worse

Can they harness the “resistance”?

By Megan McArdle

By Joshua Green

On April 4, 1841, President William Henry Harrison died. Having lasted a month, he is without question the president who had the grimmest first year in office. Donald Trump hasn’t bested that record, but he’s making a valiant push for the runner-up spot, for which he’ll have to edge out Ronald Reagan, who was shot, James Garfield, who was shot dead, and Abe Lincoln, who saw the nation descend into civil war.

In his first year, Trump has failed to repeal and replace Obamacare, failed to appoint enough staff to implement his policy agenda, seen multiple high-level staffers resign, seen his campaign investigated for its ties to Russia, and given that investigation greater heft by firing the FBI chief overseeing it. The swamp remains undrained, the wall is unbuilt, there is no major infrastructure plan. There is a new Supreme Court justice, Neil Gorsuch. And while some regulations have been eased, it’s cold comfort given how little progress he’s made elsewhere.

The latest Gallup poll shows a third of the country approving of the job he’s doing; that could drop in coming days, especially after the indictment of former Trump campaign manager Paul Manafort and a guilty plea from campaign aide George Papadopoulus.

Having entered office completely unprepared, Trump squandered his first year. Those failures will haunt him in the second. He barely has the staff he’d need to make policy, even if he had a coherent agenda, and he’s deeply alienated the allies in Congress he needs to pass legislation, who keep resigning and excoriating him on their way out the door.

Those who remain will rally around the president as best they can to do tax cuts, the one thing Trump and his estranged party still agree on. That would give the GOP an actual legislative achievement as congressional Republicans head into the midterms. But after that? Perhaps the Russia probe will dead-end at Manafort. Perhaps the GOP will come off of tax reform newly energised and proceed to attempt other major legislation—an infrastructure bill, a serious immigration reform. One can describe a scenario in which Trump recovers from his rookie mistakes and goes on to create policy. What one struggles to do is believe it.

More than likely, the second year of Trump’s presidency will look a lot like his first: shambolic, unfocused, and largely driven by external events. That’s troublesome on the domestic policy front, but it’s downright scary when it comes to foreign affairs, where Trump’s flaws—impulsivity, lack of preparation, and an unwillingness to listen to advisers—present the greatest dangers. We can’t predict what the crisis will be, only that if and when it arrives, we’re all in for sleepless nights.

The physicist Niels Bohr is said to have remarked that predictions are hard, especially about the future. But Trump’s lack of vision or preparation has plunged the country into a sort of permanent dread.

The only thing we can definitely expect for 2018 is a great deal of uncertainty.

And, probably, insomnia. <BW> McArdle is a columnist for Bloomberg View.

Trump

Almost as soon as Donald Trump was elected, an energetic resistance arose to counter him, spawning hundreds of grass-roots activist groups and the Jan. 21 Women’s March that drew 2.6 million protesters in Washington, D.C., and around the globe. But Democrats have learned the hard way that antipathy for Trump doesn’t automatically translate to votes—and if the resistance marchers don’t show up at the polls next year, their protests won’t matter.

In her new memoir, Hillary Clinton expresses admiration for them but adds a dig: “I couldn’t help but ask where those feelings of solidarity, outrage and passion had been during the election?”

Clinton wasn’t the only one to whom this thought occurred. Since November a new generation of progressive entrepreneurs and activists have quit their jobs to run for office or launch startups aimed at helping Democrats identify and turn out supporters, especially among groups such as millennials and minorities that didn’t show up for Clinton. The vital question for Democrats next year is this: Can they harness the energy of the resistance and steer its members to the ballot box in 2018? Control of Congress and the future of Trump’s presidency hang in the balance.

To reach people who didn’t vote, it helps to meet them on their turf, with enough of an enticement to grab their attention. That’s why, one night in September, the staff of MobilizeAmerica, a new field-organising app, was crammed into a dressing room backstage at an Arcade Fire concert at Capital One Arena in Washington—and why they’d brought along Danica Roem, the first transgender candidate to run for Virginia’s House of Delegates.

MobilizeAmerica was founded in May by friends Allen Kramer, 26, and Alfred Johnson, 31. Until last November both were happily toiling in the private sector. Trump’s election jolted them in a new direction. “I was helping a large corporation figure out how to sell IT hardware online,” says Kramer, who had returned to Bain & Co. in San Francisco after taking a leave to work on Clinton’s campaign. “But I’d just come back from the campaign with the gut-wrenching context of having seen what happened up close. We knew we had to do something.”

He and Johnson quit their jobs and moved back east. They set off on a fact-finding tour, quizzing campaign managers, organisers, activists, and data scientists to find the gaps in the system that were causing Democrats to lose winnable races. “We

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Roem

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If Virginia is a microcosm of America, then the 13th District race between Roem and the 13-term GOP incumbent, Bob Marshall, is like the 2016 presidential election glimpsed in a fun-house mirror: Everything is exaggerated even further. Roem grew up in the northern Virginia district, working for nine years as a local political reporter and moonlighting as a singer in a heavy metal band. She began her gender transition in 2013. Trump’s victory pushed her into electoral politics. “What the election taught me,” Roem says dryly, a rainbow scarf in her hair, “is that there is literally nothing in my background that’s disqualifying. That bar is gone.” (Even in a race bursting with sociocultural significance, Roem’s campaign pitch is a hyperlocal focus on alleviated traffic congestion along Route 28, the district’s main thoroughfare. “Traffic hates everyone,” she says.)

Her opponent, Marshall, is a kind of ur-Trump who refuses to debate Roem or call her by her preferred gender pronoun. Marshall is best known for unsuccessfully pushing a state “bathroom bill” to dictate which restrooms transgender people can use in public buildings. In late October his Republican backers sent out a campaign flier reminding voters that Roem was “born male.”

But Marshall is falling out of step with his district, which is increasingly composed of highly educated voters and went for Clinton by 14 points.

David Wasserman of the nonpartisan Cook Political Report calls the race a “toss-up” and a harbinger of national political sentiment heading into 2018.

So Roem is exactly the sort of candidate Democrats must find a way to push to victory in 2018. And her campaign is an early test run of what progressives can do at the grass-roots level. To boost her volunteer network and raise awareness of the election, MobilizeAmerica had gotten Arcade Fire’s Will Butler to livestream a pre-concert interview with Roem on the band’s Facebook page. “Local politics is a matter of quality of life and an issue of life and death,” Butler, wearing a “Butler-Roem” campaign button, told the 150,000 fans who tuned in.

Butler asked fans to text “MOBILIZE” to a special number if they could volunteer. Johnson described this as “an engagement funnel” to pull motivated locals into a MobilizeAmerica list. The next morning they were sent a video from Butler thanking them and asking them to join a recruitment effort.

One reason Democrats struggle to turn out voters in down-ballot races is that the cutting-edge technology they’ve developed since Barack Obama’s rise has mostly been housed inside presidential campaigns. When the campaign ends, the tools vanish. “Our reputation as Democrats is that we invest in technology, and that’s true,” says Betsy Hoover, a partner at Higher Ground Labs who directed digital organising for Obama’s 2012 campaign. “But the way we do that is really inefficient. We invest a ton of money inside a presidential campaign. Down-ballot races never really benefit.”

After Trump’s victory, Hoover and two

Politics

The “flake rate” among people reached by phone who agreed to volunteer to help the Clinton campaign

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kept coming back to the fact that we had millions of people marching in the streets,” says Johnson.

“There had to be ways to plug those people into the electoral opportunities that mattered most.”

What MobilizeAmerica landed on could be described as “Tinder for the resistance”: a mobile app and web interface that match grass-roots activists with nearby candidates who need volunteer support. With seed funding from Higher Ground Labs, a Chicago-based progressive technology accelerator, Kramer and Johnson hired a small staff of engineers and organisers, then fanned out across Washington, D.C., Maryland, and Virginia to connect with hundreds of resistance groups, small and large.

Like many of the new political-­technology startups, MobilizeAmerica is focusing first on Virginia, the only battle­ground state with elections in 2017, and one that also approximates the larger country, with urban and rural areas and a fast-growing immigrant population. MobilizeAmerica chose to focus on a dozen House of Delegates races—including Roem’s.

The Year Ahead 2018

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Radjy and other organisers have found it’s also more effective for reaching people. Unlike a phone call, a text message isn’t so intrusive and allows people to answer at their leisure—and many do. “People are happier to engage by text than by phone,” she says, adding with a shrug, “It’s a level of intimacy that’s kind of crazy. But that’s how we communicate with our friends. Calling would be weird.”

One early discovery from the push into new technologies is that volunteers recruited by text are far more likely to follow through on their commitments. During the Clinton campaign, the “flake rate” among people who agreed by phone to volunteer ran as high as 90 percent. But Radjy says that those reached by text sign up for jobs and follow through—particularly when they’re members of enthusiastic resistance groups. “The conversion rate of SMS has been incredible,” she says. “Now they’re showing up in higher numbers and volunteering.”

Regardless of the outcome on Nov. 7, Johnson and his peers are convinced Virginia will leave Democrats better prepared to compete and win next year. “We have a better lens into the grass roots than almost anyone—the volunteers, the delegates, and all the local groups,” he says. “When we leave Virginia, we’ll know what works, how it works, and how it can work better—and all that will be brought to bear on the midterm elections.” <BW>

Politics

“When we talk to people via Facebook or text, they often don’t know there’s an election”

Hot Seat Mitch McConnell, Senate majority leader In a broadening GOP civil war and with Senate control on the line in the 2018 midterm elections, Majority Leader Mitch McConnell will find his political skills tested as never before. After a disastrously unproductive 2017, McConnell must manage the strains in his relationship with President Trump, showcased in the ­finger-pointing that followed the failed effort to replace Obamacare. He also must face down a midterm onslaught from Steve Bannon, who along with Tea Party-affiliated groups has vowed to challenge every GOP incumbent senator on the ballot except Texas’ Ted Cruz. McConnell has some math on his side: Democrats must pick up three seats to take control of the Senate, and only eight GOP seats are on the ballot, vs. 23 held by Democrats. For now, only three seats appear to be even ­remotely in play for Democrats: those of retiring Jeff Flake of Arizona and Dean Heller of Nevada and the one in Alabama held by Jeff Sessions before he was named attorney general. Yet if Bannon continues to succeed in replacing GOP incumbents with far-right candidates, the Democrats’ takeover target list could grow. ——Laura Litvan

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partners—staked with $3 million by LinkedIn Corp. co-founder Reid Hoffman and other Democratic donors—founded Higher Ground to provide mentorship and early stage investment in politically oriented tech startups. They hoped to foster an ecosystem outside of national campaigns and focus on state and local races.

Over the summer, Higher Ground invested in 11 companies, many of them aiming at reaching voters through mobile technology and social media. Shola Farber, 27, and Michael Luciani, 25, who worked as field organisers in Michigan for Clinton’s campaign, left their jobs to found the Tuesday Company, another HGL startup working in Virginia that’s developing “digital door knocking” technology. While working for Clinton, Farber could see that the standard voter contact methods of door knocking, phone banking, and TV ads were not reaching many millennials. “When we talk to people via Facebook or text, they often don’t know there’s an election,” she says. A Tufts University poll taken a month before the 2016 election found that only 30 percent of millennials had been contacted by a campaign. “That’s a figure that haunts us,” says Luciani.

Tuesday’s technology aims to extend field organising’s best practices into the digital realm. “The one thing Democrats absolutely excel at is volunteers,” says Farber. “Our system uses a bottom-up approach to build a grass-roots volunteer network among voters who aren’t being reached by traditional Democrat efforts.” Roem’s campaign used the technology to connect with people whose doors are harder to knock on because they live in either private buildings, gated communities, or rural areas.

Reaching voters through Facebook is particularly urgent, Luciani says, because Trump’s campaign used the platform to send “dark posts” with negative messages to blacks and millennials to weaken their support for Clinton. “The same people that they don’t want to vote are the people we do want to vote,” he says.

On a Tuesday evening just before Halloween the staff of MobilizeAmerica and a small crowd of volunteers gathered in a downtown Washington loft for a weekly text-banking session, an update on the phone banks long employed by campaigns to contact voters. “Texting is a more social form of recruitment,” says Yasmin Radjy, 30, MobilizeAmerica’s Virginia state director. “You hang out, you meet people, eat pizza, drink beer, and play music—all things you can’t do when you’re phone banking.”

The Year Ahead 2018

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The Year Ahead 2018

Politics

Interview David Petraeus The former U.S. Army general and CIA director talks about the biggest national security threats of 2018 How should the U.S. manage the threat from North Korea?

The Trump administration is pursuing the appropriate course of action, which is to take steps that get China’s attention and have it tighten down on the umbilical cord that runs between it and North Korea.

With President Xi [Jinping] in an even stronger position, the hope is he will feel sufficiently confident to take action against North Korea that is significant but sufficiently calibrated to bring Kim Jong Un to his senses and to the negotiating table, but not necessarily to his knees, which they don’t want to see happen because they don’t want to see North Korea collapse and the Korean Peninsula potentially reunified. That is one of their red lines.

This is a very significant achievement and a validation of the strategy that was begun by the previous administration and then accelerated by this one.

But the battle after the battle is what matters most.

In Iraq, this is the battle over power and resources.

The future of Iraq, frankly, will depend a great deal on Prime Minister Haider al-Abadi’s ability to practice inclusive governance to ensure that the Sunni Arab community that felt alienated and even abused by the previous prime minister [is brought] back into the fabric of society.

In Syria, there is going to have to be stabilisation of the cease-fire lines, the provision of humanitarian assistance, the establishment of local security forces and local governance, and then over time the determination of a path forward for Syria as a whole or perhaps Syria as a number of entities.

What might we see in 2018 with Iran and the nuclear deal?

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With the fight against Islamic State winding down, what can we expect next in Iraq and Syria?

We need to see what happens in 2017 first, because Congress now has to take action within 60 days of the president choosing not to certify the agreement.

There will have to be a determination of whether to reform or to change that particular law and also what Congress might initiate in terms of legislation that puts sanctions on Iran over its missile program, its malign activities in the region, and other actions of concern to the U.S. That is going to predicate to a considerable degree what takes place in 2018.

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Will the U.S. deepen its footprint in Niger in 2018? With an additional base or armed drones?

It’s very hard to say. The Africa Command has always been a bit of a so-called economy-of-force mission, because of the demand for the intelligence, surveillance, and reconnaissance assets—Predators and Reapers [drones] in particular. It’s not the platform that is hard to get. It’s the 150 or so people that keep it in the air, that fly it, that operate the payload, that fuel it, that fix it.

Do you ever feel that sense of déjà vu?

There’s never been a doubt that we would defeat the Islamic State as an army. But there’s also no doubt that after that there will still be residual elements. We will not be able to put a stake through the heart of the virtual caliphate, the activities in cyberspace, the way we will have put a stake through the heart of the Islamic State army. Clearly there has to be more done … to reduce the availability of extremist content online.

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In the fight against Islamic State, “the battle after the battle is what matters most”

Do you think we might see you take a position in the Trump administration?

I feel very fortunate to be doing what I’m doing as a partner at KKR and chairman at the KKR Global Institute, [professor at] the University of Southern California, a fellow at Harvard, and a personal venture capitalist.

So you’re not ruling it out?

I’m not job-hunting. �Nafeesa Syeed

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Edited by Roger Field Saudi Arabia will push ahead with economic and social reforms in 2018, giving a boost to the Gulf economy

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The Year Ahead 2018

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Middle East economic outlook Despite a shaky geopolitical outlook and uncertainty over oil prices, most analysts are upbeat about the outlook for the Gulf region in 2018

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With protracted wars and instability in Syria, Iraq and Yemen, a political split between Qatar and its neighbours and seismic political and economic changes afoot in Saudi Arabia, attempting to predict how the year ahead might pan out in the Middle East is a bit like trying to predict where the balls on a billiards table will rest after a break shot. However, while the geopolitical climate in the region may not inspire optimism, there are a number of positives when assessing the region’s potential in 2018, including Saudi Arabia’s bold moves towards implementing its Vision 2030 agenda, the introduction of VAT in the UAE and Saudi Arabia, rising oil prices and preparations for events such as the World Expo 2020 in Dubai. Taking a broad sweep, most analysts agree that there are grounds for cheer in 2018, albeit tempered by the unpredictability of the geopolitical situation.

While countries in the Gulf Cooperation Council (GCC) are committed to diversifying their economies, hydrocarbons remain a key pillar of the region’s economy, and the price of oil and gas will have a major impact on how 2018 plays out.

Hydrocarbon production cuts and lower oil prices, which weighed on growth in 2017, are expected to ease in 2018, potentially helping to boost government coffers and raise investor confidence, according to BMI Research, a UK-based research firm owned by Fitch Group. The GCC member states are expected to see annual aggregate average GDP growth of 2.8 percent between 2018 and 2012, a significant recovery from the 1.5 percent that was forecasted for 2017, BMI stated in a research note.

“Over the medium term, we forecast economic growth to accelerate across the region, as hydrocarbon prices pick up further and curbs on oil production ease. While growth in hydrocarbon production will remain relatively slow throughout the next decade, higher prices will boost confidence and government investment into the development of non-hydrocarbon sectors in all GCC states,” BMI stated in its research note.

Sammy Kayello, Chairman and CEO of Morgan Stanley in the Middle East and North Africa, expects to see oil remain in the “$50-60 [per barrel] zip code”, which he views as an important price for increasing confidence and investment in the region.

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By Roger Field

He views hydrocarbons as one of three pillars, along with the geopolitical situation and regulatory reform, which will determine the success of the region in 2018. While he believes 2018 will ultimately bring “more of the same” in the GCC and wider Middle East, he sees a few sweet spots. “OPEC has done a good job of maintaining the quotas and agreements. There is a genuine desire, through financial and regulatory reform, to open up and position the region closer to where developed markets are. I think that pace will continue and that is very good for the markets,” Kayello says.

Gianmario Pisanu, managing director and management consulting lead in the Middle East and Turkey at Accenture, agrees with Kayello’s views on oil prices, and adds that these price levels are important for economic diversification plans in the region. [With oil at $50-60] governments should find themselves in a good place to implement their visions. The key to success for the UAE will be to continue expanding the non-oil sectors, while for Saudi growth will depend on a rich social and economic reform agenda,” he says.

However, not everyone is convinced that recent tightening in oil supply will equate to sustained higher prices. Gautam Duggal, regional head of wealth management for Africa, the Middle East and Europe, and head of wealth management for the UAE at Standard Chartered Bank, takes a somewhat more pessimistic view. “We expect economic growth in the Gulf to remain muted in 2018 on the back of the prolonged decline in oil revenues. While oil producers in the Gulf are expected to maintain lower output levels as per their committed targets, a rebound in US inventories and upbeat forecasts for US shale output indicate limited price gains,” he says. “The resulting shortfalls against breakeven oil prices will likely force Gulf governments to continue with their fiscal tightening measures, limiting economic growth further.”

Thankfully, reform agendas are arguably easier for governments to control than oil prices and geopolitics and most commentators who spoke to Bloomberg Businessweek Middle East were optimistic about regulatory reforms, particularly in the UAE and Saudi Arabia, in 2018. “We expect 2018 to be an important year for the GCC economies as

Gianmario Pisanu

“The key to success for the UAE will be to continue expanding the non-oil sectors, while for Saudi growth will depend on a rich social and economic reform agenda.”

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EGYPT

Dr. Bashar Hawamdeh, CEO

THE POTENTIAL HUB FOR EXPORTS AAIB

PERSPECTIVE

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The flotation of the Egyptian pound in 2016 was a step towards building foreign currency reserves, attracting FDI and boosting investor confidence. Along with this move, the government’s strategy (Egypt Vision 2030) focuses on five crucial pillars, which will be addressed in parallel to attain the industrial growth rates.

The strategy, which has been endorsed by the President and the Egyptian Parliament, is setting the scene to promote Egypt’s exports and limit its imports to protect and develop the reach of its home-based industries.

The government’s five pillars strategy will focus on industrial development, micro, small and medium-sized enterprises & entrepreneurship development, exports development, competition, enhancing technical and vocational education, governance and institutional development.

Minister of Trade Tarek Kabil’s new export promotion strategy will be coordinated primarily through the newly-established Export Development Authority (EDA) to ensure a five-year strategy that focuses on: Streamlining export procedures through a one-stopshop policy; Improving the quality of exports; Launching an exportpromotion portal, and encouraging exporters to participate in international fairs and expos. In tandem, the Ministry of Trade’s renewal of directives, to impose duties on certain competitor industries such as to limit price undercutting from cheaper markets.

Industrial training programmes will be the key driver of quality improvement, with target markets to include Europe—a traditional export destination—and new markets in East and West Africa as well as South America.

Under the stewardship of Sherine El Shorbagy, the EDA functions will network with export councils and business associations in order to assess market challenges and find collective strategies to improve Egypt’s non-oil exports.

Although further reform is required, as the Egyptian economy continues to expand, exporters and investors are finding that recent government legislation, supported by a willing financial sector, is making it possible for them to extend their marketplace beyond Egypt’s borders. In 2015, 29.2% of Egypt’s exports were to the European Union. In 2016, exports of goods were valued at €6.7 billion, with the largest contributors in fuel and mining (43.2%), textiles & clothing (12.3%) and chemicals (13.2%). However, this was 22% lower than in 2014, despite the fact that Egypt has had an “Association Agreement” (AA) with the EU since 2004, which eliminates tariffs on industrial products and lowers them on some agricultural ones. Negotiations to enhance the openness of trade, to a full-blown “Deep and Comprehensive Free Trade Area” (DCFTA), were started in 2013 and are currently on hold.

Theoretically, Egypt’s export sector should always perform well because of the advantage provided by the Suez Canal, Egypt’s

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“Industrial training programmes will be the key driver of quality improvement.” proximity to Europe, a large population with low wage costs and the potential of an indigenous gas supply.

Policy makers devalued the Egyptian Pound at the end of 2016, making exports much cheaper and, therefore, much more competitive. With power supplies improving as a result of additional gas production, greater support from the EU (which would prefer to avoid refugee and migrant flows becoming an issue), and with wages still lower than Southern Europe, Egyptian exporters can feel encouraged by the growth prospects.

TOP TIPS FOR POTENTIAL EGYPTIAN EXPORTERS? • The financial sector, banks in particular, are increasingly tailoring their structured products for specific requirements. Less rigidity in the banking sector makes it easier to agree sensible and, more importantly, competitive international transactions.

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• The Egyptian Government is developing free zone areas around the Suez Canal. The Chinese have already indicated their willingness to invest in manufacturing in these areas for the purpose of exports.

Those same zones offer indigenous businesses opportunities.

• Nearly 50% of Egypt’s exports are in the oil and gas sector.

Agriculturally, Egypt is a net importer despite having a significant amount of very fertile and arable land.

• Competitiveness is the key to developing a successful exportoriented business. The demands of the local market can be, and often are, very different.

• The textile sector is underdeveloped and opportunities abound.

Although Egypt produces some of the best cotton in the world, its downstream processing capabilities lag behind the tremendous potential.

• The Suez Canal has opened up a world of benefits for East-West trade and Egyptian businesses are in pole position. However, there are significant markets in the Middle East, North Africa, South Asia and to the East, as well.

The government’s positive reforms, sensibly pegged currency, geographical location and educated as well as inexpensive workforce offer an ideal combination for the development and growth of a thriving export-oriented economy.

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The Year Ahead 2018

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prices increase slightly and believes that it may dampen consumer sentiment at the cash register. He adds that VAT is an important part of the countries’ economic plans and that the tax is low enough to avoid disturbing economic activity while still helping governments in their quest to diversify their economies. And in this area, Kayello offers an upbeat appraisal. “It will be challenging at first but ultimately I see it working. The businesses that will benefit from that are healthcare, transportation, and telecommunication,” he says.

Accenture’s Pisanu adds that the introduction of VAT and increased spending in capital project and infrastructure (CP&I) across the region will be important factors in helping to achieve economic growth. However, Standard Chartered Bank’s Duggal says that Saudi Arabia and the UAE still have “some way to go” before the potential VAT earnings boost non-oil revenues across the Gulf.

One of the advantages that Saudi Arabia has is a large of pool of young people who could become more productive, as well as women of all ages who could increasingly participate in the economy, given the right opportunities, according to Kayello. “The country has compelling demographics, with a highly educated workforce, of which about 60% is below the age of 30-35. If you tap this pool of labour successfully and productively then your capacity utilisation will shoot through the roof,” he says.

VAT is being introduced in Saudi Arabia and the UAE from January.

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fiscal and diversification policies bear their fruits in terms of growth,” Pisanu says. “The introduction of VAT, which will help overcome deficits, and increased spending in capital project and infrastructure (CP&I) across the region will be important to achieve economic growth.”

Moreover, assuming oil remains in its current $50-60 price bracket and the geopolitical situation in the region improves slightly, Morgan Stanley’s Kayello believes investor confidence will follow, at least at the level of sovereign wealth funds. “I believe most of the sovereign funds in the region are in a position to attract more investment,” he says. “Ultimately if they get some of the geopolitical news to abate a bit and oil prices to show some stickiness to the range we’re in now, international investors will continue to invest at the sovereign level.”

This in turn would help Saudi Arabia’s government to achieve some of the reforms it has committed to as part of its Vision 2030, and could also translate into improved credit ratings and lower costs of borrowing.

Among reforms being implemented in 2018 in Saudi Arabia and the UAE is the introduction of VAT of 5% on most goods and services. The move is intended to shore up government coffers and help with economic diversification plans. But upon its implementation in 2018, VAT is also likely to create a one-off inflationary spike. Kayello expects to see

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This is particularly important given that productivity is viewed by many commentators as one of the major factors that will influence the Gulf economies in 2018 and beyond. For example, Pisanu says that productivity will be key to securing the GCC’s living standards and ensuring long-term sustainable growth. “To raise productivity, the region must focus on giving the youth the right tools to succeed and meet the demands of a changing job landscape,” he says.

Gianmario adds that countries that offer relevant, quality education to their youth stand to “create a pipeline of talent” that can propel economies

The Year Ahead 2018

Middle East

forward. “A more inclusive labour market, especially for women, can also help improve productivity,” he says. “The region’s biggest opportunity is linked to its unique demographics: a fast growing and young population that is increasingly well-educated and digitally savvy. The local youth has the potential to help the GCC move away from its dependency on hydrocarbons towards a knowledge-based economy. It is the region’s youth who will define our future prosperity. The impact of this fresh wave of talent is increasingly visible across multiple sectors, from renewable energy to transport, to ICT and education.”

Interview Sameer Lakhani Managing director of Global Capital Partners offers an upbeat perspective on the GCC in 2018 Whether it is F&B or real estate, we are seeing the greatest amount of optimism in the UAE. What sectors will drive growth in 2018?

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In the UAE in particular, aviation is one driver. In the real estate sector over the last six months there are bigger and grander projects appearing, and there are grander projects on the infrastructure front, which are more from the government side. I think we are going to see a return to optimism in our region in a few months but the UAE is already moving up. Just look at how the Emaar IPO was oversubscribed, and Adnoc has already announced its IPO. In real estate we’re seeing a lot of capital so I think sentiment has already changed.

“I think we’re going to see a return to optimism in our region in a few months”

How do you see prospects for 2018 in the GCC?

I am more optimistic than most. In the Gulf there are so many different dynamics going on. There is Saudi Arabia which is going through its political and economic reforms, which are just starting to take shape. The UAE is furthest along in this field in terms of its diversification efforts. The rebound in economic growth is probably going to be led by the UAE in 2018 and 2019. This may be partly because of the build-up for the World Expo, and partly because the UAE has been the most resilient in absorbing an oil price decline, and because other parts of the world continue to allocate investment to the region, and whenever they decide to do so the UAE is pretty much on the top of that list. We are seeing a wave of optimism in all of the areas we are involved in:

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On a small scale we operate across a lot of sectors including real estate, F&B, e-commerce, smart homes and facilities management. We’re a diversified group with about 600 employees. It’s interesting: We think a lot of the opportunities are about efficiency, especially as subsidies are being removed, which spawns opportunities across the board. In real estate and facilities management, energy efficiency is particularly important. This part of the world needs to be a little more cost conscious. Energy efficiency right down to the consumer level is one of the important issues that we see in our smart home and real estate units, and we appreciate that buildings have to be designed more efficiently. There are also dramatic strides in e-commerce spending taking place in the region. So while 2016-17 has been about cost consciousness, I think there will be a continuation in 2018. � Roger Field

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Where do you see the main opportunities in 2018?

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The Year Ahead 2018

Middle East

Interview Nabil Habayeb President and CEO of GE, MENA and Turkey, talks about the need for sustainability and efficiency in 2018 liquidity means limited capacity to offer critical national projects. As nations and partners continue to grow more cost-conscious accordingly, the onus is on us to provide them with tangible benefits to their respective sectors in different forms, such as securing financing for required projects through global partnerships with financial institutions, to increasing the efficiency and productivity of industries through our Predix Industrial Internet platform. It is about finding the right solution for all of our partners. It’s also a matter of balancing our different offerings, with the UAE and Saudi focus on renewable energy a prime example of this.

Where will renewable energy sources fit in?

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How do you see the Gulf economy in 2018 and will higher oil prices help significantly?

It’s an interesting position. While oil markets have primarily stabilised, there is still a somewhat negative outlook concerning Gulf markets. While this is understandable given the price downturn in recent years, it doesn’t take into account more long-term and long-lasting economic reforms underway.

Diversification plans have taken on a new impetus in the Gulf. How important are these plans for the Gulf economy in 2018?

Diversification has emerged as the one constant across the region, with nations adjusting to a clearly changing economic reality and coupling that with the need to advance multiple sectors, from education and STEM related fields to healthcare and an increased focus on trade.

It sounds like these plans will provide opportunities in a range of sectors.

Opportunities often arise from difficulties, and this is no different. This is a chance for Gulf economies to set their respective nations on the path to growth for years to come.

What are the major headwinds in your industry, and how do you plan to mitigate them?

The recent downturn in oil prices has had a trickledown effect on different industries as well: Less

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The region has seen an incredible surge in the demand for clean and sustainable forms of energy, from a heightened focus on solar energy in the UAE to the goal of completely powering NEOM in Saudi Arabia through renewable sources. Finding the right balance between traditional and renewable forms of energy is critical to regional growth.

Where do you see the biggest opportunities for GE in the Middle East?

There is a significant demand for infrastructure development across the region, and in many cases the requisite financing is not available to support it. Our role as a cross-sector digital industrial player involves more than simply selling our technology; it is about working with our partners to ensure they are able to deliver projects that have a positive impact on citizens. Our ability to bring together regional and global banks, as well as leading export credit agencies, allows for the successful launch and implementation of these projects. This is a crucial aspect of the industry and one that will only continue to grow in years to come.

In light of your expectations for 2018, what strategies does GE plan to adopt?

Our focus will be entirely customer driven in 2018; how do we work with customers to ensure that their campaigns and visions are delivered. It’s about continuing to build awareness of the efficiency and productivity derived from our digital industrial platforms across sectors including power, healthcare and others, and ensuring that we maintain our position as an all-encompassing private and public sector partner.

“The region has seen an incredible surge in the demand for clean and sustainable forms of energy, from a heightened focus on solar energy in the UAE to the goal of completely powering NEOM in Saudi Arabia through renewable sources.”

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Bloomberg Businessweek Middle East

The Year Ahead 2018

Scoreboard

What We Got Right (and Wrong) Last Year Legend:

Right

Right-ish

Kinda wrong

Insurance

Trade

Markets

Energy

“The event that could really turn the [reinsurance] industry is impossible to control: a major natural disaster. … ‘We’re kind of due for a big event,’ [Rod] Fox [chief executive officer of reinsurance brokerage TigerRisk Partners LLC] says.”

“The next president of the U.S., whether [Donald] Trump or more likely Hillary Clinton … could blow up the delicately constructed [Trans-Pacific Partnership].”

Chinese banks are lending at an unsustainable rate and will pose a major risk to the world economy.

For the first time in 60 years, the U.S. will become a net exporter of natural gas.

Once a reliable moneymaker, the industry stumbled this year, although it didn’t totally tank.

But after hurricanes Harvey, Irma, Jose, and Maria, we wish we’d been less right.

Politics Right-wing populists and nationalists will make big gains in Europe.

Austria’s anti-immigrant Freedom Party gained ground, and Germany’s Alternative für Deutschland became the first far-right party to win seats in the Bundestag since the Nazis. That said, nationalists were largely halted in France, Italy, and the Netherlands.

Power Xi Jinping will use the National Congress of the Communist Party to concentrate control.

Indeed, no obvious successor to the Chinese president emerged from the party’s twicea-decade meeting in October, triggering speculation that Xi will try to stay in office beyond the two terms mandated by Deng Xiaoping. He also stacked the party’s Standing Committee with loyalists.

Stocks New York Stock Exchange floor trader Peter Tuchman will show up in photos as the face of Wall Street.

AP IMAGES (8); GETTY IMAGES (2); REUTERS (1); YOUTUBE (1)

Wrong

11/21/16

12/1/16

1/13/17

While that turned out to be true, we did get one very obvious thing wrong. Then again, so did just about everybody else, so we’ll call it a wash.

Far from collapsing, Chinese bank stocks have increased more than 20 percent.

On the other hand, the country’s largest institutions are still overleveraged, so the fuse may just be longer than we thought.

Corporate Leadership Activist investor Bill Ackman may force out Steve Ells as CEO of Chipotle Mexican Grill Inc. if its performance remains sickly.

6/21/17

7/17/17

8/2/17

9/20/17

10/18/17

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100 1/2016 8/2017 2017 DATA: U.S. DEPARTMENT OF ENERGY

Regulation Europe is about to get ­uncomfortable for technology companies.

Oil

Growth

It’s highly unlikely U.K. negotiators will try to secure special treatment for banks in the Brexit talks.

“After two years of pumping at full blast … the Saudis now appear willing to pull back.”

The world’s developed economies are in for another year of mediocre growth at best.

Saudi Arabia reduced oil production from a record 10.7 million barrels per day in 2016 to less than 10 million, helping drive the recovery in oil prices.

The Anthem-Cigna and Aetna-Humana mergers will face a tough time with regulators.

5/17/17

50

Brexit

After a disastrous snap election in June, the U.K.’s ruling Conservative Party has walked back some of its hard-line stances, including this one.

Both deals ultimately crumbled. Anthem Inc. and Cigna Corp. are suing each other over the $1.9 billion breakup fee that Cigna says Anthem owes—plus $13 billion in alleged damages. In October, CVS Health Corp. made a reported $66 billion offer to acquire Aetna Inc.

0b

Net imports

Ells has managed to hang on even after a board shakeup. Unfortunately for Ackman, earnings continue to disappoint. He’s so far lost about $386 million on his original $1.2 billion position.

Mergers and Acquisitions

4/4/17

Net exports (cubic feet)

Not only did Margrethe Vestager, the European Union’s commissioner for competition, slam Google with a record $2.7 billion fine, she also hit Facebook and Amazon.com for hundreds of millions of dollars each.

2/17/17

3/10/17

True, so far. In 2017 the U.S. has exported more natural gas than it has imported:

If you’ve read our opening essay, you already know that most beat growth expectations for the year. Over the course of 2017, the International Monetary Fund changed its assessment of global demand from “subdued” to “seeking sustainable growth.”

Personal Technology “Heading into 2017, there isn’t a clear answer to the basic question of what, exactly, VR technology is for.”

This remains true going into 2018, but we do know who’s winning virtual reality: Sony Corp. In the second quarter of this year, the company sold more VR headsets than its two primary rivals, Facebook and HTC Corp., combined.

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