The Lights All Went Out in Massachusetts

The Lights All Went Out In Massachusetts                                                28 May 2020

According to Property Finder, and despite the Covid-19 economic impact, there were still 1.8k property sales last month, worth US$ 1.0 billion, of which 70% were off-plan and the rest in the secondary market. JLL estimates that 12k units were handed over in Q1, as average sale prices came in 7% lower, year on year, on concerns that there is an oversupply of properties in Dubai.

One developer moving forward is Kleindienst Group, confirming that the first occupiers of villas in their Heart of Europe project in Dubai’s World Islands will move in by year-end. The development of the World Islands was completed as long ago as 2003 and handed over to various developers five years later. Kleindienst is also developing two hotels, Portofino and Cote D’Azure, together with 1.5k rooms, sea-horse villas, now selling at over US$ 5 million, and ten ‘palaces’, with private beaches, that have all been sold. One of the more expensive properties, already bought for US$ 27 million, is a beach palace on ‘Sweden Island’. Currently, there are a reported 1.2k workers on site in the process of completing the two hotels, as well as building hundreds of smaller villas and apartments.

Accor expects the local hospitality sector to bounce back slowly – taking between 18 to 24 months – once airline schedules are returned to pre-Covid-19 levels, driven by pent up demand from both business and tourism sectors. The French hospitality group notes that the UAE will be the quickest in the MENA region to return to 2019 levels because of its resilience and that the emirate has always been a touristic hotspot and business hub. Dubai’s hospitality sector has probably been hit as hard as any other in the world when all travel came to a complete standstill because of enforced lockdowns and travel restrictions. According to the World Travel and Tourism Council, there will be a US$ 2.1 trillion loss in tourism revenue and about 75 million global jobs will be lost in the sector. Accor has already closed 67% of its 5k properties worldwide, of which 350 are in the MENA region, and has furloughed, or temporarily laid off, 200k or 75% of its staff. The company, whose brands include Raffles, Fairmont, Sofitel, Ibis and Mercure, has 64 UAE properties, with a further thirty to be added over the next three years.

Dubai tourist chiefs will be closely watching Spain to see whether they can lean any valuable lessons when it opens up the country to foreign visitors in July. The government there has agreed not to introduce a 14-day quarantine, as has been the case in the UK. Spain relies so much on tourism, which provides more than 12% of its GDP, that opening up the economy, despite the risks involved, was seen as an economic necessity. Last year, the country attracted 80 million visitors, many of whom were from the UK; currently once such visitors return from Spain, they will have to self-isolate for fourteen days. Unfortunately, the same rule would apply to UK holidaymakers coming to Dubai which would have a negative impact on numbers who would have otherwise chosen the emirate as their vacation choice. The flip side of the coin would see the usual high number of UAE visitors to the UK drop significantly, as they have to isolate for two weeks on their arrival to the UK. No wonder business groups are petitioning the Johnson government to amend these regulations, suggesting a more “targeted, risk-based” approach.

There has been no change to petrol prices for June, as May prices had remained flat, following a 10% decline in April. Special 95 and diesel pump prices will retail at US$ 0.491 and US$ 0.561 respectively. The stations will welcome the increase in business, as lockdown restrictions are beginning to ease and some sort of normality is returning to everyday life.

Still pleading his innocence, following the collapse of NMC Healthcare, its founder, BR Shetty has indicated that because his UAE bank accounts have been frozen, he cannot pay salaries for some of his companies, including Neopharma and others. He seems to be admonishing banks for “without proof, they have taken this action” to freeze his accounts, even though NMC was placed into administration, with debts of US$ 6.6 billion owed to more than eighty lenders, of which US$ 2.0 billion is due to UAE banks. Mr Shetty is blaming seventeen ex-staff members – with their details forwarded to local authorities – for involvement in siphoning money, including share sales and equity collar transactions carried out in his name that generated a reported US$ 500 million over a two-year period. Another group company, and also listed on the London Stock Exchange, Finablr, that also owns UAE Exchange, has had its shares suspended since March, after it was found that previously unreported debts of US$ 1.0 billion had been discovered.

As it continues to maintain its confidence in the sector, Yellow Door Energy is planning to raise a further US$ 100 million in debt finance, partly because of an estimated 18% reduction in 2020 revenue, attributable to the pandemic. The Dubai-based company, with interests in Bahrain, Egypt, Jordan and Saudi Arabia, still expects to have about US$ 110 million of projects operating come the end of 2020, as well as to reach 100MW of capacity, with 55MW under construction. The five-year old company, spun off then by solar energy investor Adenium Energy Capital, has investors, including the International Finance Corporation, Mitsui & Co and Norway’s Equinor Energy Ventures. Although global bodies, such as the World Economic Forum, are worried that Covid-19 might be a catalyst to slow down the drive to clean energy growth, the company is confident that business will remain on track, as it continues to focus on existing markets. Currently, it has three on-going projects in Pakistan and is “actively looking for new investments”.

A decade after a significant project had been completed, Union Properties has lodged a claim that “is related to construction work for a significant project that was completed around ten years ago”. Surrounded by a little bit of mystery, the concerned parties – a UP subsidiary and an entity that carried out the work – have yet to be named, as is the project concerned. However, what is known is that an arbitration process, to recover about US$ 409 million, has been initiated by a UP subsidiary. The company also announced that it will not “spare any effort in pursuit of the collection of the amount owed, and is taking the proper legal procedures, which are in the interests of the company’s shareholders”. In 2019, the embattled developer posted a US$ 60 million loss, following a US$ 17 million profit in 2018.

Amanat Holdings, currently listed on the DFM and an investor in healthcare and education businesses, plans to move its headquarters to Abu Dhabi and list its shares on the Abu Dhabi Securities Exchange. The nature of its businesses has obviously been negatively impacted by Covid-19 and has resulted in the need to cut costs and restructure the business model. One of its first measures has seen top management take voluntary pay cuts and, with no redundancies currently necessary, this has allowed the senior team to remain together to look for growth opportunities and additional regional investments. Amanat, which posted a 40% jump in 2019 profit to US$ 11 million, already holds shares in Middlesex University Dubai, Abu Dhabi University Holding Company and Jeddah’s 300-bed hospital, International Medical Centre.

Although Q1 revenue was 33.9% higher at US$ 327 million, Damac announced a US$ 26 million loss for the quarter, (compared to an US$ 8 million profit last year). The two main drivers for the deficit were impairment provisions of US$ 35 million, against the value of development properties, and a US$ 14 million charge in relation to trade receivables. Its share value at the close of trading last Thursday was US$ 0.169, equating to a market value of US$ 1.0 billion. Cognisant of the fact that there is an apparent oversupply in the local market, the chairman, Hussain Sajwani, has reiterated that “in 2020, we will remain focused on delivering projects that are already in our development pipeline,” as Damac tries to bring the supply/demand curve to some sort of equilibrium. In Q1, the developer delivered 650 units in its Akoya master community.

Because of the Eid holiday, the bourse opened on Wednesday 27 May and, 45 points (2.4%) higher the previous week, after two days’ trading was 21 points to the good (2.4%), to close on 1,961 by 28 May. Emaar Properties, up US$ 0.01 the previous week, was US$ 0.02 higher atUS$ 0.68, whilst Arabtec, down US$ 0.02 the previous three weeks, was US$ 0.01 lower at US$ 0.16. Thursday 28 May saw the market trading at 337 million shares, worth US$ 118 million, (compared to 252 million shares, at a value of US$ 101 million, on 21 May).

By Thursday, 28 May, Brent, lower by US$ 0.08 the previous week, closed US$ 3.64 (11.6%) higher on US$ 35.08. Gold, down the previous week by US$ 16 (1.0%), nudged up US$ 7 (0.4%) on the week to close on Thursday 28 May, at US$ 1,735.

It seems that the Macron government will bailout Air France, with a US$ 7.7 billion finance package on condition it halves its carbon dioxide emissions by 2024. To meet this target, the carrier would have to “drastically” reduce domestic air traffic – a heavy price to pay since last year it was already losing US$ 220 million on its domestic network. In Q1, it posted a US$ 2.0 billion loss and, because of the lockdown restrictions, is currently operating only 5% of its usual schedule. By the end of next month, it hopes to have 15% of its scheduled flights operating.

Having closed its budget airline Germanwings last month, Lufthansa has negotiated a US$ 9.6 billion state rescue deal to save it from collapse, with the government becoming a 20% shareholder, which it proposes to sell within three years. Part of the package also includes a US$ 6.3 billion non-voting capital, which can be converted to an additional 5% equity stake, which would then allow the government to veto any hostile takeover bid. The deal, which has saved 10k jobs, still has to be ratified by the shareholders and the EC. The Merkel government has set up a US$ 120 billion fund to shore up, and “save” legacy companies, such as Lufthansa, that had been viable prior to the pandemic.

A decision by Germany’s highest court has paved the way for 60k similar cases to take similar action against Volkswagen, who seem to have already agreed to offering affected motorists a one-off payment.   It ruled that VW had to pay compensation, being partial reimbursement with depreciation taken into account, to a buyer of one of its diesel minivans, fitted with emissions-cheating software. It has already paid out a massive US$ 33 billion in fines, compensation and buyback schemes over the past five years and has already settled a US$ 910 million separate class action by 235k German car owners. It is now facing similar action in the UK where 90k are chasing the German car giant (including its other brands – Seat, Skoda and Audi) for damages. The company – and some of its senior employees – are paying the price for using illegal software, by fitting a “defeat device”, which alerted diesel engines when they were being tested.

There are reports that SoftBank’s Vision Fund could be retrenching almost 10% (500) of its workforce, as it comes to terms of horrific Q1 figures when, because of the declining value in start-ups, it racked up losses of US$ 18 billion. This came after a US$ 17.7 billion loss for the US$ 100 billion Vision Fund, attributable to the writing down of the value of investments, including WeWork and Uber. SoftBank founder Masayoshi Son estimates that of the eighty companies in its portfolio, led by ex-Deutsche Bank’s Rajeev Misra, 18.8% will probably go bankrupt. Son realises that it is difficult to find new investors when results are so bad and so has to invest internal money – he has plans to divest US$ 42 billion in assets, including a near 50% stake in dog-walking start-up Wag Labs, to finance stock buybacks and pay down debt.

April saw UK car manufacturing in dire straits in a month that only 197 premium and luxury sports vehicles were produced – 99.7% lower than a year earlier. Last year, the UK manufactured 1.3 million vehicles, of which 82% were exported, although exports did decline 14.7%. In March, manufacturing was 37.6% lower at 79k, with Q1 figures 13.8% lower at 319k, whilst exports hovered around the 79% level. Now the aim of the industry is to ramp up manufacturing, as quickly as possible, as it could have already lost 400k sales equating to US$ 15.0 billion in revenues and also valuable exports.

Chief Executive Andy Palmer has paid the ultimate price for being in charge of a company that had seen its share price nosedive 94% since its October 2018 listing. The Aston Martin boss had been in charge for the past six years and the carmaker was struggling even before the coronavirus crisis hit sales, with its share price trading at just US$ 0.42. In Q1, unit sales halved to just 578 units., with the losses seven time higher at US$ 143 million. In January, the 107-year old company raised emergency funding of US$ 500 million, of which 37% was attributable to Lawrence Stroll, part owner of Racing Point Formula 1; the deal will also see a rebranding of his F1 team to Aston Martin next year.

Another UK car maker in trouble is McLaren which plans to slash its 4k workforce by 30%, as sales have slumped and advertising revenue tanked, having been “severely affected” by the crisis. The supercar maker has been impacted by F1 racing being suspended and slowing car sales; its 800-strong workforce at its Formula 1 operation will see cuts of about 9% initially, but because of a recently introduced sport-wide budget cap will see more redundancies next year. All F1 teams – including Mercedes Ferrari and Red Bull – will have to adhere to the new rules that includes reducing head counts.

To the dismay of so many Australians, Wesfarmers, the owner of the much-loved Target brand, has either to close – or rebrand – 167 Target sites. Since Target is operating in the same sector as its more “successful” sister, Kmart, the owners have decided to rebrand 92 of the stores and close the remaining 75. Kmart was always considered the “higher-priced”, but more popular alternative, with the Australian public whilst moving away from successful collaborations with designers such as Stella McCartney. Where Kmart was successful, was with their embracing online trading and convincing the public that it had a preference for the Kmart brand. Now that consumer confidence is at an all-time low, and wages growth stalled, it is logical why Wesfarmers has decided to opt for Kmart, especially with increased competition from the likes of Uniqlo and H&M. There is no doubt that with overall retail spending falling by US$ 215 billion – with online trading currently growing at 10% – the retail pie will only accommodate a certain balance of consumer spend and this is going south so that physical stores will suffer and close.

A major Australian “cock up” has seen the number of people on JobKeeper reduced from 6.5 million to 3.0 million and that the cost to the government of running the scheme being cut from US$ 80 billion to US$ 43 billion. According to the ATO, the error was caused by some 1k businesses wrongly filling out their applications and, in true bureaucratic style, the problem has been deftly handballed away from their court. However, they did concede that the application form “could have been more straightforward”. It seems that many businesses filled out how much financial assistance they expected to receive rather than how many employees they though would be eligible.

Japan is set introduce a further US$ 1.1 trillion stimulus package, following a similar package rolled out in April, as it tries to cushion the severe impact Covid-19 has had on the country. US$ 333 billion of the total will be for direct spending, including increased medical funding, student support and subsidies for struggling companies.  The Abe government has now spent the equivalent of 40% of Japan’s GDP on fighting the pandemic and, to fund these packages, Japan will issue US$ 310 billion in government bonds. These developments come at a time when the world’s third largest economy is now in technical recession and heading for a major slump.

As widely expected, Argentina failed to meet Friday’s deadline and has defaulted on about US$ 500 million in bond payments. The government’s initial offer of restructuring some US$ 65 million in foreign debt was roundly rejected, whilst the Exchange Bondholder Group, a major group of eighteen investment institutional creditors has confirmed its commitment to counter proposal to provide “significant debt relief to Argentina and beyond doubt provides a sustainable debt structure for Argentina in respect of Exchange Bonds”. This is the country’s ninth sovereign default and an agreement of sorts is expected in days despite an “important distance” left to reach a deal between both parties.

To help their economy to weather the Covid-19 storm, Chinese authorities have announced US$ 430 billion worth of stimulus funding, as the economy contracted 6.8% in Q1. The money will be spent by local governments to help with the survival of private companies, to prevent job losses and to ensure the public’s basic needs are met.  More interesting is the fact that the Party failed to set a future growth target, which has been the norm for some time, citing it would be focussing all its efforts on fighting the pandemic. Although it was the first country to come out of the pandemic, having been the first to suffer, it has struggled to get the economy going. It was estimated that 30% of the country’s 442 million workers lost their jobs, at least temporarily during the Chinese lockdown, and that 25 million jobs may have gone for good.

There are concerns of China’s role in possibly not sharing all the relevant details of the initial Covid-19 breakout in Wuhan last December. Now the country has angered world powers again by passing a national security law to crack down on political freedoms in Hong Kong. Donald Trump will again be centre stage and there is no doubt that, just as last year when the US/Sino tariff war disrupted global trade, the global economy will suffer at such a critical time. Any ramp-up of tensions between the two superpowers will have a negative knock-on effect on the global economy at a time when it will be trying to recover from Covid-19.

For the first time since the onset of Covid-19, the US has posted a decline in jobless numbers – a sure indicator that people are starting to return to work. The number of ongoing benefit claims has declined to 22.1 million – a surprise to many who thought that this number would continue to rise. Weekly jobless claims, of 2.1 million were reported, as at 23 May, bringing the total from mid-March to 40.7 million. The beginning of June could see a US unemployment rate of 20%.

Dubbed Next Generation EU, the bloc has finally agreed to a major US$ 825 billion recovery plan, two thirds of which will be in grants and the balance in loans. With this boost, and the initial US$ 600 billion initial rescue package, along with the proposed 2021-2027 US$ 1.2 trillion budget, it hopes that the total of US$ 2.6 trillion is enough money to “throw” at the problem to “kick-start our economy and ensure Europe bounces forward”. Although the two major players, Germany and France, have agreed to raising money on the capital markets, all 27 member states have to agree to the proposal and there are still the so-called “Frugal Four” – Austria, the Netherlands, Denmark and Sweden – continuing to object to both taking on the debt for the poorer countries and cash handouts to relatively poorer countries, rather than low-interest loans. “Problem” countries include those with high government debt to GDP – Greece (177%), Italy (135%), Portugal (118%), Belgium (98%), France (98%), Spain (96%) and Cyprus (96%).  All this money has to be repaid and could take up to thirty years, with the EC considering ways of raising the money including a carbon tax, a digital tax and a tax on non-recycled plastics.

With many outlets still closed, UK retail sales plummeted last month by 18.1%, with clothing sales faring even worse by almost 50%. However, one glimmer of hope was that online shopping accounted for a record 30.7% of total sales, with all items, excluding clothing or household goods, posting record highs. As a direct result of the lockdown, the number of shoppers visiting UK High Streets, retail parks and shopping centres fell by 80%, compared to 41.3% a month earlier. Primark is a good illustration of the economic damage being wreaked on the sector and has posted monthly sales down from an average US$ 780 million to almost zero.

Latest figures indicate that 8.4 million UK workers are now covered by the government’s furlough scheme, (costing US$ 18 billion, so that those affected can receive 80% of their wages up to a maximum US$ 3k), whilst 2.3 million self-employed workers have made claims costing US$ 8.1 billion. These and other costs are expected to total US$ 150 billion, with the annual borrowing bill equating to 15.2% of the country’s GDP.

The UK government is racking up huge amounts of debt, as public borrowing surged to US$ 75 billion in April – a record monthly high, caused by heavy public spending, including the furlough scheme that has been extended to October, to ease the impact of the coronavirus crisis. It is now estimated that the deficit could near US$ 360 billion – this means that the UK government is forecast to spend more, as a result of Covid-19, than it will earn, as tax revenue tanks; for example, April VAT revenue was negative, as collections were less than refunds.  This new figure is five times more than was forecast at the time of the March budget – and could be even worse come the end of the fiscal year. As a result of the borrowing, total public sector debt, at the end of last month, rose to US$ 2,266 billion – US$ 142 billion higher than in April 2019 – and equating to about US$ 34k per person in the country. Even with low – and even negative – interest rates, the money has to be repaid. This rate of spending cannot go on ad infinitum and the time will come when the painful decision has to be made to turn the spending tap off. Then when the pandemic abates, both the state and business will be saddled with falling revenue and increasing debt; the amount required to refloat the sinking UK economy will be astronomic, bearing in mind that even before Covid-19, UK businesses were carrying an estimated US$ 125 billion in unsustainable debt. 

There is no doubt that history repeats itself – this time it seems that the UK government could imitate a model once undertaken by the Iron Lady, Margaret Thatcher, some forty years ago. Then her government supported various prominent troubled UK companies by investing state funds, often by way of offering convertible loans or taking an equity share, and then selling their share, more often than not, for a profit. A win win for both stakeholders – the company received much needed backing to carry on business and the government not having to pay out on benefits, whilst still continuing to receive tax receipts. There could be up to US$ 30 billion set aside for the government to assist otherwise stable UK companies, impacted by Covid-19, with a cash boost. Stellar names such as Rolls Royce, Jaguar Land Rover, Virgin Atlantic and British Aerospace could already be in the queue to take advantage of “Project Birch”. It will enable the Chancellor, Rishi Sunak, to handle bailouts on a case-by-case basis of viable companies, whose failure will “disproportionately harm the economy”.

Thomas Edison must be turning in his grave with news that the company he founded has sold its lighting business, (along with smart home goods), to Savant Systems, for an undisclosed amount. General Electric has been struggling with falling cash flows and sluggish demand. The company was established in 1892, even though Edison had created the first practical commercial incandescent lamp, thirteen years earlier. Lightbulbs had been the centre of its business but GE struggled to keep up with the times, particularly when it came to LED. Since then, GE has been transforming itself into a more focused industrial company primarily on making jet engines and power-generation equipment and lighting became an increasingly small part of its business. Now with the final demise of this part of Boston-based General Electric, it seems The Lights All Went Out In Massachusetts.           

Posted in Uncategorized | Tagged , , , , , , , , , | Leave a comment

School’s Out Forever?

School’s Out Forever 21 May 2020

There are an estimated 245k companies in Dubai and now the world press is already writing eulogies for the emirate, based on the results of a survey of just 0.005% of that total. There is no doubt, in line with most of the world, that Dubai has seen – and will continue to see – a downturn. A University of Chicago that estimates that more than 40% of recent pandemic job cuts in the US are likely to be permanent.Although not as daunting as some other countries, the figures are horrendous but it is a fact of life that reality has hit home and positive steps are now in play to soften the impact for the economy and for the people.  More companies will close, people will leave and when this phase is over, both the economy and population will be smaller and will take time to return to pre-Covid levels. The economy will not bounce straight back and nobody knows what it will look like but it will be different and being Dubai, it will be smarter, more tech-oriented, forward-looking and a global leader.

Despite external reports, Emirates has yet to make any announcement on its future plans, in relation to aircraft and payroll numbers, currently numbering 269 and 105k respectively. As the global industry starts to come to terms with a new future for air travel, Emirates will undoubtedly be considering their various options, including cost cutting measures and a revamp of its assets. Recently, its Chairman, Sheikh Ahmed bin Saeed Al Maktoum, noted that the airline’s top priorities included conserving cash, safeguarding our business, and preserving as much of our skilled workforce as possible.

Today, 21 May 2020, Emirates restarted scheduled passenger flights to only nine selected destinations, with these return flights continuing until the end of June. These flights will include London Heathrow, Frankfurt, Paris, Milan, Madrid, Chicago, Toronto, Sydney and Melbourne. Depending on circumstances, there could be timetable changes. Any person flying into Dubai will require a Ministry of Foreign Affairs approval letter before entry is allowed, a mandatory DHA test on arrival and a compulsory 14-day quarantine.

A recent update to the Dubai SME guarantee scheme sees it extended to include not only 100% locally owned SMEs, that could apply for funding of up to US$ 213k, but now Dubai-based SMEs that are 50% owned and managed by Emiratis to seek funding up to US$ 114k, backed by a 50% capital guarantee; it also allowed qualified businesses to get a three-month payment holiday. The original aim of the exercise was for the government body, in association with lending platform Beehive, to facilitate funding of up to US$ 213k for locally owned start-ups.It is reported that local banks have already utilised US$ 10.2 billion of the US$ 13.6 billion of the interest free loans, as part of the Central Bank’s efforts to mitigate the negative impacts of Covid-19 on the country. In order to further facilitate the implementation of its Targeted Economic Support Scheme, the central bank has added clarifications on the deferral requests, recently issuing further guidance on how TESS operates to smooth its workings, so that more entities can claim. The options for granting postponements include deferring only the principal of a loan, deferring both interest and principal repayments or deferring interest and profits only.

As gaming is becoming more popular in the region, Riot Games MENA is set to introduce the Intel Arabian Cup which will see teams from thirteen MENA countries fighting it out for the League of Legends. The year-long competition will be split into two seasons of four months each. The first season will see each of the thirteen countries playing local games to find a national champion team, with a US$ 130k prize pool being made available to the top three teams in each country. All 13 leagues will be held and broadcast every weekend on the League of Legends Arabia Twitch channel. The second season will see the thirteen national champions play to be crowned the regional champion. to the KHDA, Dubai schools should reopen in time for the beginning of the academic year in September. The education regulator is still unsure what the reopening will look like and whether the date will change. All Dubai schools have been closed since mid-March and since then most of the students have been receiving e-learning programmes; it will be interesting to see how much impact on-line education has had on the traditional educational status quo.

Late in the week, Etisalat’s CEO, Saleh Al Abdooli, announced his resignation, citing “personal reasons”, after four years in the chair and 28 years with the telco. The board appointed its CEO International, Hatem Dowidar, as Group Acting Chief Executive Officer; a relative newcomer to the country’s biggest telecom operator, starting as COO in 2015, following a five-year tenure as CEO of Vodafone Egypt. Etisalat recently announced Q1 results, with revenue rising 1.0% to US$ 3.6 billion and a 2.0% profit decline to US$ 599 million, driven by forex losses, rising finance costs and higher depreciation.

A former top official at Pacific Controls – allegedly implicated in the loss of US$ 100 million of company funds – has been detained in Dubai, after he returned to divest some of his local properties. It seems that a complaint had been lodged against the former finance manager, Srinivasan Narasimhan, by the current Pacific Controls management that he and his team fraudulently created and operated bank accounts in the company’s name. Located in Jebel Ali,and founded by Dilip Rahulan, who is also under investigation, the company was a pathfinderin sustainability solutions but seemed to have lost its way four years ago when it was bedevilled with heavy bank debt. An audit at the time found that over US$ 100 million was unaccounted for and the company nearly folded. Since then the management has been trying to right the wrongs of the past and this latest development could be a major turning point for its future. Because of the quality of its data centre infrastructure and cloud computing services, it still has an enviable customer base including Dubai Civil Defence, RTA, Dubai Airport, Etisalat, and Mobily.

The principal arm of Dubai’s government, Investment Corporation of Dubai, has posted a credible 16.9% improvement in its 2019 annual profit to US$ 6.8 billion, although revenue dipped 1.9% to US$ 62.1 billion, with a decline in energy revenues and transportation income, offset by higher income in the financial sector; the main contributor being a US$ 1.2 billion gain on the partial disposal of Network International. The conglomerate’s asset base jumped 27.5% to a record US$ 305.2 billion, whilst liabilities were 35.6% up at US$ 237.0 billion.

Deyaar Development has posted a Q1 revenue of US$ 27 million and a profit of below US$ 1 million, after posting impairment charges of U$ 3 million, attributable to the impact of Covid-19. In February, Deyaar handed over Midtown, a six-building project comprising 570 units, the second phase of its Midtown development.

Because of a notable increase in Q1 volume, which boosted revenue, up 13.0% to US$ 24 million, Dubai Financial Market posted a 24% jump in net income to US$ 9 million. The two revenue sources were operating income and investment returns, contributing US$ 13 million and US$ 11 million respectively; operating expenses were 7.4% higher at US$ 15 million. With its main sources of revenue being fees and commissions, the bourse saw its quarterly trading value 19.0% higher at US$ 3.9 billion. DFGM has an 845k investor base, with foreign investors responsible for 51% of trading activity in Q1 as well as holding an 18% market cap. Because of the Covid-19 factor, and the increase in market volatility, the Securities and Commodities Authority lowered the threshold trigger, to stop a company trading for the day, from 10% to 5%.

The bourse opened on Sunday 17 May and, 133 points (7.0%) down over the previous fortnight, reversed its fortunes this week, trading 45 points higher (2.4%) to close on 1,939 by 21 May. Emaar Properties, having shed US$ 0.09 the previous two weeks, was US$ 0.01 higher atUS$ 0.66, whilst Arabtec, down US$ 0.02 the previous fortnight, was flat at US$ 0.17. Thursday 21 May saw the market trading at 252 million shares, worth US$ 101 million, (compared to 113 million shares, at a value of US$ 41 million, on 14 May).

By Thursday, 21 May, Brent, up US$ 9.05 (40.3%) the previous three weeks, nudged lower by US$ 0.08, to close at US$ 31.44. Gold, up the previous two weeks by US$ 50 (2.9%), was also down US$ 16 (1.0%) on the week to close on Thursday 21 May, at US$ 1,728.

Latest IATA data indicates that MENA carriers could lose more than US$ 30 billion in revenue, as departures tanked by 95%, quarter on quarter. ME carriers account for 80% (US$ 24 billion) of that total, with departures down 88%; the current estimate is US$ 5 billion more than its previous forecast of 02 April. The world body is calling for more government aid to support their airlines, in the way some have already initiated economic packages for SMEs and other businesses. It has concerns that with carriers facing major liquidity problems, with plans to slash payroll numbers and costs, government aid may come too late to save the estimated 1.2 million job losses in aviation and related industries.

Air Canada is the latest global airline to announce massive redundancies, as it cuts its workforce by 60%. The company is trying to save cash, as well as downsizing to adhere to what many believe will be the aviation sector’s position in the mid-term. To help the cash flow, it may mean flight staff going on a two-year sabbatical, with staff privileges, or reducing working hours. Like other global airlines, Air Canada is facing a short-term future where air travel has come to a standstill and most airlines facing inevitable bankruptcy, without state aid.

It is reported that Rolls Royce is planning to cut 9k, equivalent to 17% of its workforce, saving US$ 840 million, from its payroll, as it tries to slash total annual costs  by US$ 1.6 billion, in the Covid-19 era; the current slump, that has seen air travel sink by up to 90%, has resulted in  its maintenance revenue stream drying up and global airlines abandoning aircraft sales orders. Unfortunately, thecompany was a leading player in the larger aircraft and now as the travel sector will focus on the smaller, one-aisle planes in the future, it will be badly hit. Its production target has already fallen 44.4% to 250 plane engines.

Further to recent liquidations of a number of Australian retail chains, (even before Covid-19), Dutch brand G-Star Raw, with 57 national outlets, has entered voluntary administration. It is but one of many retailers that had already faced a difficult start to 2020, with chains including Bardot, Jeanswest and Harris Scarfe all closing. Like others, G-Star Raw’s main creditors are commercial landlords and if this were the problem prior to the pandemic, it is going to be a bigger problem coming out of lockdown, as customers have reduced discretionary spending due to growing uncertainty about job security and income.  Add in the fact that some retailers saw revenue fall up to 80% during lockdown,  and these losses have to be recovered from future profits, then it seems that landlords will have to consider easing rents..

Meanwhile in US, JC Penney, with 850 national outlets, has filed for bankruptcy, after 118 years of trading, but will be allowed to restructure, even though it is not in a position to pay its debts. In its latest statement, the company confirmed that it had a cash balance of US$ 500 million and access to a further US$ 900 million from lenders. The retailer, with an 80k payroll, has seen sales fall 39.5% over the past decade to US$ 10.7 billion and has closed hundreds of shops.

In the UK, Clarks is taking steps to still be a viable business, post Covid-19, and has already announced a 7% cut in its 13k global payroll and plans to close some of its worst-performing stores.  Currently, all of its UK and Irish stores remain closed because of the lockdown but some of its international outlets, including in China, have reopened. Even before the crisis, the 195-year company had posted a US$ 102 million loss as it sold 20 million pairs of shoes – 9.1% down on the previous year. Much of the production was moved to China in 2007, as it closed its Millom UK factory and last year it closed its only UK facility, which had only been operating for two years, when it failed to make set targets for making desert boots.

Despite no longer selling its talc-based Johnson’s Baby Powder in North America, Johnson & Johnson says it will continue to sell the product elsewhere in the world. The reason behind this move is that sales have shrunk there mainly because of adverse publicity arising from numerous court cases that has seen the company being ordered to pay out billions of dollars in compensation because of many claims, involving over 20k, that it causes cancer; to date,  all its appeals have been successful. (Talc is mined and can be found in seams close to that of asbestos). Currently, Johnson & Johnson is appealing against a 2018 court order that awarded damages of US$ 4.7 billion to 22 women who alleged that its talc products caused them to develop ovarian cancer.

Tesla’s Autopilot became 14.3% more expensive this week to retail at US$ 8k, with Elon Musk commenting that with improving technology, the price will continue to rise in the future; but in true Musk-style, he added that the technology it is adding will be worth more than $100k. Although not fully autonomous, it will add features such as automatic lane changes, parallel parking and a summon feature, which automatically parks and retrieves the car. With these new additions, the Tesla Model 3 will cost US$ 41.7k, as the base model retails for US$ 33.7k.

Following a massive dent in revenue (and profit), attributable to Covid-19, Fiat is in discussions with the Italian government about a possible US$ 6.8 billion state-back finance package; this would be the biggest European government-backed financing, eclipsing the US$ 5.5 billion sourced by Renault last month.  In Q1, the Anglo-Italian carmaker lost US$ 5.5 billion as new car sales slowed markedly but still managed to raise US$ 11 billion additional financing. The three-year credit facility would be “dedicated exclusively to financing FCA’s activities in Italy” and supporting about 10k national supply chain enterprises. Italy’s trade-credit insurer Sace SpA, Italy’s will provide a public 80% guarantee.

Having slashed 3k jobs earlier in the month, Uber Technologies will cut a further 3k jobs, as coronavirus-led restrictions have resulted in business being 80% lower. Over 65% of the business is generated in North America, where many locations had been in lockdown since mid-March. In other moves to reduce its costs, the ride-hailing firm has closed down 45 offices, as well as plans to move its regional Singapore hub to another yet unknown Asian city; it will also reduce investments in several non-core projects and is in discussions with GrubHub Inc to reinforce its food delivery business.

Japan’s SoftBank Group Corp posted a surprising US$ 14.0 billion loss, attributed to a US$ 18.0 billion deficit with its Saudi-backed Vision Fund, including almost US$ 10 billion on two of its high-profile investments – Uber and office-sharing firm WeWork. The US$ 100 billion fund, had already made two quarters of losses of which US$ 75 billion had been invested in 88 start-ups, now valued at US$ 69.6 billion and still heading south. Its founder, Masayoshi Son, has announced that the company will spend almost US$ 1.2 billion for a share buyback, using its stake in Alibaba. Coincidentally, as well as reducing its stake in the Chinese tech company, it has also seen the departure of its co-founder, Jack Ma, from its board.

In the US, delivery app DoorDash is evidently backed by SoftBank and if the following was a typical example, it might point to why the Japanese investment giant is in trouble. Last year, the owner of a pizza restaurant discovered that the delivery app, unbeknown to him, had his details on their app and was selling his premier pizza US$ 8 cheaper than his US$ 24 retail price. As he had been receiving complaints about deliveries, even though his outlets did not deliver, he decided to order ten pizzas for a friend; he paid DoorDash US$ 160 and received US$ 240 from the app. It appears that this was a “demand test” by the app whereby they have a test period where they scrape the restaurant’s website, not charging any fees, so they can then contact the restaurant with positive order data so as to convince them to sign up.

According to AdColony, ME mobile game downloads jumped 28% in March, just as many countries started imposing lockdown regulations; daily time spent on mobile gaming per user rose 24% month on month. A December report from Newzoo forecast that the ME industry would show a 25% annual growth over the next two years to US$ 4.4 billion – bound to be on the low side because of its increased usage since the Covid-19 onset. Also, the launch of Playstation 5 console and Microsoft’s Xbox X later in the year will also give a further boost to the gaming sector and maintain it as the most profitable form of global entertainment. By the end of 2022, the worldwide market is expected to generate US$ 187.8 billion, of which US$ 159.3 billion will be spent by an estimated 2.7 billion gamers.

China surprised Australian officials by imposing an 80% tariff on the country’s barley, which currently earns about US$ 1 billion a year and now sees the close of a lucrative expanding market. It seems that Australia will not take retaliatory action, but it did follow Chinese claims of local subsidies and that the sales prices were below the cost of production. It may onlybe a coincidence, but the introduction of tariffs came just after Australia’s call for an independent inquiry into the origins of COVID-19.

Now there are fears that China is tightening the screws further, after new rules, regarding the inspection of Australian iron ore, have been introduced; they change the current method of inspecting such imports, from batch by batch, to inspecting on the request of the trader or importer. Although it is claimed that the new process would “streamline” inspections at Chinese ports, some see it as another warning to Australia not to meddle in Chinese internal affairs.

On Sunday, the chairman of the Federal Reserve noted that the US economy could “easily” contract by 20% – 30% and that the economic downturn might last a further eighteen months. However, Jerome Powell reiterated that the economy would recover, as he called on the country’s legislators to pass more economic stimulus and extra relief packages; to date they have already approved nearly US$ 3 trillion in spending, equivalent to 14% of the country’s economy. In a more positive note, the Fed Chair was confident that, since the financial system was healthy, the US could avoid a depression as long as there was not “a second wave of the coronavirus”.

The ongoing labour crisis in the US continues unabated with more than 2.4 million applying for unemployment benefits last week, bringing the total to 38.6 million since the crisis started in mid-March; this figure already equates to all of the initial claims filed during the Great Recession. The latest figures, based on the number currently receiving unemployment insurance, points to an unemployment rate of 17.2%. The figures are even worse when those in the gig economy, who are not included on the current labour data, as they are self-employed, are considered. This week’s claims, via the federal Pandemic Unemployment Assistance, totalled 2.2 million and continuing claims under the program were at 6.1 million at the beginning of the month. What is really worrying is the forecast from the University of Chicago that estimates that more than 40% of recent pandemic job cuts are likely to be permanent.

The IMF is soon likely to downgrade its most recent forecast for the global economy to a 3.0% contraction this year and only a partial recovery in 2021, not the 5.8% rebound initially expected. The recent data is a lot more serious than first thought and “that means it will take us much longer to have a full recovery from this crisis,” according to its Managing Director, Kristalina Georgieva. This comes a week after the Asian Development Bank warned the global economy could face economic damage of up to US$ 8.8 trillion – and even this could be on the low side.

Meanwhile three of the global economic powerhouses are looking straight down the barrel of a gun. The US posted its worst quarterly figures since the Great Depression, down 4.8% in Q1, with anything up to negative 15% expected in the current period. China fared even worse in Q1, mainly because it was impacted by Covid-19 a lot earlier, 6.8% down and probably marginally worse in Q2. Europe’s biggest economy, Germany, actually fell into recession in Q1, with expectations that the current quarter could contract by up to 22.0%.

In Q1, Japan’s economy contracted 3.4%, despite the fact that the country is not going into full lockdown, although it did issue an April state of emergency which has had a dire impact on its supply chains and businesses. Because in Q4, it registered an even bigger fall of 6.4%, driven by an October sales tax hike from 8% to 10%, the country is in technical recession (based on posting two successive quarterly declines). The outlook is even worse despite the government pumping in US$ 1 trillion, the central bank expanding its stimulus measures and the lifting of the state of emergency in 39 out of its 47 prefectures. Some analysts forecast that the world’s third largest economy could tank again in Q2, declining by as much as 22%.

After the feast, came the famine in Australia; following record 8.5% hike in March, driven by panic buying at the lockdown onset, retail sales slumped 17.9% in April – the steepest monthly fall on record; sales of non-perishables came in 23.7% lower (after a massive 39% uptick in March). However, it seems that the “loss” in retail sales could have been offset by a similar hike in on-line revenue. This could continue into this month as a raft of factors are working against any improvement, including higher household debt, declining house prices, slumping wage growth and rising job insecurity driving consumer confidence downwards. Meanwhile, April turnover in cafes, restaurants, clothing and footwear retailers was 50% lower, year on year.

In a desperate bid to tighten the EU – and also help in its recovery cycle from Covid-19 – Germany and France have agreed to support a US$ 500 billion aid package, with Angela Merkel confirming her agreement that bonds issued by the EC would be repaid from the EU budget, with her country being its main provider of funds. However, it still has to be ratified by all 27 states and it is likely to face opposition from the likes of Austria, the Netherlands, Denmark and Sweden, which are against increasing aid to the areas worst hit by the pandemic. This new proposal will see money distributed through grants whereas the “Frugal Four” would prefer utilising loans. The German change of heart is probably the last roll of the dice by the Germans to keep the bloc in situ.

Rishi Sunak has warned the UK public that Itis “not obvious there will be an immediate bounce back” for the economy, once the pandemic abates. The Chancellor has reiterated that although some countries were beginning to ease containment restrictions, it would take time to see a full recovery to some sort of normalcy. In April, the UK had 2.1 million claiming unemployment benefits – 69.3% higher month on month.  Nobody knows how long the process will take – what is certain is that the longer the recession lasts the more damaging the economic scarring will be.

The World Economic Forum foresees a possible increase in economic distress and social discontent if there is a prolonged recession and no global governmental action is taken. There seems no doubt that the number of bankruptcies will skyrocket, as millions of companies fail mainly driven by lack of liquidity. The knock-on effect will see households struggling and could well result in major bouts of social discontent. Furthermore, government debt levels will jump to almost 100% of GDP, as trillions of dollars have been “thrown” at efforts to mitigate the negative impact of Covid-19, leaving a massive build-up of public debt that has to be repaid. There is a chance that xenophobia may have its day in the sun especially when international travel is severely curtailed and supply chains are still being restructured. The study puts the Covid-19 economic loss at US$ 26.8 trillion, and especially when international travel is severely curtailed and that global GDP will shrink by 5.3%.

Education will be a big Covid-19 loser, as many of its revenue streams have been drastically cut because of the pandemic. There is no doubt that the number of fee-paying students – and especially overseas student registrations – will slump, with a knock-on effect on accommodation charges. Add to these, there will be less conferences and perhaps the value of endowments from wealthy alumni will decline. Probably the biggest revenue driver for say UK, US and Australian universities are the fees received from overseas students. In the UK, standard “domestic” fees of US$ 12k are dwarfed by fees of up to US$ 70k for those from outside the UK and the EU. Now with such undergraduates being sent home and many courses going on-line, it will be harder to charge such a high premium in the future. It is estimated that overseas students in US and Australian universities add US$ 45 billion and US$ 20 billion to their respective economies every year – and that does not include the indirect benefits generated for the local economies around university locations. Not many are hoping that School’s Out Forever?

Posted in Uncategorized | Tagged , , , , , , , | Leave a comment

Stuck With U!

Stuck With U                                                                                              15 May 2020

An unnamed errant Dubai real estate agency was fined US$ 13k by RERA for violating laws relating to their escrow account and permits of real estate advertisements. The fine covered a number of violations, including receiving amounts outside the escrow account and launching a promotional campaign, without obtaining the necessary permits. It was warned that if the agency committed any other infringement, it will face a licence suspension, office closure, and criminal prosecution.  The legislator has introduced these regulations to protect potential customers and safeguard the interests of all stakeholders.

ASGC, with an annual turnover in excess of US$ 1 billion and an 18k payroll, have spent US$ 31 million for a 15% stake in Costain, as it tries to expand its international presence; this formed part of the UK contractor’s US$ 124 million cash raising share issue. The Dubai-based company is confident that Costain is well placed to take advantage of an expected increase in UK public spend, including billions in healthcare infrastructure, roads, railways and housing, as part of the Johnson’s government’s promise to spend over US$ 700 billion in capex over the next five years.

The UAE has set out its strategy to deal with Covid-19 in a two-prong attack. The short-term, already under way, involves the gradual reopening of the economy and has already seen US$ 80.0 billion pumped into the economy, with the aim of getting money into those sectors, including SMEs, in most need. In the longer term, and in a much-changed economic environment, the government is looking at the value of investment in “sectors of high potential”, including digital, renewables and food security. This paradigm shift will put the local economy more in line with the more mature global economies, with a marked emphasis on the digital sector, which will include 5G, IoT, AI, blockchain, robotics biotechnology, 3D printing etc, and marks a move away from what the UAE was like prior to Covid-19. In some ways, this pandemic can be seen as a vehicle that has pushed the economy in a way in which it was heading but at a much greater speed.

After Ramadan, it has been announced that the emirate’s malls will return to normal working hours (12 hours a day and 14 at the weekend). Nevertheless, the current social distancing rules will remain, and malls can only utilise 30% capacity; only those aged between 13 and 59 will be allowed to enter. At the same time, wholesalers and retailers will again be able to offer promotions.

In a bid to expand its global presence, Emerging Markets Property Group, has bought out Lamudi Global’s operations in the Philippines, Indonesia and Mexico; no financial details were made available. This acquisition will give the Dubai-based parent company of property portal Bayut a marketplace of almost 500 million, with a commission potential of US$ 2.3 billion on the back of annual sales transactions totalling US$ 55.1 billion. Last year, the company acquired Lamudi’s Middle East and Pakistan businesses and three months ago bought Thailand’s property portal Kaidee. In April, EMPG, which also owns Dubizzle in the UAE and several other on-line marketplaces, sourced a further US$ 150 million in funding, valuing the company at US$ 1 billion.

Emirates Group, comprising Emirates (the airline) and dnata, posted their 32nd consecutive profit – at US$ 456 million – for the year ending 31 March 2020 on the back of lower revenue of US$ 28.3 billion; at the end of the year, it had a cash balance topping US$ 7.0 billion. Although Emirates revenue dipped 6.0% to US$ 25.1 billion, (attributable to a planned 45-day runway closure earlier in the financial year and latterly, in Q4, to the impact of Covid-19), its annual profit was 21.0% higher at US$ 288 million. Passenger numbers fell 8.0% to 58.6 billion ATKMs in 2019 because of the 45-day runway closure last May and the recent advent of Covid-19. Fleet numbers were flat at 280 aircraft, following the addition of six A380s and the retirement of four Boeing 777-300ERs, its last 777-300 and a 777 freighter. There will be no dividend this year, compared to the US$ 500 million declared to the shareholder, International Corp of Dubai, last year.

As global trade softened – not helped by the US-Sino tariff war and the onset of Covid-19 in Q4  – so did Emirates cargo division’s revenue – down 14.0% to US$ 3.1 billion, with tonnage declining 10.0% to 2.4 million tonnes, as one plane was retired leaving the fleet standing at eleven Boeing 777F freighters.

Boosted by a US$ 59 million gain from the sale of its shareholding in Accelya, an IT company, dnata showed a US$ 168 million profit on the back of a 2.0% rise in revenue to US$ 4.0 billion, driven by international business accounting for 72% of the total. There were major impact costs that slowed profit growth including Covid-19 (US$ 75 million), goodwill impairments of US$ 45 million and the failure of Thomas Cook (US$ 26 million).

Following the shenanigans at Abraaj and NMC, which left several local banks with sizeable impairments for bad loans, it is reported that the liquidation of Phoenix Group could result in further local losses. The company, one of the largest global rice trading firms worldwide, is estimated to owe financial institutions US$ 1.6 billion, of which local banks have up to US$ 400 million exposures; this is a lot less than the estimated US$ 6 billion plus they had with NMC. By the end of the week, local banks had confirmed exposure in the region of nearly US$ 140 million, but as others have yet to do so, this will inevitably rise. To date, FAB is the largest “casualty” having declared a figure of US$ 73 million outstanding. It appears that the group’s problems emanate from its Dubai subsidiary, with one of its commodity traders exceeding his authority and undertaking some extremely risk currency hedging deals, in a vain attempt to recover losses incurred earlier in the year. The situation was further exacerbated by the onset of Covid-19 which could be the final nail in the coffin of a very successful company which posted a 2019 gross profit of US$ 152 million, on the back of a US$ 3 billion plus turnover.

The bourse opened on Sunday 10 May and, 104 points (5.1%) down over the previous week, nudged a further 29 points lower (1.5%) to close on 1,894 by 14 May. Emaar Properties, having shed US$ 0.07 the previous week, was US$ 0.02 lower atUS$ 0.65, whilst Arabtec, down US$ 0.01 the previous week, fell US$ 0.01 to US$ 0.17. Thursday 14 May saw the market trading at 113 million shares, worth US$ 41 million, (compared to 182 million shares, at a value of US$ 51 million, on 07 May).

By Thursday, 14 May, Brent, up US$ 7.31 (32.5%) the previous fortnight, continued moving north, US$ 1.74 (5.8%) higher, to close at US$ 31.52. Gold, up the previous week by US$ 36 (2.1%), nudged US$ 14 higher (0.8%) on the week to close on Thursday 14 May, at US$ 1,744.

With the auto sector sinking by the day, Nissan has unveiled a three-year plan to take the drastic action of cutting US$ 2.8 billion in annual costs, as well as booking restructuring charges, the total of which has yet to be ascertained. The plan will also include phasing out the Datsun brand, slashing marketing and research budgets and shutting down one production line. The Yokohama- based company has still not come to terms with having to rejuvenate an ageing vehicle line-up and a management still recovering from the arrest of former Chairman Carlos Ghosn. It is expected that Nissan will declare a loss when it publishes its annual results next week, as well as posting a 12.0% fall in revenue to US$ 95.3 billion.

In order to ease financial pressure on his other investments, including Virgin Atlantic, it is reported that Richard Branson is selling a stake in Virgin Galactic. The US$ 500 million raised will be usedsupport its “leisure, holiday and travel businesses” hit by “the unprecedented impact” of Covid-19.

It seems that Airbus will follow Boeing’s lead from last week and start preparing its workforce for staff cuts of up to 10% of its 134k payroll, as the fall in demand leads to lower production numbers; figures indicate that aircraft deliveries have nosedived by 35% since the onset of Covid-19. Even before the pandemic, it was evident that there was a shift away from the wide body plane option, so this sector would bear the brunt of cuts, as compared to the helicopters and defence divisions.  After a decade of impressive growth, the wheels have fallen off as the pandemic has decimated air travel and put most of the global carriers in dire financial distress. Measures have already been taken such as slowing the ramp up of the A220 single aisle plane, postponing a new A321 assembly line and cancelling the tie up with RR for hybrid-electric powered aircraft.

Following a US$ 8.5 billion 2019 deficit, Uber has posted a Q1 US$ 2.9 billion loss, as its overseas sectors started to get battered by Covid-19, with its global core business, ride hailing, down by more than 80%. It has also sold its loss-making bike and scooter business, Jump, to Lime. On a positive note, Uber Eats has seen a surge in business, posting a 53% hike in revenue, and there have been early signs of markets picking up, as lockdowns start to ease in many countries. The loss was exacerbated by the fact that the value of its investments in Chinese ride-hailing giant Didi, Singapore-based Grab and others plummeted by US$ 2.1 billion, as demand collapsed in those regions.

As a bellwether for the German economy, Siemens Q2 (ending 31 March) 21.0% fall in profit to US$ 634 million reflects the perilous state of the country’s economy going forward. Because of the nature of Covid-19 – and the unknown factor of when the economy will return to some form of normalcy – the Munich-based conglomerate has abandoned its full-year earnings forecast. Although it managed to keep its factories operating, its revenue was badly dented because of the lockdown affecting some of its customer base.  With industrial production declining 9.2% in March, with worse to come in April as Covid-19 tightened its grip, the company is seeking a new credit line of US$ 3.3 billion to help tide it through these trouble times. The problem facing Siemens, and probably most other global entities, is that nobody knows when the pandemic will end, and Europe’s powerhouse economy will not be immune from the fallout.

The Australian investment bank, Macquarie, has posted its first annual loss in seven years, with net income dipping 8.0% to US$ 1.8 billion for the year ending 31 March, attributable to an almost doubling of impairments to US$ 667 million and Covid-19 towards the end of their year. Because of the uncertainty surrounding the pandemic, the bank did not post their usual earnings outlook, because it was “unable to provide any meaningful” guidance for this year.

Australia, like most developed countries, is facing major economic problems, with current forecasts pointing to a post Covid-19 US$ 235 billion hole in the Federal Budget and unemployment taking four years to return to below 5.0%; annual deficits over the next four financial years are expected to reach US$ 93 billion (by June 2020), US$ 86 billion, US$ 34 billion and US$ 22 billion by June 2023. The economy will be suffering a “hangover from the traumas of the moment” for years to come that will result in the national income falling US$ 22 billion below the official projections in December’s mid-year budget update, 2019-20 and by US$ 130 billion in the following year, ending June 2021.

The government coffers will be badly hit as reduced personal income tax and company tax receipts result in much lower than expected federal revenues. With interest rates almost at  zero, and inflation heading south, the RBA is fast running out of monetary policies to get the post Covid-19 economy up and running. One way that could be considered is to introduce long awaited and badly needed tax reform that could see GST receipts heading north, (maybe doubling or expanding the base by adding more “exempt” items to the tax list), with stamp duty heading in the other direction, and perhaps to the tax history books. It is reported that parliament has already approved US$ 200 billion of tax cuts. As consumer spending is of such importance to any economy, it makes sense for the government to ensure that more money is in the hands of the general public. This will get the money cycle moving quicker than say government pumping money into major infrastructure projects and will result in businesses – and the economy – returning to some sort of normalcy a lot quicker.

To bolster falling public revenues as a result of the pandemic (and slumping energy prices), the Saudi Government has decided to triple its VAT rate to 15% from July, discontinue COLA (Cost of Living Allowance), cancel or postpone capex for some public agencies and reduce provisions for a number of initiatives from its Vision 2030. It is expected that these measures will save US$ 27 billion as the Kingdom tries to ameliorate the double whammy of a fall in public revenue and a necessary increase in public spending. More cuts are expected within thirty days when the results of a ministerial committee study into the financial benefits paid to all stakeholders, not subject to Civil Service Law in government ministries, institutions, authorities, centres and programmes, are published.

With its President opposing any lockdown and claiming that the fallout from social-distancing measures could be worse than the actual pandemic, it is no surprise that Brazil is on the verge of collapse. Despite Jair Bolsonaro’s protestations, statistics show that Covid-19 has worsened in the country, which has registered 132k confirmed cases and 9.1k deaths. Now Economy Minister Paulo Guedes has warned there is a possibility that production may seize up, state emergency subsidies for the poor will dry up, and there will be a lack of food in the shops by the end of May. The President is keen to take early steps to bring the economy out of “intensive care”, despite some municipal governments defying the official advice of full lockdowns. There is no doubt that the economy is buckling under the pressure with the rial trading at record lows.

Following Brazil’s economic malaise worsening, Argentina joins its neighbour with news that it has extended a deadline, by ten days, to restructure a US$ 65 billion debt package, requesting private bondholders to markedly reduce the agreed interest rates and to defer payments to 2023. With most creditors rejecting this offer, the government finds itself in a dilemma – it patently cannot afford to repay the debt on the agreed terms and if it does not it will find it very difficult to source future funding, particularly with its dismal track record. The relatively new Alberto Fernández government has not been helped by a fall in the peso, (making any debt repayment in US$ more expensive), and the country’s exports not generating enough foreign currency to repay the massive debt. By the end of last year, public debt, at US$ 323 billion, was equivalent to 88% of GDP. If the US$ 500 million interest payment is not made on 22 May, the country will once again go into default and will then face even more pressing economic and political troubles.

The latest estimate by Lloyd’s of London is that Covid-19 claims could already be as high as US$ 4.3 billion – slightly less than the 9/11 US$ 4.7 billion payout and the 2017 hurricanes’ US$ 4.8 billion. However, if this pandemic goes into Q3, claims could be double these figures. Not surprisingly to any observer is the fact that some insurers – as is their want – are refusing to settle many would-be claimants finding the virus is not covered by their policies, although Lloyd’s chief executive John Neal confirmed that it was paying out on “a very wide range of policies” to support business and people affected by the pandemic. However, some insurers are not paying out on business interruption claims  resulting from Covid-19. Up to 30% of total claims are expected to arise because of the cancellation or postponement of major global events.

To help mitigate some of the impact of Covid-19, and get the country on the go again, India is planning to introduce a US$ 265 billion package, equating to 10% of the country’s GDP.  In April, it was estimated that 122 million Indians had lost their jobs, as a significant economic package was implemented to help Asia’s third largest economy recover from weeks of lockdown that have been in place since mid-March. Apart from the monetary aspect of Modi’s package, the government also included tax breaks for new plants and incentives for overseas companies. The Prime Minister has been criticised that the package is not big enough and that his dilatory behaviour has resulted in millions of migrant workers being stuck in the cities and unable to return to their villages.

The UK Chancellor, Rishi Sunak, has extended  the scheme to pay  80% of wages (up to US$ 3k) of workers on leave because of coronavirus for the next four months; however, he did add that from August companies will be asked to “start sharing” the cost of the scheme. It is estimated the government is “subsidising” 7.5 million people, from 935k businesses – or 25% of the country’s workforce – costing US$ 16.8 billion a month that could top US$ 120 billion by October.

With a further three million Americans claiming unemployment over the past week, the number of new jobless claims has climbed to 36 million since mid-March – equivalent to almost 25% of the total workforce; unfortunately, the minority and low-income households continue to bear the brunt of the job losses.  Covid-19 is still causing havoc, as shutdowns weigh heavy on the US economy, but some analysts believe that this could be the bottom of the cycle, as an increasing number of states start to ease lockdowns and hiring will start to pick up.

The US has already approved nearly $3tn (£2.5tn) in new spending packages, worth an estimated 14% of the country’s economy. The Fed has also taken radical steps to shore up the economy, pumping trillions of dollars into the financial system. Meanwhile, Federal Reserve chair, Jerome Powell, has reiterated that the recovery is going to be slow and would be even if slower if government funding is not forthcoming, as well as unemployment levels remaining at elevated levels, compared to the 50-year lows seen just three months ago in February. The Fed has also pumped in billions of dollars but more money may have to be injected into the economy but there has to be a limit, as the country’s public debts nears a record US$ 26 trillion.

In 1989, David Gower, the then captain of England, was struggling with his form, whilst the team were being battered by the Australians. The opening pair, Mark Taylor and Geoff Marsh, were nearing a 300 partnership on the first day at Trent Bridge when a tired and disgruntled Gower called on the 12th man and started pointing to the press box. Evidently, he was asking him to go up to see the reporters and ask them what they would do with the field position and the bowling – he wanted to know there and then and not read in tomorrow’s papers what he should have done.

Likewise, 99.99% of analysts, and economists did not see this disaster coming and will only be able to advise what went wrong when this crisis is over. Not many have any idea how this pandemic will unfurl but these experts may do worse than pick a Scrabble letter and use that to solve the problem. Most letters could be used but L, U, V and W would be beneficial. Whatever happens, without positive – and the right – steps taken by governments and central banks, this recession could turn into a major depression. An example of an L-shaped recession was the bursting of Japan’s speculative bubble in 1990 and the country has never returned to its previous 5% levels. This is a possible outcome that should be considered. Then there is the U-shaped curve, when the economy collapses and remains in the doldrums for some time; return to work might take more time than expected, with many companies going into liquidation, whilst those that do survive taking maybe years to recover. For example, following the 1973 oil crisis, economies only started recovering two years later.

Then there is a chance of a V-shaped recovery, with the dramatic fall matched by an almost similar recovery path; this looks highly unlikely, as economic activity cannot fully return until containment is lifted, by which time the economic damage has already seen liquidations and most other businesses struggling. The W-curve would involve an initial rebound before declining – a possibility if the “second wave” occurs. When there is a further recovery, it might not be as high as the earlier rebound and could easily turn into more of an L-shaped curve. A recent example is the Russian experience which saw a massive recovery in 2010, followed by another decline and then a slight improvement in the economy. Although many other letters can be used, maybe we will be Stuck with U.

Posted in Uncategorized | Tagged , , , , , , , | Leave a comment

Time To Move On!

Time To Move On!                                                                                        07 May 2020

Despite the April lockdown, there were still over 1.8k Dubai property sales transactions, valued at almost US$ 1.0 billion, bringing the YTD total to 12.3k, worth US$ 6.6 billion. According to Property Finder, the secondary market accounted for just 30% of total transactions, with Dubai Marina and Palm Jumeirah the top-selling locations. The majority of sales were in the off-plan sector, dominated by the communities of Villanova for villas and Dubai Creek Harbour for apartments. An interesting fact was that since the problems from Covid-19 worsened, the percentage of searches on the company’s app was skewed in favour of villas rather than apartments. Maybe that with the lockdown, apartment dwellers missed having gardens.

According to Valustrat, and no surprise to anyone, Dubai Q1 property rentals and sale prices continued their declines and could get worse in Q2, as the impact from Covid-19 gains traction; it is estimated that rents for villas and apartments declined by 8.0% and 9.4% over the quarter. Although off plan sales grew 18.2%, year on year, the Q1 return was 26.3% lower, compared to Q4 2019, as developers had already cut back on new projects because of the sector’s oversupply. On an annual basis, cash sales of ready homes climbed 30.4% – but were flat, quarter on quarter. The pandemic took its toll in April, with marked monthly falls in cash sales transactions, ready home sales and off plan sales of 50%, 74% and 32%. With business confidence falling, and many people worried about their economic future, the outlook is that prices will continue to move downwards, more so with salary reductions and job losses becoming more prevalent. 

Severe measures have been taken by Nakheel to combat the effects of Covid-19 and its drag on cash reserves. As from 01 April, top management will be paid 50% less than before, with more junior staff having their salaries cut by 30% – 40%. Those earning less than US$ 1.1k (AED 4k) will continue to be paid at previous rates. Such drastic action was required to secure the continuity of the business by preserving cash reserves. It was also reported that Chief Executive Sanjay Manchanda had left the company on 01 March to pursue new opportunities. The developer, that had to close most of outlets in its shopping centres during the lockdown, was badly hit by the 2009 GFC and it is hoped that it is in better shape this time to weather an even bigger economic storm.

As part of the government’s initiative to assist SMEs and small investors, tenants at Dubai Healthcare City will be on the receiving end of “conditional” rent waivers for up to three months, along with  deferred rental payments; furthermore, they will also see certain fees either reduced or waived during this difficult period. Those companies, including hospitals, education providers, retail stores, hotels etc, that have had to “close or significantly reduce operations to comply with national precautionary and preventive measures, resulting in reduced revenues and customer footfall”, will be eligible to claim.

Latest figures from the Central Bank reports that the country’s GDP grew by 1.7% in 2019, with the UAE hydrocarbon sector 3.4% higher, whilst non-oil activities had a softer 1.0% growth. Not surprisingly, the agency expects that Covid-19 will have a negative impact on 2020’s figures but notes that it is still too early to estimate the scale of how big this will be. The inflation level has been pushed into negative territory, driven by the uptick in the value of the greenback (and hence the value of the dirham heading north), sinking energy prices and almost double-digit reductions in residential rents.

 It is reported that local banks have drawn down 75% of the US$ 13.6 billion liquidity facility arranged by the Central Bank to support individuals, small and SMEs and private companies impacted by COVID-19. Twenty-four of the country’s banks have now joined the scheme, with an increasing number of customers signing up for the Targeted Economic Support Scheme. The TESS liquidity facility will run until the end of the year by which banks will postpone interest payments and/or principal loans of customers over the time period agreed.

Dubai’s Q1 external trade topped US$ 88.0 billion, with imports accounting for US$ 51.5 billion, (58.5% of the total); reexports and exports were at US$ 25.1 billion and US$ 11.7 billion, accounting for 13.3% and 28.5% respectively.  The figures were quite impressive considering that trade was disrupted because of the pandemic. Further segregation of the figures sees direct trade accounting for 58.2% of the total (US$ 51.2 billion), followed by free zones (41.2% – US$ 36.2 billion) and customs warehouse trade (0.6% – US$ 600k). Most of the trade was carried by air, followed by sea and land with totals of US$ 44.4 billion, US$ 31.6 billion and US$ 1.1 billion respectively. Dubai’s three most important trading partners remain China, India and the USA contributing US$ 9.8 billion, US$ 8.3 billion and US$ 5.3 billion to the total. Gold/jewellery/diamonds was again the top traded commodity, valued at US$ 25.1 billion, followed by phones (US$ 10.0 billion) and petroleum oils – US$ 4.4 billion.

Whilst agreeing that life protection is of prime importance, Khalaf Al Habtoor reckons that the country must return to work as soon as possible and “can’t wait for a vaccine until the end of the year.” Noting that his companies, like many others, are “bleeding”, he commented that the biggest risk is that of unemployment. To date, his companies, including seven hotels, car dealerships, schools and property, have yet to retrench but staff have taken unpaid or holiday leave. If Covid-19 does not abate, then he would have “no choice but to cut” positions. It seems that the longer the pandemic goes on, the economy will continue to deteriorate and will take longer to recover once normality returns.

Uber Eats will now merge into using Careem’s food delivery services, as it has decided to close the Uber Eats app in the country. The company, founded in 2017, believes that the change is in their best interest, not only as a cost-cutting measure but also as Careem’s food delivery operations are “better placed to serve our food delivery communities as it expands its app across the region.” Careem Now was first rolled out last October and has quickly become a leading player in the region’s food delivery sector. Uber Eats has also closed down in Egypt and Saudi Arabia, so now the parent company can once again focus on its core ride-hailing business.

As Careem has seen post Covid-19 business tank by up to 90% for its main revenue stream, ride hailing, and delivery down 60%, it has taken the inevitable decision to cut its workforce by 536 (31% of the total payroll). The Dubai-based firm, which operates in the MENA and Pakistan, and has seen losses mount up, with overall business 80% lower, has also temporarily shelved its mass transport ‘Careem BUS’ venture.

Despite the ongoing Covid-19 generated problems, yallacompare has raised over US$ 4 million in its fourth round of funding that sees Kuwait insurer Gulf Insurance Group become a 9.6% shareholder in the insurance aggregator; the four-year old company had already raised nearly US$ 12 million from the three previous funding rounds. Gig has a presence in its home country, as well as Bahrain, Egypt and Jordan. The money raised will be utilised to expand yallacompare’s regional presence.

After the shock of being terminated because of the impact of Covid-19, many are now worrying whether they will receive their full dues, as companies struggle with lack of funds to meet their staff obligations. It seems past norms, that gratuity payments are settled around termination date, will be thrown out of the window. There will be cases when the company has no funds to pay out end of service benefits and if no agreement can be arranged between the parties, the only recourse seems to be notifying the Ministry of Human Resources & Emiratisation or Dubai courts. That will probably take some time and money. So companies are in a quandary – do they not terminate employees now and put them on salary cuts and holiday leave and hope for the best in the future. The only problem is that if that future is some time away, the money spent on keeping staff on the payroll will result in the cash drying up completely, with even less in the kitty to pay final settlements.

Although its Q1 revenue only dipped 3.0% to US$ 324 million, Dubai-listed Aramex saw its profit slump by 37.6% to US$ 18 million, attributable to the Covid-19 impact on its international express and freight forwarding units., as flights and supply chains were disrupted. In line with its rivals, it will be difficult to ascertain the true cost of the pandemic will have on the business because of the problems of forecasting future consumer demands.

If March is anything to go by, the local bourses will continue to struggle to entice foreign investors to move funds to UAE’s stock markets; of the fifty-five listed companies, which have permitted foreign investment, including the likes of CBD, Air Arabia and DIB, the average non-local ownership is 10.32%. Even just before the pandemic outbreak, foreign selling was on the increase so that by March there was a record shortfall in investments of US$ 208 million. As Covid-19 gains traction, this is certain to exacerbate the problem. However, in the past, there had been steady overseas buying so that since January 2019, there had been a net inflow of US$ 599 million, with stocks bought totalling US$ 10.0 billion, including a US$ 3.4 billion increase in net investments of non-Arab foreign investors.

The bourse opened on Sunday 02 May and, 300 points higher (17.4%) over the previous four weeks, shed some of that, down 104 points (5.1%) to close on 1,923 by 07 May. Emaar Properties, having gained US$ 0.15 the previous four weeks, was US$ 0.07 lower atUS$ 0.67, whilst Arabtec, US$ 0.07 higher the previous four weeks, was down US$ 0.01 to US$ 0.18. Thursday 07 May saw the market trading at 182 million shares, worth US$ 51 million, (compared to 317 million shares, at a value of US$ 78 million, on 30 April).

By Thursday, 07 May, Brent, up US$ 4.01 (28.6%) the previous week, gained a further US$ 3.30 (12.5%), to close at US$ 29.78. Gold, down the previous week by US$ 51 (2.9%), regained US$ 36 (2.1%) on the week to close on Thursday 07 May, at US$ 1730.

Despite only having just accessed a US$ 371 million  UK government backed loan, IAG, owner of BA, Iberia and Aer Lingus, is also set to receive a five-year US$ 1 billion loan from the Spanish government in state-backed loans for Iberia (US$ 750 million) and Vueling (US$ 250 million); the loan is conditional that the banks involved receive guarantees from state-owned Instituto de Crédito Oficial. It seems iniquitous that IAG’s chief executive, Willie Walsh, had earlier said that his company had sufficient liquidity to see it through the coronavirus pandemic and did not need government support. To add to its pandemic woes, in Q1, the group was hit by a US$ 1.4 billion charge from fuel and currency hedges.

Another airline is warning staff that it will have to cut payroll numbers to “act decisively to protect the future of the business”. Like all other global carriers, Qatar Airways is facing a turbulent and unsettling future and has notified staff that it “will need to make a substantial number of jobs redundant – inclusive of cabin crew.” The airline currently employs 45k and has a fleet of 240 planes; it is also a 25% shareholder in IAG, which, as indicated above, owns BA, Iberia and Aer Lingus.

Exxon Mobil Corp and Chevron Corp are planning massive investment cuts in the Permian shale basin, the country’s biggest oilfield, which will see 800k bpd pulled out of the market, as the demand for oil tanks on the back of growing numbers of company lockdowns. At the start of the year. production was ramping up to the one million bpd mark but things changed with the onset of Covid-19, when prices slumped by over 70%, (and at times even went into negative territory) and fuel demand was a third down due to travel and business lockdowns. A lot of money has been borrowed by many companies for shale productions. Many of these will go out of business and the knock-on effect will be felt by the US banks, who will inevitably be on the losing end and carrying billions of dollars of bad loans.

GE is set to cut its aviation workforce by 10%, with more (13k) to come, on the back of the distinct possibility of an extended slowdown of up to 85% in the global travel sector, as Boeing and BA announced recent cuts of 16k and 12k respectively. The US conglomerate has estimated that, to date, the virus has cost it at least US$ 1 billion.

It appears that Hertz is on the brink of filing for bankruptcy after failing to agree terms with some of its creditors to restructure their debt and obtain further credit extensions. The US car rental company’s Chapter 11 filing would allow it time to finalise its discussions with its lenders and try to turn the faltering business around. Currently, the US government has no plans in place to bailout such companies, (unlike the US$ 50 billion one in place for the airlines) so Hertz has been left to deal with its own liquidity problems, attributable to slumping demand,  with too many vehicles in operation,  and falling prices for used fleet cars. Prior to the lockdown, the 102-year old Florida-based company was operating in 12.4k locations.

Elon Musk has put his foot in it once again. After tweeting that Tesla’s share value was too high, the market reacted quickly, wiping off US$ 14 billion from its market cap, which in turn depleted his personal wealth by US$ 3 billion. Two years ago, he was fined US$ 20 million by New York stock market regulators for tweeting that he may take the company private which saw a marked swing in Tesla’s share price and this was adjudged by the SEC to be a market-moving comment.

Uber is a lead in Lime’s latest US$ 170 million funding round, which includes Bain Capital, GV (formerly known as Google Ventures) and Google’s parent Alphabet. This values the scooter hire firm at US$ 400 million – well down on the US$ 2.4 billion estimated at its previous funding round in February 2019. The money raised will be used for expanding Lime’s range within the micro-mobility sector. As part of this deal, Lime acquired Uber’s own e-bike hire business, Jump.

With the business already struggling prior to the onset of Covid-19, and now falling off a cliff, Uber has moved to cut 3.7k full-time staff members (about 14% of its workforce), which will cost US$ 20 million in severance pay. In line with its competitors, such as Lyft, its business has been badly hit by the fact that not only are more people working from home but also are avoiding such transport for fear of infection. Last year, it posted a massive US$ 8.5 billion loss, and reported that 23% of money spent on the platform emanated from just four metro areas, including New York and London – probably the two biggest global pandemic hotspots.

Airbnb is another travel-related company struggling to come to terms with the consequences of Covid-19. This week, the home rental company cut 25% of its current 7.6k work force to offset recent losses caused by its main revenue stream almost drying up. It expects this year’s revenue to come in more than 50% lower, at US$ 4.8 billion, than in 2019. As the twelve-year old company has decided to focus on its main business and reduce its investments in other non-core activities, it is suspending projects not only in luxury projects but also related to transportation and television production.

Q1 was no fun for Walt Disney Co as the pandemic cost the company US$ 1.4 billion in lost profit. The world’s largest entertainment company saw its theme-park division operating income slump 57.7% to US$ 639 million; revenue did increase by 21.0% to US$ 18 billion thanks mainly to its 21st Century Fox acquisition last year. The loss this quarter is set to worsen as in April, its parks remained closed, cruises were cancelled, cinemas were closed, and its ESPN network struggled with most live sport events being cancelled. The company has taken some major decisions to reduce costs, including executive pay cuts, furlough for staff, cancelling the US$ 1.6 billion annual dividend and slashing capex by US$ 900 billion.

Warren Buffett’s Berkshire Hathaway Inc confirmed that it had divested its entire shareholding in four of the US’s largest airlines, with the chairman noting that “the world has changed” for the aviation industry. His conglomerate had stakes of 11% in Delta, 10% in both American and Southwest, as well as 9% in United. His firm took a battering in Q1, posting a US$ 49.8 billion loss, compared to net earnings of US$ 21.7 billion a year earlier.

J Crew became the first major US retailer to fall foul of Covid-19 by filing for bankruptcy protection, resulting in its main creditors – Anchorage Capital Group, GSO Capital Partners and Davidson Kempner Capital Management – taking over control. At the same time, they have cancelled debts totalling US$ 1.7 billion and injected a further US$ 400 million financing package. The fashion firm, which has 500 stores which remain closed because of the pandemic, also owns denim clothing specialist Madewell, which it had planned to sell off.

As is the case in most of the western world, retail has been on its knees for some time, attributable mainly to on-line sales and rising property costs, and now Covid-19 has come along to deliver the knock-out punch. Two years ago, when Sears filed for bankruptcy protection, but subsequently survived, it had 700 outlets, now it has only 200. Likewise, JC Penney has been on the same slippery slope for some time and has divested 15% of its stores, now operating only 850.

Despite the pandemic onset, Q1 overall smartphone shipments were 20% higher, year on year, with total quarterly sales of 13.7 million units. Apple grabbed 55.5% of that total with sale figures of 7.6 million, compared to 6.2 million a year earlier. Its main rivals, Samsung and Garmin still trail far behind, accounting for just 13.9% and 8.0% of the 13.7 million smartphone sales, with the former posting an 11.7% rise to 1.9 million and the Kansas company increasing sales by 37.5% to 1.1 million.

There are reports that the proposed merger, between O2 and Virgin Media, owned by Spanish firm Telefonica and O2 respectively, has gone through but is subject to regulatory approval. The mobile operator is the UK’s largest phone company, with 34 million users, and the merger with a broadband giant like Virgin Media, (with three million mobile users and six million broadband and cable TV customers), has created the UK’s largest entertainment and telecoms firm, as well as causing rival  BT some sleepless nights. In 2015, a US$ 19.3 billion merger deal between CK Hutchinson’s Three and Telefonica’s O2 was rejected on competition grounds by the EC regulators but this time approval seems to be a formality.

One business sector benefitting from the pandemic is the gaming industry, with reports that Q1 figures have skyrocketed, as more people are having to face lockdown; in these troubled times, the industry has posted record sales, as an increasing number of users turn to their entertainment services. Activision Blizzard’s posted Q1 net revenues from digital channels at US$ 1.4 billion, as player numbers of its games, the most popular of which are Call of Duty and Candy Crush, have been averaging 407 million a month; its latest CoD game, Warzone, has already interested 60 million users since its March launch. Electronic Arts is also “making hay while the sun shines”, with a higher number of users. Its latest edition of Fifa has attracted 25 million players, its Madden NFL 20 has recorded the highest online engagement numbers in the franchise’s history whilst newly released ‘Star Wars Jedi: Fallen Order’ already has ten million users.

Like most other countries, UK car registrations have taken a major blow since Covid-19 arrived on the scene. Year on year, registrations fell 97% in April from 161k to just 4k – a figure not seen since April 1946. The impact of the coronavirus lockdown measures saw dealerships all over the country closed for business so that most of the vehicles sold were company related.  Despite these dismal numbers, sales are “only” expected to fall 27.0% to 1.7 million this year. The other side of the sector has seen car production grinding to a halt, as factories have been closed since early March and only now are slowly opening. Covid-19 is the last problem the industry wanted, having struggled in recent years with slowing sales, falling demand for diesel vehicles and expensive tough new emissions targets. When the pandemic dissipates, whenever that may be, who will be able – or would want – to buy a car in a deep recession?

It is estimated that India has 122 million people out of a job because of the pandemic and the Modi government imposing a 40-day lockdown. The country, with a 1.3 billion population, has seen its unemployment rate top 27.1%, most of whom were employed as daily wage workers and SME employees – both sectors mostly belong to the more vulnerable parts of Indian society.

As the number of jobs for the month ending 18 April fell by 7.5% (33% in accommodation and food services), almost one million Australian workers – out of a total of 13 million – have lost their jobs, with losses in Victoria (8.6%), Tasmania (8.0%)  and South Australia (7.8%) worst hit. The RBA expects the economy to contract by 10% as a direct result of the pandemic and the unemployment rate to top 11% by the end of April. The Prime Minister, Scott Morrison, has confirmed that more than five million are receiving JobKeeper, which does not apply to casuals who have been with their employer for less than one year; problems with the scheme include bureaucratic complications and that employers have to pay staff upfront before receiving the government assistance. One worrying aspect of the labour crisis is that there had not been a decline in job numbers, but the curve was getting steeper, with a week on week decrease up fivefold to 1.5%.

Covid-19has already cost the US government a record US$ 3 trillion, which includes ‘helicopter’ pay-outs and health funding, bringing the national debt to a mouth-watering US$ 25 trillion. The 2020 figure, which is already almost triple the 2019 amount, is set to rise even further; it is also five times the amount spent at the height of the 2008 GFC and equates to 14% of the US economy. Last month, the US Congressional Budget Office forecast that the 2020 budget deficit would top US$ 3.7 trillion, at the same time the national debt climbed above 100% of GDP. Although recognising the increasing danger to the long-term future of the economy of such high spending, Fed Chief, Jerome Powell, said it was of prime importance to continue with high spending in order to cushion the economic fallout of the pandemic; since the beginning of April, the agency  has bought more than US$ 1 trillion in treasuries.

By the end of the week, another 3.2 million Americans sought unemployment benefits: that brings the total of new applications to 33.3 million since mid-March, equating to about 20% of the country’s total workforce, compared to 4.4% in March.  ADP (Automatic Data Processing) reported that US companies cut 20.2 million jobs in April, reacting to a lockdown of many factories, retail outlets, offices, construction sites and schools – the lifeblood of the world’s largest economy. The losses will obviously continue into this month, with an optimistic view that hiring will recommence slowly in July but will take at least two more years to return to February 2020 levels. Whilst larger companies shed 8.9 million jobs in April, more than 50% of the losses came from smaller entities employing less than 500. The leisure/hospitality sector reported a further 8.6 million cuts, followed by trade/transportation/utilities, with 3.4 million retrenched, construction 2.5 million jobs, manufacturers 1.7 million and the health care sector 1 million jobs. The scale of this downturn is no longer pointing to a “quick fix” but a much longer and slower “rebound”.

There is no doubt that the global stock markets, already on steroids prior to Covid-19, have become even more volatile, with a case in point being the Australian bourse. April had seen the ASX200 recording it its best month since June 2000, posting an 8.8% return. On Friday, 01 May, the ASX closed the day 5.0% lower to close on 5,245, with the All Ordinaries down 4.9%, whilst losing US$ 55 billion in the process, mainly attributable to dismal US employment figures and some profit-taking.

Latest 2020 forecasts from the EC indicate the bloc’s economy will fall 7.7%, with inflation down to 0.2%, as the so called PIGSs’ economies are expected to fare worse than most. Portugal’s GDP is expected to lose 8.0%, driven by shrinking fixed investment, a major downturn in its vitally important tourism sector and lower consumer spending. Italy, which is the EU country that has suffered most Covid-19 deaths, is forecast to witness a 9.5% decline this year and its budget deficit will balloon from 1.6% of its GDP in 2019 to an expected 11.1%; the country will see its public debt jump from 134.8% to 158.9% of GDP. Greece is the country forecast to contract most with a 9.7% dip in the country’s 2020 GDP. Meanwhile Spain’s budget deficit will also skyrocket from 2.8% to over 10.0%, as its economy declines by 9.4%. It is expected that, at the other end of the scale, countries including Luxembourg, Malta and Austria will come out a little better than average.  On the macro level, investment will slump by 13.3%, budget deficits will jump from 0.6% to 8.5% of GDP and public debt will increase 16.7% to 102.7% of GDP in 2020.

Not all countries will come out of the recession the same way, or at the same time, as the depth of the recession will result in economies coming out in different manners and at different levels. For example, Germany has eased restrictions this week, whilst the UK has yet to decide; all things being equal point to the fact that Germany will come out of the recession the quicker of the two. Countries like Portugal are heavily reliant on tourism and indicators are that tourism will be slow to recover so the country may be slower to recover than say Luxembourg, with a much lower dependency on tourism. Germany was in a stronger economic position than Greece before the arrival of the pandemic and thus should be in a better position to recover quicker. The forecasts come with a caveat – the outcome could be a lot worse if Covid-19 runs longer and is more severe than currently envisaged. All bets will be off if the world is hit by a second wave.

Today, the BoE issued its direst ever warning on the state of the UK’s Cvid-19 hit economy and it does not make pleasant reading, warning that the country is heading towards its deepest ever recession. Assuming the lockdown is eased in June, it expects the economy to contract by 14% this year and that jobs and income will be dramatically reduced; activity will not come fully back until next summer. The agency’s latest Monetary Policy Report expects a 3% contraction in Q1, followed by a massively unlikely 25% slump in Q2. It was noted that the housing market had come to a standstill, (and house prices could fall 16%), whilst consumer spending had dropped 30% in April, with shopping in the High Street tanking by 80%. The unemployment level was expected to more than double from 4% to 9%, whilst inflation will start next year at zero. No wonder then that business confidence was “severely depressed”.

However, it must be noted that the BoE has history when it comes to a bit of scaremongering and getting predictions hopelessly wrong. In what seemed a political move at the time, the then governor, Mark Carney, came out in apparent support of the Remain camp ahead of the Brexit referendum vote. He indicated that there would be some sort of economic catastrophe if the UK pulled out of the European bloc, only to eat humble pie some months later, admitting that the BoE had got it wrong. In relation to the latest report, it seems highly unlikely that certain European nations will be that much better off than the UK post Covid-19.

One major – if not the most important – economic casualty of the pandemic could be the just-in-time concept, developed by the Japanese some fifty years ago, with the aim of reducing times within the production cycle, as well as cutting response times of suppliers and customers. Over time, JIT manufacturing has become widely known as lean manufacturing, but it is basically the same as it had always been – with the aim of saving time and money. Famously, Toyota, the main instigator of the concept, had early major problems in South Africa when a dock strike prevented raw materials reaching its plant ‘just in time’, resulting in the inevitable backlog. Improved logistics management, the introduction of the internet and the emergence of digital technology assured that JIT became an integral part of global economic progress.

With regard to inventory, the key to its success was that JIT delivery cut out the high cost of warehousing and the need to actually hold inventories for any longer than necessary. When first introduced on a global scale – mainly relating to production techniques and inventory management – it proved to be revolutionary and the best thing for the economy since sliced bread.

But the arrival of Covid-19 has turned the concept on its head and has left former experts scratching their heads to ascertain why such a finely tuned and complex system went haywire, potentially causing financial pandemonium worldwide. Carmakers have had to close their factories, because of shortage of materials, with tech giants and most of the world’s factories struggling for the same reason. The immediate solution would be to turn back the clock – try and source more domestic material – difficult if local factories had been closed long ago because they could not compete with overseas entities. If that were to happen it would be a severe dent to globalisation. Maybe, the new world, post Covid-19, may see a mix of both but it would also reduce the problem of global trade being held to ransom from the shenanigans of the two superpowers – USA and China.

Then along came the delivery couriers, Uber and Airbnb and before we know it a new term has entered the commercial vocabulary – the gig economy. This new category of worker does not have fulltime employee status as well as not being fully protected by the law, as is the case for full-time workers.  Before we knew, it had crept into other sectors so that before the world realised everything seemed to have to be done just in time.

The gig economy, estimated to number 150 million in North America and Europe (including 1.3 million in the UK), treats people as independent contractors, not employees, and normally pays on piece rate, with a set payment to drive a person somewhere or to deliver a package. It often involves connecting the two stakeholders, customers and clients, through a third-party online platform. Zero-hour contracts also treat people as contractors, who are paid hourly with no set minimum. There was much concern about the ethical value of such arrangements prior to the advent of the pandemic, as “wages” paid were often below government minimum levels and lacked “normal” employment benefits such as holiday pay, public holidays and sick leave. In many ways, employment in the gig economy is similar to the traditional JIT inventory management – perhaps this could be known as JWN, i.e. using labour ‘just when needed’. There is no doubt that it enables companies to save costs and perhaps for them work more efficiently, by only using labour when required, usually to the detriment of the “worker”. (There is also the danger of a rising number of zombie workers becoming more isolated post Covid-19).

Take away the safety net of not working directly for an employer, then suddenly there is no money to pay the bills. The nature of the business is that persons working in the gig economy are often at the lower end of the food chain, especially working on a zero-hour contract, whilst others are involved in SMEs that often take time to build up a business. Many start-ups fail to get off the ground and many of those that do struggle to make ends meet in their early stages. There is no doubt that a post-pandemic review will see changes. The JIT process in this regard just does not work when the system is put under any sort of stress as so many individuals and SMEs have little or no cash reserves when their revenue stream disappears. Business bills have to be settled and people paid for their labour – if not, other businesses are pulled into the problem and end up with a liquidity problem with the same unfortunate ending of having no cash to settle liabilities. So the just in time money supply that used to keep the gig economy and small companies turning over has gone out of the window. What was once a manageable risk for the economy, because it could cope with individual ‘failures’, becomes a systemic one when there is a failure of the entire system of ‘just getting by’ because it no longer works.

Even before anyone had heard of Covid-19, too many households – and small businesses – were living hand to foot and carried little or no extra emergency cash, relying on maxing up on credit cards or availing of short-term loans. A recent study concluded that 25% of Australian households only had ‘savings’ of less than US$ 650. Last December, the country’s household debt (at US$ 220k) stood at 124.9% of nominal GDP, whilst the level of housing debt to income had jumped to a record high of 140.4%, mostly credit card-related, followed by home loans. The level of household debt to income has topped 191% for the first time, as the debt burden has almost trebled in the past thirty years. Australia is typical of what is happening worldwide.

As financial stress levels tighten in this segment of the economy, the consequences are felt in households where a reduction in cash leads to less consumer spending and a dilution in consumer confidence.  If this spend accounts for 70% of some countries’ GDP, there has to be a negative and dangerous impact of less money circulating in the economy not only in retail but also by institutions such as banks, (when mortgages, loans and credit card payments suffer), educational institutions – when fees cannot be paid – utilities and insurance companies. Discretionary spending takes a battering so everything from motor vehicles, white goods, hotel stays and house purchases will see less custom.

All of a sudden, the ‘get out of jail’ credit card debt portal does not exist, and people cannot rely on topping up their credit card to purchase items. This then impacts not only on the merchants, who no longer have a sale, but also on banks that miss out on a lucrative revenue stream that used to return up to 20%. The banks also lose out on non-payment of loans, reduced mortgages, an increased rate of bad debts and a depletion in personal investments. Then what happens?  Businesses also will have less access to bank loans as the money cycle tightens and the merry-go-round is completed by the government missing out on tax revenues which have been greatly reduced by lower company profits and less people paying income tax, VAT etc. On top of that, governments are forced to spend money on unemployment and other benefits, further depleting the state coffers. The whole economy is suddenly in a downward spiral when governments, banks, companies and people stop spending and the economic cycle stops working all because ‘just in time’ is no longer a viable concept. Now  is time for just in Time To Move On!

Posted in Uncategorized | Tagged , , , , , , , , | Leave a comment

Start All Over Again!

Start All Over Again!                                                                                     01 May 2020

The best scenario for the emirate’s tourist sector is that its doors may open by July but there could be a further two-month delay, depending on global restrictions. Tourist visas have been on hold since 17 March but with tourism contributing US$ 40.9 billion to Dubai’s GDP, and attracting 16.7 million annual visitors, it is essential that it gets off to a flying start as soon as authorities deem it fit.

DEWA has signed a 25-year old agreement with Acwa Power to build the fifth phase of the Mohammed bin Rashid Al Maktoum solar park which will see a further 900 megawatts added to the emirate’s solar energy capacity. When the project is completed, it is expected to generate 5k MW of electricity and result in solar energy providing 25% of Dubai’s total energy requirements by 2030. The US$ 0.0169 bid submitted by the Saudi Arabian company was the lowest received from sixty other global companies.

Having been placed into compulsory administration earlier in the month, the country’s largest health care provider, NMC, has requested the delisting of its shares from the London Stock Exchange. Its visible problems started in December when US short seller, Muddy Waters, pointed to anomalies in its financial reporting, followed two months later by a trading suspension of its shares on the London bourse. The knock-on effect of these irregularities is that several local banks are owed in excess of US$ 2.7 billion, with ADCB being the largest creditor with US$ 980 million of that total. As NMC have reported liabilities of US$ 6.6 billion, it is possible that the banks may be looking at impairment losses of up to 50%. Meanwhile, the founder and major shareholder, BR Shetty, maintains his innocence from India, blaming the fraud on “a small group of current and former executives at these companies”; he also claimed that bank accounts were created in his name and transactions were made without his knowledge.

Bayut has secured a new round of funding of US$ 150 million which values its parent company, Emerging Markets Property Group, at US$ 1 billion. The deal, led by Dutch-based OLX Group, (with a 39% stake) will result in the Dubai HQ being combined with operations in the Middle East, North Africa and South Asia, with expansion plans to serve one billion global customers. The five-year old Dubai-based company also has other property portals – Zameen (Pakistan), Bproperty (Bangladesh), Mubawab in North Africa and Thailand’s Kaidee. Its new partner, a subsidiary of Naspers which owns Dubizzle, will combine its own operations in Egypt, Lebanon, Pakistan and the UAE.

DP World reported a 1.7% decline in Q1 shipping container volumes to 17.2 million 20’ equivalent units, with a bigger decline, that could be as high as 10%, expected this quarter for obvious reasons. The Dubai-based ports and logistics conglomerate saw a 3.4% drop to 3.4 million TEUs at its Jebel Ali facility, because of a decline in lower-margin cargo, although this was 0.3% higher on a like to like basis.

DIB posted an 18.5% decline in Q1 net profit to US$ 300 million, as the bank took a conservative approach with additional provisions and impairments, totalling US$ 409 million, in realistic expectations of the negative impact of Covid-19 on its business. The country’s largest Islamic bank posted an expansion in total assets, year on year, by 19.0% to US$ 75.2 billion, with financing and sukuk investments 17.0% higher at US$ 58.8 billion. The bank also approved the foreign ownership limit be increased to 40% from 25%.

The bourse opened on Sunday 26 April and, 164 points higher (9.5%) over the previous three weeks, jumped 136 points (7.2%) to close on 2,027 by 30 April. Emaar Properties, having gained US$ 0.08 over the previous three weeks, climbed US$ 0.07 toUS$ 0.74, whilst Arabtec, US$ 0.04 higher the previous three weeks, was up US$ 0.03 to US$ 0.19. Thursday 30 April saw the market trading at 317 million shares, worth US$ 78 million, (compared to 318 million shares, at a value of US$ 87 million, on 23 April).  In April, the bourse opened on 1,771, (having lost 31.6% in value the previous month) and gained 256 points (22.7%) to close the month on 2,027. Emaar started the month at US$ 0.59 and gained US$ 0.15 to close at the end of April on US$ 0.74, with Arabtec also up US$ 0.06 to close on 31 March at US$ 0.19.

By Thursday, 30 April, Brent, down US$ 9.01 (28.6%) the previous fortnight, regained US$ 4.01 (17.8%), to close at US$ 26.48. Gold, up the previous week by US$ 28 (1.6%), gave up that gain, and more, losing US$ 51 (2.9%) on the week to close on Thursday 30 April, at US$ 1,694.  For the month of April, Brent nudged marginally higher (US$ 0.11) from its April opening of US$ 26.35 to close the month on US$ 26.48, whilst gold was US$ 98 (6.1%) higher from its month opening of US$ 1,596 to close on US$ 1,694.

Bitcoin continues to titillate the market with its volatility.  Early morning trading on 30 April saw the cryptocurrency gaining US$ 1,706, in just two days, to US$ 9,478 but by the end of Thursday’s trading, it was worth US$ 8,742 – 74.0% higher than its 16 March’s US$ 5,024 but 7.8% lower than its early morning high; this was put down to dismal US unemployment numbers.

Although BP saw profits, (referred to as underlying replacement cost profit), slide US$ 1.6 billion (66.5%) to US$ 800 million, the oil giant – unlike some of its peers- will continue to pay dividends, whilst warning that it was facing an “exceptional level of uncertainty”.  Following the onset of Covid-19, and the introduction of lockdowns, demand for oil has slumped, causing prices to twenty-year lows.  Whilst most of the world’s planes remain grounded and more people work from home, reducing fuel demand, the outlook for oil remains dim.

Shell’s Q1 adjusted net income was ahead of market expectations but 46.0% lower at US$ 2.9 billion, as the Anglo-Dutch conglomerate, having announced earlier in the year that it had slowed down its US$ 25 billion share buyback, cancelled the next tranche of purchases due to current economic conditions. It also surprised the market by cutting its dividend, by 67% to US$ 0.16, for the first time since World War II and it does appear that the traditional US$ 15 billion dividend may become history. Other global players have also gone the same way – with Exxon Mobil freezing its dividend for the first time since 2007 and Norway’s Equinor ASA going even further by cutting its pay-out.

Despite i-Phone sales declining in China, as well as supply problems there, Apple saw a marginal 0.5% Q1 revenue growth to US$ 58.3 billion, driven by increased demand for its streaming services and “phenomenal” growth in the online store, due to the coronavirus lockdown. iPhone sales declined 7.2% to US$ 28.9 billion but this loss was offset by growth in two sectors – like for like services, including Apple Music and Apple TV, 16.6% higher at US$ 13.3 billion and wearables, home, accessories up 22.5% to US$ 6.3 billion.

Covid-19 has seen Twitter’s advertising business badly hit, as revenue, from the 11th, was 27% lower, whilst Q1 sales came in 3.0% higher at US$ 808 million; it now boasts 166 million daily users – a 9.2% annual increase. However, it did post its first ever quarterly loss in over two years, with a US$ 8 million loss.

HSBC’s Q1 profit sank 48.0% to US$ 3.2 billion and, at the same time, warned of an inevitable future decline, as it set aside US$ 3.0 billion for bad debts, which may top US$ 11 billion by year-end. Revenue lost 5.0%, to US$ 13.7 billion, some of which was attributable to adverse valuation adjustments. Europe’s largest bank was not the only financial institutions in trouble as, over on the other side of the Atlantic,  JPMorgan Chase posted  a 69% decline in Q1 profit, as it set aside $8.3bn for loan loss provisions, whilst the other three major lenders, Bank of America, Wells Fargo and Citigroup, reported their highest provisions in decades, (as non- performing debt continues to rise across the board).

In Australia, NAB reported a 51% decline in H1 profit to US$ 845 million, as it seeks an extra funding of US$ 2.3 billion from shareholders to shore up dwindling reserves in the midst of Covid-19. At the same time, it announced that its dividend will be more than halved to US$ 0.194. US$ 775 million was set aside for potential future losses and a further US$ 650 million for a change in the way the bank accounts for the cost of its software.

To the surprise of nobody, ME carriers reported a 14.1% slide in cargo, as capacity dipped by more than 20.0% – globally the figures were down 15.2% and 22.7% respectively. IATA also posted figures of ME cargo in and out of Europe, noting declines in excess of 30% and 20%. The problem facing the sector seems to be that there is not ready capacity to meet the demand, not assisted by bureaucracy that is often too slow to approve special chartered cargo flights.

In March, global passenger demand fell off the cliff, mainly caused by the pandemic and government enforced restrictions, with IATA reporting that March passenger demand had slumped 53%, year on year; there was a 36.2% decline in monthly passenger capacity as load factors declined 21.4% to 60.6%. Undoubtedly, April and ensuing months will report even worse results as global travel and tourism grinds to an almost complete standstill.

It seems likely that Renault SA will be the beneficiary of a US$ 5.4 billion aid package from the French government to help it through the coronavirus impact that has seen a 19% fall in Q1 revenue, as unit sales declined by more than 33%; over the quarter, it saw its liquidity down US$ 6.1 billion to US$ 11.5 billion by 31 March. The French automaker was already in financial trouble before the advent of the pandemic, as sales in most of its markets were heading south. In addition, its key partner, Nissan, was also struggling, not helped by the instability since the late 2018 arrest of former leader Carlos Ghosn.

An even bigger bailout, involving the Macron administration, was the one for Air France-KLM, in another industry that has been smashed by the effect of Covid-19, with most routes closed, passenger demand decimated and fast running out of cash. The airline is set to receive funding of US$ 7.7 billion from the French government and up to US$ 4.4 billion from Dutch coffers. Last year, its passenger traffic exceeded 100 million to 312 different destinations; its 550-plane fleet is as good as grounded.

Last week, he saw Virgin Australia go into administration, now Richard Branson is in funding talks with the UK government, (for a reported `US$ 500 million), and private investors, as well as seeking a buyer for Virgin Atlantic, of which he is a 51% shareholder; Delta owns the remaining 49%. He has even offered his luxury island resort Necker as collateral. In March, the Chancellor, Rishi Sunak, warned both airlines and airports that the Johnson government would only step in as “a last resort”.

In line with other major airlines, IAG, which includes BA, Aer Lingus and Iberia in its portfolio, is facing financial Armageddon, with Covid-19 continuing to impose more damage on an already battered sector. As revenue streams dry up, BA has had to look at stringent cost-cutting measure which may result in 28.6% of its 42k-strong staff facing redundancy. The problem facing all airlines is to try and forecast if and when demand returns to pre-pandemic levels which could take years. Airlines such as Qantas, putting 20k staff on leave, Air Canada, (placing 15.2k employees on furlough) and Ryanair planning 3k cuts have already taken drastic measures.

On Monday, exactly fifteen years after the Airbus A380 had its first maiden flight, the anniversary was marked by the fact that only one of the planes was actually in the skies on April 27, 2020. Over the past fifteen years, 242 of the world’s largest commercial aircraft have been delivered and the final plane will be come off the assembly line next year. Meanwhile, the plane maker is to furlough 3.2k staff at its North Wales site, as the government will pay 80% of wages, with a 10% company top-up. This comes after Airbus announced that it would be cutting production by a third and warning the 135k payroll that there could be “potentially deep job cuts”, as the aviation industry will face a major contraction driven by Covid-19; already, it has resulted in global airlines facing financial ruin and plane deliveries almost completely halted. Airbus reported a Q1 49.0% plunge in an adjusted, year on year, EBITDA to US$ 300 million, as revenue dipped 15.0% to US$ 11.7 billion, with a quarterly loss of US$ 525 million, compared to a US$ 44 million profit in Q1 2019.  It also posted a negative US$ 8.8 billion cash flow, not helped by a US$ 4.0 billion penalty to settle bribery investigations in Britain, France and the US. There is worse to come.

Covid-19 is not the only reason why Boeing is struggling, as its 737 Max planes are still grounded more than a year after its second fatal crash in Ethiopia. This, along with a collapse in air travel, has resulted in plans for the plane maker to ditch 10% of its 150k workforce. Chief executive Dave Calhoun warned that “the aviation industry will take years to return to the levels of traffic we saw just a few months ago.”

After years of negotiations – and so close to sealing a deal – it seems that Covid-19 has put the brakes on a proposed US$ 4.2 billion deal between Boeing and Embraer SA’s commercial-aircraft business; this figure was about four times more than the Brazilian plane maker’s total market cap but would have given Boeing a boost in the smaller jetliner market. If it had gone ahead, it would have competed with the new Airbus smaller single-aisle planes which are set to become even more popular as the industry adjusts to a “new reality” as travel demand almost dissipates on the back of the pandemic and any recovery will be slow. Embraer, which is the third largest plane maker in the world, has also agreed with Boeing to ditch a second venture to sell Embraer’s C-390 Millennium military cargo aircraft.

This is but one major deal that has hit the buffers because of the pandemic. Three other high profile “casualties” include Stein Mart and Kingswood calling off their merger earlier in April, citing unpredictable economic conditions. Sycamore Partners is pulling out of a deal to purchase a majority stake in Victoria’s Secret, whilst Softbank has withdrawn its US$ 3 billion stock purchase in We Co, with the case now going to court.

Official figures indicate that the US economy contracted by 4.8% in Q1, its first contraction since 2014, attributable to the onset of Covid-19. Since the lockdown only came into force mid-March, the omens are dire for Q2 data, and Donald Trump’s re-election chances, with the possibility of the economy slumping by as much as minus 25%. Over the past five weeks, Washington has implemented over US$ 3 trillion in emergency spending, including ‘helicopter’ payments to many families. Fed Reserve Chair, Jerome Powell, has reiterated that the agency would maintain rates at almost zero until it “has weathered recent events and is on track” and, that this is “not the time” to worry about the US debt burden. Since mid-March, more than 30 million people have filed for unemployment, (including 3.8 million this week), thus erasing all the job gains made over the past eight years. Consumer spending, accounting for almost 67% of the domestic economy, was off 7.6% in Q1, whilst spending on food services and accommodation dropped by more than 70%. The eurozone is also facing major economic contractions, with Q1 records showing the impact of Covid-19, even for only part of March, has had – and will continue to have; the bloc’s economy declined by as much as 3.8% in Q1 and this could rise to negative 15% by the end of June. The figures for three major economies were even worse, with contractions of 5.8%, 5.5% and 4.7% recorded in France, Spain and Italy respectively. Germany has yet to post Q1 data but it did post a 337k rise in unemployment numbers this month which would have been worse if the Merkel government had not introduced Kurzarbeit, a financial package that helps people put onto shorter working hours. The ECB cut the cost of funding for banks and introduced measures to inject more liquidity into the economy, whilst awaiting further fiscal measures from the EU politicians, with Christine Lagarde confirming that “an ambitious and coordinated fiscal stance is critical, in view of the sharp contraction.” The EU President also stated that the central bank is “fully prepared” to increase or extend this US$ 800 billion+ programme, if needed. Europe is still not united when it comes to the terms of the agreement with the likes of Germany and the Netherlands in disagreement with France and Spain whether the aid should be grant or loan driven. It looks as if we all may have to Start All Over Again!

Posted in Uncategorized | Tagged | Leave a comment

It’s About Change!

It’s About Change                                                                                          23 April 2020

Ramadan Kareem!

There was welcome news at the end of the week, with the Dubai authorities easing some of the restrictions as from tomorrow, Friday 24 April. For the first time in three weeks, people will be able to move more freely, being allowed out between 6am and 10pm without a permit. Masks will still have to be worn and the two-metre distancing rule applied but the use of gloves will be optional. Residents can now leave home for up to two hours to exercise with  a maximum of two others (within their area of residence) and can visit “first and second-degree” relatives (of no more than five people). They can also leave home from 6am to 10pm for essential journeys. Shopping malls, markets and commercial outlets, operating at only 30% capacity, will be open daily to the public from 12:00 pm to 10:00 pm, whilst restaurants and shops are allowed to operate with a maximum 30% capacity at the shopping malls. Temperature checks will be mandatory for anyone entering and separate entrances and exits will be introduced.

Arabian Travel Market  has been rescheduled to run after Eid next year, from 16 – 19 May 2021; it had earlier been changed from its April 2020 date to the end of this June but after intense discussions, involving all stakeholders, it has been moved to next year and will remain at its established home, the World Trade Centre. Before its postponement, the event was forecast to attract more than 39k professionals from the global travel industry, generating about US$ 2.5 billion of new business.

The Central Bank has advised all local banks not to terminate their UAE national employees as part of any job cuts in response to the Covid-19 outbreak, adding that the 2020 targets for Emiratisation have been postponed, provided that the Emirati staff are retained and their services not terminated, as a result of the pandemic. The banks have also been requested to notify the regulator of any planned amendments to the positions or roles of their UAE national staff.

The Central Bank has indicated that UAE lenders have utilised 60% of the US$ 13.6 billion Targeted Economic Support Scheme facility set up to assist businesses and individuals through the Covid-19 outbreak. The regulator is keen to “protect impacted individuals and ensure continuous operations of private corporates and SMEs” during the crisis and sees TESS as a positive move by the government. Furthermore, the Central Bank relaxed banks’ capital buffers, allowing them to increase lending by a further US$ 13.6 billion.

There seems to be a lot of smaller F&B outlets, thought to number around 150, unhappy with the fees being charged by online food ordering and delivery portal, who are considering a plan not to take orders from platforms – including Zomato, Deliveroo and Uber Eats – for three days. They disagree with the size of these portals’ charges that include up to 15% for booking the orders and then up to another 15% for delivery. It is estimated that between 60% – 80% of the orders are serviced through these third-party operators and that indicates that the F&B outlets’ margins continue to be impacted at a time when they have lost what used to be normal walk-in custom. The newly formed Middle East Restaurant Association recognises the importance of both sides coming to some sort of middle ground – if not both sides could lose out.

Travelex, owned by BR Shetty’s UK-listed holding group Finablr, is up for sale as it tries “to maximise value for its stakeholders”. The currency exchange group, which was hit by a cybersecurity breach on New Year’s Eve, went public twelve months ago and started trading on the London Stock Exchange with a market cap of US$ 1.3 billion. Following this breach, it was found that over 50% of its shares had been pledged as security when one of BR Shetty’s companies, BRS Investments, had taken loans to buy out Travelex in 2014. In March, its share trading was suspended, at which time the company was valued at US$ 77 million, some 94.1% lower than a year earlier.

Etisalat Group’s Q1 consolidated revenue nudged 1.0% higher to US$ 3.6 billion, whist net profit was 2.0% lower at US$ 599 million, on the back of increased competition and slower economic activities, especially in March, when Covid-19 became a reality for the local market. Although its UAE revenue was 3.0% down, at US$ 2.1 billion, its international revenue was up 4.0% to US$ 1.4 billion following the strong performance of Etisalat Misr and the consolidation of Tigo Chad into Maroc Group. The board approved a US$ 0.068 interim dividend bringing the total pay-out to US$ 0.218 per share for the year. Its total capex was 32.0% lower at US$ 300 million, of which 5G capital expenditure accounted for 45.5% of the spend at US$ 136 million. The telco has 150 million subscribers, up 5.0% on the year, with the UAE market nudging 1.0% higher to 12.7 million.

Du posted a 21% decrease in Q1 profit to US$ 91 million on the back of revenue 4.8% down to US$ 815 million, attributable to a 13.5% dip in mobile subscribers (to 7.4 million) and the March impact of Covid-19. Other revenue, which excludes income from its fixed line and mobile businesses, fell 3.2% to US$ 230 million, as the number of fixed-line subscribers increased by 7.9% to 224k. The fifteen-year-old telco has three main shareholders – Emirates Investment Authority, Emirates International Telecommunications and Mubadala Investment Company, with stakes of 50.12%, 19.70% and 10.06% respectively.

Although Emirates NBD turned in a 3.0% hike in Q1 profit to US$ 572 million, year on year profit was 24.0% lower, mainly attributable to higher impairment charges but despite this credit quality remained stable. Total income remained flat at US$ 1.9 billion, as total assets were US$ 188.6 billion, 1% higher on the year, as loans increased 1%. Positive signs were seen in marked increases in net interest income and non-interest income by 45% and 48% respectively.  The bank’s cost cutting exercise has borne fruit, as expenditure fell 18.0% to US$ 556 million, on the back of lower staff and marketing expenses. Due to higher Stage 1 and 2 ECL allowances, Q1 impairment charges of US$ 695 million were 24% higher, quarter on quarter, and 349% on the year.

Commercial Bank of Dubai posted a 7.3% decrease in net profit to US$ 86 million, (and a 2.3% drop in operating income to US$ 206 million), driven by low interest rates, weaker business conditions and Covid-19; quarterly impairment charges were at US$ 65 million, mainly attributable to future potential losses expected from Covid-19, as the coverage ratio fell 16.5%, year on year, to 66.6%.  The non-performing loan (NPL) ratio increased to 6.59% from 5.94%. Total assets, net loans/advances and customers’ deposits all moved north – by 2.1% to US$ 24.5 billion, 3.6% to US$ 16.4 billion and 0.9% to US$ 17.4 billion respectively.

The bourse opened on Sunday 19 April and, 133 points higher (7.7%) over the previous fortnight, nudged up 31 points (1.7%) to close on 1,891 by 23 April. Emaar Properties, having gained US$ 0.07 over the previous two weeks, was US$ 0.01 higher at US$ 0.67, whilst Arabtec, US$ 0.03 higher the previous fortnight, was up US$ 0.01 to US$ 0.16. Thursday 23 April saw the market trading at 318 million shares, worth US$ 87 million, (compared to 228 million shares, at a value of US$ 55 million, on 16 April). 

By Thursday, 23 April, Brent, down US$ 3.66 (12.6%) the previous week, had a tumultuous trading week ending, with a further US$ 5.35 (19.2%) loss, to close at US$ 22.47. Gold, down the previous week by US$ 36 (2.1%) regained US$ 28 (1.6%) on the week to close on Thursday 23 April, at US$ 1,745. 

According to reports, Facebook has paid US$ 5.7 billion to snare a 9.99% stake in cut-price Indian mobile internet company Reliance Jio. The move will give the US interloper a position in the country, where it already has WhatsApp being used by 400 million Indians, with more in the pipeline, as it launches its payment service. There are plans for WhatsApp to increase collaboration with Reliance’s e-commerce venture, JioMart, that will enhance connections with domestic businesses, shops and purchase products. The owner of the Reliance Group, Mukesh Ambani, has seen his liabilities jump from US$ 19 billion, four years ago, to its current level of US$ 65 billion and is keen to cut this to zero within a year. Deals like this will help.

Debenhams has struck deals with 85% of landlords of its 142 stores, and is in “advanced talks” with the remainder, to keep most of them open, this after it fell into administration last week.  However, seven stores (affecting over hundred staff) will close after discussions broke down without any agreement. All its outlets remain closed, in line with current government guidelines, (with a majority of staff furloughed) but most will be ready for business when restrictions are lifted. Arcadia – which has chains including Miss Selfridge and Top Shop – is also in negotiations with its landlords for rent reductions. Currently, over 90% of its 16k employees are being paid through the government furlough scheme.

Oil is not the only product that is running out of storage capacity, with many global retailers now requesting shopping companies to push back deliveries. So far this year, it is estimated that container shipments are 15% lower, year on year, but this could soon rise to over30% if countries do not start to open up their economies. The current situation sees shoppers staying at home, many shops remaining closed and retail sales nosediving, resulting in some container ships now running at 20% capacity. The main questions to answer are when will “normal” demand return to the market and has the pandemic changed how future global trade will be carried out?

IATA’s latest data has amended its previous US$ 19 billion forecast loss for ME airlines to US$ 24 billion because of their enforced service disruption. For the UAE, the estimated loss is put at US$ 6.8 billion, plus a US$ 23.2 billion loss to the country’s GDP, as well as putting 379k direct and indirect jobs at risk. The world body estimates that, at best, airlines will only have a maximum three months cash reserves and that government support is of prime importance. The Dubai government is on record that it would support its two airlines – Emirates and flydubai.

It seems that the South African government is either unwilling, or cannot afford, to save the country’s 86-year old national airline. SAA, which last made a profit in 2011, plans to lay off all its 4.7k payroll, with compensation being one-month pay per year of service. It was only a matter of time before the inevitable happened because the airline had for years been living off bailouts and state-guaranteed debt agreements; the advent of Covid-19 proved to be the final nail in its coffin. SAA, not helped by so many episodes of corruption and mismanagement, as well as nine chief executives in a decade, had recently only been flying cargo and chartered flights and had already given up on its “normal” flight schedule.

Already indebted by US$ 3.2 billion worth of long-term debt, Virgin Australia has finally gone into administration, leaving the country’s aviation sector in tatters, without a second airline. This comes after the Morrison government refused a request for an interim US$ 888 million loan but later announced a US$ 570 million support package for all local airlines. Its downfall would see the loss of 1k direct positions and 6k indirect jobs. The airline, which has the UAE government, Singapore Airlines, China’s HNA, and Sir Richard Branson’s Group among its shareholders, is now seeking new investors. Over the past twenty years, many companies – Ansett, East West, Compass, Ozjet and Impulse – have tried but all have crash landed. Virgin’s demise confirms the belief that the Australian market has no room for two airlines but needs more than one to keep Qantas “honest”. There is no doubt that a strong second airline would put pressure on Qantas to keep fares competitive, so the big losers, apart from the shareholders, are the Australian public who will also see certain local routes reduced. Things may have been different if Virgin has focused more on its core market – as a low-cost carrier – rather than compete with Qantas on its traditional turf, as an international player.

The RBA has warned the country that it will be facing its biggest ever contraction since the Great Depression, as there will be a 10% decline in Australia’s GDP and the unemployment will be around the 10% mark come 30 June. There is no doubt that the introduction of the government’s JobKeeper wage subsidy has helped to keep unemployment rates in some sort of check. As with every other country afflicted by the pandemic, authorities have to be careful not to lift population containment too early, as Covid-19 could easily reappear with an even more devastating impact on lives, incomes and jobs. Expect that by tax year end, 30 June, Australia will be posting negative inflation on the back of historically low energy prices and the introduction of free childcare.

As stockpiling deceases and more shops extend shutdowns, April should see a downturn in Australian retail turnover from its record level of an 8.2% surge the previous month, with supermarket and grocery sales rising 22.4%. A more detailed analysis shows that turnover doubled for items such as toilet paper, rice, pasta and flour as canned food, cleaning products and certain medicines recorded 50%+ rises. It is expected that April will be ‘payback time’ that could well result in the “largest decline ever recorded”. The other side of the coin shows large falls for food outlets and clothing, with 20%+ declines in cafes, restaurants and takeaways, as well as similar percentage falls in clothing, footwear and personal accessories; year on year vehicle sales were 18% off. Following a solid start to the year, new home sales slumped 23.2% in March.

The motor vehicle industry is another sector that is almost out for the count because of Covid-19, with data from both sides of the Atlantic confirming sales have fallen off a cliff and production is struggling. European sales sank to their lowest level in over thirty years, with new registrations down 56.2% to 570k, compared to March 2019. The sector is considered a bellwether for the bloc’s economy, as it accounts for 9% of total factory workers, employing 2.6 million. Considering that most car dealers were open for half of March, it points to numbers really tanking this month; Italy took the biggest punch, as March car sales were 85% lower. With Germany being one of the first countries easing lockdown restrictions, Opel reopened its dealerships in that country on Monday, but the great unknowns are how sales will pan out after coronavirus has abated and whether manufacturers can make up for lost revenue. What is known is that consumer confidence has been shaken, incomes reduced and many jobs lost.

Even before the arrival of Covid-19, the industry was showing signs of weakness with double digit annual contractions. Last month, Fiat Chrysler sales plummeted 77% to 27k in the EU plus UK and Switzerland, whilst PSA, (whose brands include Peugeot, Citroën and Opel), posted a 68% fall in sales. Although slightly less than those of their European rivals, but probably more worrying, the three German powerhouses – BMW, Daimler and Volkswagen – saw declines of almost 50%. That country’s economy relies heavily on exports from this sector and if such figures continue, it will have a negative impact on the country’s future progress, post Covid-19.

Meanwhile, all is not well with the industry in the US, as Ford raised US$ 8 billion, from corporate debt investors, following an estimated Q1 US$ 2 billion loss, as Q1 sales dipped 21%.  Unsurprisingly, the issue was five times over-subscribed as rates on offer were around 9%, at a time when rates are hovering around zero. It is not the only car maker taking a beating from the pandemic which has wreaked havoc on all sectors within the industry. GMC has availed a US$ 2.0 billion 364-day revolving credit agreement, backed, like the Ford arrangement, by certain assets as security, to be solely used by its financial services business.

On Thursday, the US Congress passed its fourth aid bill (of US$ 484 billion) in response to the pandemic which will be used for small business aid and hospital funding. The country has 845k confirmed cases and 46.8k reported deaths. With a further 4.4 million Americans applying for unemployment benefits last week, the total over the past five weeks has topped 26.5 million – its steepest downturn since the Great Depression. The latest figures point to an April potential rate of 20% – more than double the 10% mark that followed the 2009 GFC.

Covid-19 has helped to speed up the everyday use of contactless mobile payments in the US, as an increasing number of people now see it as a safer way to pay, whilst also using mobile apps tied to payments for pickup orders. Some experts see an additional 20% of future transactions making use of this technology. Already, 27% of U.S. small businesses have reported an increase in customers using services like Apple Pay, according to a survey of 361 companies released in April. For example, Safeway’s rush delivery service noted, that at the beginning of March, less than 50k of their customers were active mobile users – last week this number topped 670k. At the beginning of the month, Walmart’s self-checkout system, Walmart Pay went completely contactless.

By the end of the week, European economic data was published and if anything the figures were even worse than expected. IHS Markit PMI for April saw the private-sector activity in the euro area tank to 13.5 from 29.7, a month earlier, as Germany’s April figure of 17.1 was well down, month on month, from 35.0. France performed even worse as their PMI slumped to just 11.2, from 28.9, (with 50 being the threshold between expansion and contraction). To add to their woes, there were further decline in confidence, as well as record job cuts.  

Ahead of Thursday’s EU Leaders’ meeting, the Central Bank president, Christine Lagarde, had warned them that the euro-area economy could shrink by as much as 15% and there is the danger that they risk doing too little, too late. Although Chancellor Angela Merkel was talking about a massive US$ 2.2 trillion stimulus package, the meeting agreed to a US$ 1.1 trillion recovery fund, closely tied to the bloc’s seven-year budget and confirmed that US$ 600 billion would be released through existing mechanisms from 01 June. There is no doubt that there is still much disunity within the bloc which will not help with efforts to deal with a certain sharp recession, as government restrictions leave companies unable to raise any revenue whilst incurring on-going running costs. Likewise, EU revenue will be severely disrupted at a time when so much money is being spent by authorities to combat the impact of the pandemic.

Not to be outdone, horrific returns in the UK saw its PMI slump to just 12.9 and questions have to be asked whether the money is reaching businesses quick enough – it looks not. On the back of this, the UK economy will contract by more than 13% in Q2. Because of the money being “thrown” at the current Covid-19 economy, the UK budget deficit could top US$ 320 billion; by the end of the UK tax year, 05 April, the deficit was at US$ 59 billion, more than US$ 11 billion higher, (and equating to 2.2% of the GDP), over the year. The government has already announced spending increases and tax cuts which has already added US$ 120 billion to the figure. Even the most optimistic of analysts cannot visualise that the economy will be in any better shape within two years as it was at the beginning of 2020. Until the end of June, the government will have issued gilts, government bonds, totalling US$ 270 billion. In this perfect storm, the government loses out from both sides – it has to spend more, (e.g. furloughing may end up costing more than US$ 100 billion), and will incur a massive loss in its tax revenue – less payroll-related taxes and VAT receipts, along with corporation tax revenue stream drying up; then when things return to normalcy, many companies will be able to offset prior losses against current profits – again leading to less money going into the government coffers. Then, of course, this money spent on Covid-19 incurs interest rate charges and has to be repaid.

After posting a historic high in UK employment in February, at 33.1 million or 76.6%, (and unemployment at 4.0%), Covid-19 will turn these figures on their head when latest data is soon released. In February, pay continued to rise quicker than inflation – 2.9% to 1.8% – so that real wages moved in its upward spiral. Initial figures point to nearly a million new claims of universal credit and this, in itself, will lead to a massive increase in unemployment. There is every chance that unemployment could more than double to 9% in Q2 as it is estimated that 36% of all UK jobs will be highly impacted by the pandemic. Inflation, which had been heading upwards towards the BoE’s 2.0% target, slid to 1.5% by March with the inevitability of falling even further to 0.5% by year end, on the back of lower energy prices, loss of consumer confidence and falling employment. The declining inflation level is a sure indicator that the economy is heading for a steep recession.

History was made this week when the price of oil turned negative for the first time ever, as expectations rose that capacity would soon be unable to cope with the supply. There had been reports earlier in the month that low grades of West Texas Intermediate were in negative territory – now it has been confirmed that the US oil benchmark, WTI, fell as low as minus US$ 37.63 a barrel. The sector is in an impasse as it weighs up the consequences of falling demand and disagreements within Opec+ about balancing the supply requirements in a market producing too much oil. It will take a recovery in demand to really turn the market around and that will depend on when different governments decide to ease restrictions that continue to choke the global economies.

There are two professional sectors that will be changed forever because of Covid-19. Economists have always excelled at explaining what has gone wrong in the past and what should have been done at the time. Likewise, auditors have always been regarded as historic record-keepers so that shareholders could derive some comfort that the past figures presented a true and fair value. Both professions seem to be run by the older generation. With the onset of Covid-19, and the serious impact it has had – and will continue to have – on global economies, businesses and people, it is essential that both spend more time focussing on what is happening and what will happen in the future. It may be time to bring in tech-savvy younger leaders, with fresh and modern ideas. Accounting 101 and Economics 101 will never be the same again. It’s About Change!

Posted in Uncategorized | Tagged , , , , , , | Leave a comment

Wake Me Up When September Ends

Wake Me Up When September Ends!                                                          16 April 2020

Q1 property handovers were 27.5% lower at 5k, compared to the same period last year – a possible indicator that the year-end total will be less than 2019’s 32k and a lot less than the 60k figure bandied around by analysts at the beginning of the year. This could prove beneficial to the Dubai property sector, as it could narrow the current supply/demand imbalance into more of a state of equilibrium. A new report by Core expects “future handover volumes to come down as construction timelines and supply chains are impacted along with softened demand”. It also saw the Dubai Expo 2020 postponement giving developers more time to take stock of their immediate priorities and adjust accordingly. Not helped by the current pandemic, the consultancy also noted that property prices continued to head south and that “we have seen more double-digit drops than previous quarters.” Furthermore, the fact that rents continue to decline, at a faster rate than sale prices, sees many potential buyers sitting on the fence in the short-term and probably delaying decisions to see the outcome of the eventual economic fallout from Covid-19.

Despite the impact of Covid-19 on the local economy, Dubai real estate transactions in March reached US$ 190 million, with total transactions of 3.1k and 10.2k in Q1; this was partly attributable to recently introduced government policies including the Central Bank’s initial US$ 27.2 billion economic stimulus package, followed by an additional  US$ 42.5 billion; at the same time,  the regulator reduced reserve restrictions on bank deposits and expanded its Targeted Economic Support Scheme markedly, whilst  federal government introduced a US$ 34.3 billion economic boost. Property Finder estimated that March witnessed 1.2k mortgage registrations, the highest monthly number in six months, and 24.8% higher than a year earlier.

Because of a change in the economic environment, brought about by the onset of Covid-19, many project promoters are insisting that UAE contractors go through the whole price negotiation process again. There is the urgent need that this has to be done because most clients will insist on some sort of reduction in contract values which in turn will see further falls in margins for a sector that has been going through tough times for at least three years. Covid-19 prevention measures – including 50% capacity on transport buses and the numerous site anti-contamination processes – have seen the number of shifts and site hours being cut; these delays will necessarily cost money in both extra direct costs and “running expenses”, incurred by projects running over schedule. Luckily, the prices for key material, including cement and steel, have remained constant.

The latest initiative from the Dubai Land Department sees a reduction in service charges, as part of its strategy to lower the associated costs involved in owning a home in the emirate. Furthermore, those property owners that have been fined for not paying their service fees for the past fifteen months will have them waived and, in future, service charges can be paid in instalments.

UAE businesses are expected to be US$ 31 million better off this year, following the Ministry of Economy announcing reduced fees for 94 of its services pertaining to trade, innovation, business, investment and production. This move will support those sectors reeling from the impact of Covid-19, by reducing the cost of carrying out of business and stimulating the moribund local economy temporarily laid low by the pandemic. Other fees that have been reduced include those relating to commercial registrations, trademark/intellectual property services, commercial agencies and auditors. Meanwhile, there were 25% fee reductions for the collective management licence, annual renewal and replacing a lost licence of US$ 20k, US$ 10k and US$ 20 respectively. These are but the latest moves by the government and come on the back of free zones, such as DP World and the Dubai Multi-Commodities Centre, slashing business-related fees.

The Dubai Airport Show has been moved from its original June date to late October, as the pandemic gains traction, leaving the air travel industry unravelling in its tracks. Last year, it hosted 351 exhibitors and 7.1k attendees, from 89 countries, with a 20% jump in visit numbers expected this year. IATA has estimated that if travel restrictions were to continue for more than three months, 25 million global jobs would be at risk.

According to Abdulaziz Al Ghurair, chairman of the UAE Banks Federation, local financial institutions do not need more stimulus from the central bank to deal with the Covid-19 impact, after the federal agency had injected US$ 70 billion in stimulus measures, as well as extending the duration of the Targeted Economic Support Scheme. Tess allows banks to let its retail and corporate clients defer the principal amount of loans and interest, at until the end of the year. The aggregate value of all capital and liquidity measures totals US$ 69.2 billion, including buffer reliefs in capital and zero-cost funding support (both at US$ 13.6 billion), along with a US$ 25.9 billion liquidity buffer relief. Currently, 62.5% of the total bank lending of US$ 436 billion is loaned to individuals and commercial entities.

It is reported that UAE banks want to ensure that there is a smooth flow of funds within the construction sector and to try to end the ongoing problem of delayed payments, which has bugged the industry for some time. This drag effect on liquidity has been a perennial problem and has become even more so because of Covid-19 and now, it seems, the banks want to break the cycle which has had such a negative effect on the local economy. With a little “encouragement” from the government, banks are becoming more open to giving more flexibility on loan paybacks, extending repayment terms and helping free up the liquidity bottleneck. It is reported that banks’ exposure to the construction sector is in excess of 15%, whilst there are currently over US$ 700 billion of building and civil engineering projects currently planned or underway in the country.

On Thursday, the number of new coronavirus cases in the country totalled 432 bringing the number of UAE patients to 5.8k, with thirty-five fatalities to date.  On a global basis, there have been 2.17 million cases,, of which 550k have recovered as deaths continue to rise and now stand at 146k) .In recent days, the UAE has boosted its testing capacity and has conducted over 650k tests to date; only this week, fourteen drive-through screening centres opened, each capable of testing up to 600 people a day.

Having received its ADGM licence last October, TransferWise is now set to start operations in the country. The global low-cost digital money transfer service will introduce fully online money transfers to the UAE, the third largest remitter in the world after the US and Saudi Arabia. It is estimated that US$ 46.1 billion left these shores in 2018 and obviously the new fintech is keen to get some of the action to add to its current global portfolio of US$ 60 billion annual payments, to over eighty countries, from its seven million customer base. The UK-based company, with fourteen global offices, operates a platform that customers use to transfer money online, using 49 currencies, at the mid-market exchange rate, with the only charges being an upfront, transparent fee.

Gateway Partners has acquired a 40% stake in Apparel Group’s Gulf franchise of Tim Hortons which currently has 141 stores in the ME. Financial details of the investment, by the Dubai-based private equity firm, have not been made but it is expected that money raised will fund future expansion plans by the coffee and breakfast chain in the GCC, Egypt and India. Prior to the arrival of Covid-19, Apparel had plans for a further 300 Tim Hortons outlets prior to the end of 2022.

The newly appointed administrators for NMC Health have confirmed, in a letter to 15k staff members, that the embattled and debt-ridden company is not going into “liquidation”. It will be administered by Alvarez & Marsal, with the aim of trying to stabilise the business and keep it functioning, more so because of its importance to the UAE’s healthcare system. The message reiterated that “all hospitals, medical centres, care facilities and distribution services will be unaffected by the appointment… so their current activities will not change”. It also stated that “the problems with the business .  .  .  . are not related to the day-to-day operations, or with the hospitals and clinics”.

The Al Ghurair family-controlled Mashreq Bank reported a Q1 28.0% drop in net profit, on the back of declining rates and slowing economic activity not helped by the coronavirus pandemic. Revenue fell 3.0% to US$ 414 million, as investment income doubled to US$ 35 million, whilst net interest income and income from Islamic financing, was 16.5% lower at US$ 213 million. Impairment losses were 56.5% up to US$ 111 million. There were also increases in the bank’s assets and loans/advances, up 2.0% to US$ 44.3 billion and 2.8% to US$ 213 million respectively; customer deposits were 2.7% off at US$ 24.1 billion.

The bourse opened on Sunday 12 April and, 103 points to the good (6.2%) over the previous week, nudged 30 points higher (0.2%) to close on 1,860 by 16 April. Emaar Properties, having gained US$ 0.06 the previous week, was US$ 0.01 higher at US$ 0.66, whilst Arabtec, US$ 0.03 higher the previous week, was flat at US$ 0.15. Thursday 16 April saw the market trading at 268 million shares, worth US$ 55 million, (compared to 230 million shares, at a value of US$ 57 million, on 09 April). 

By Thursday, 16 April, Brent, up US$ 5.14 (19.5%) the previous fortnight, went back to its old ways by falling US$ 3.66 (12.6%), to close at US$ 27.82. Gold, up the previous week by US$ 118 (7.2%) was also in negative territory, losing US$ 36 (2.1%) on the week to close on Thursday 16 April, at US$ 1,717. It looks as if April could be the worst month ever in the history of oil, as further shutdowns see its demand plunge so much so that the industry is running out of storage. Brent crude lost 6.0% on Wednesday to US$ 28.00, with West Texas hovering around the US$ 20 level. There is an urgent need for Opec+ to bring in more production cuts, as the pandemic has driven demand so much lower.

Vision Fund, SoftBank’s U$S 100 billion tech start-up financing vehicle, is set to lose up to US$ 16.7 billion on the back of some bad investment decisions which will see the biggest global technology investor post its first loss in fifteen years. The Japanese conglomerate also put the blame on a “deteriorating market environment”, caused by the coronavirus pandemic. This has resulted in slumping revenue (and profit) on some of its investments in consumer spending, travel and transportation, including Uber, hotel chain Oyo, along with fast-growing ride-hailing apps Grab and China’s Didi Chuxing. It has also suffered from investing in the likes of WeWork, satellite operator OneWeb and US telecoms firm Sprint.

With slowing business because of Covid-19, Adidas is set to receive a syndicated US$ 3.3 billion German government-backed loan, comprising US$ 2.76 billion from KfW, (the country’s state-owned development bank) and US$ 667 from another consortium. One of the loan conditions ensures that the company will suspend any dividend payments, with the sports company adding that it decided to forgo its 2020 short- and long-term bonuses.

This week, Boeing announced a further cancellation of 75 of its 737Max, (including 35 of a 130 order from Brazil’s Gol), in addition to the same number being cancelled earlier by Irish leasing company Avolon. As it continues to rectify two new software issues, Boeing remains in talks with regulators seeking approval to return 737 Max to service. Q1 saw the plane maker post 49 new orders (or a negative 147 planes after cancellations) and handed over fifty planes – its lowest ever quarter results since 1984 and well down on the 149 posted in Q1 2019.  Airbus joined Boeing in cutting production, as the demand for new planes plunged on the back of liquidity problems being felt by all major airlines (potential buyers) and logistical difficulties in delivering aircraft. The US administration has agreed a US$ 25 billion rescue package, (including a range of low-cost loans and direct grants), for the country’s ten biggest airlines, with the money being used for mainly payroll.

Two hundred have lost their jobs, whilst a further 1.8k staff have been furloughed, as Oasis and Warehouse, owned by Kaupthing, call in administrator, Deloittes; the Icelandic bank had been looking for a buyer before coronavirus. The group, which also includes The Idle Man and Bastyan Fashions, have had to shut their 92 stores whilst it also maintains 437 concessions in department stores including Debenhams and Selfridges.

Australia’s finance industry is still paying for its past sins and the fall-out from a royal commission more than two years ago. One of the bigger offenders, Westpac, has indicated that its H1 earnings will be almost US$ 1 billion lower, mainly because of a potential US$ 700 million fine relating to the Austrac money laundering scandal; it is alleged that the bank failed to prevent  a staggering 23 million breaches of anti-money laundering and counter-terrorism financing laws. Another Big-4 bank, CBA, has already been fined US$ 420 million for failing to report 54k suspicious transactions, whilst HSBC has admitted to the regulators breaching anti-money laundering laws. Little wonder to see Westpac shares trading 38% lower since late February.

A major winner from Covid-19 is Amazon, after the demand for online shopping went through the roof as well as boosting its share value, to a record high, climbing 5.3%. It is estimated that because of this, its founder and 11% shareholder, Jeff Bezos has seen his wealth grow by 21.1% to US$ 138 billion. Two other beneficiaries from the current crisis are Eris Yuan, founder of Zoom, with his fortune doubling to US$ 7.4 billion, and the Walton family, whose wealth has risen 5% to US$ 169 billion, making them the richest family in the world. But not everyone has been able to cash in on the coronavirus – Bloomberg estimates that the world’s 500 richest people have lost US$ 553 billion already this year.

The World Bank came up with a gloomy forecast that South Asia, with a 1.8 billion population, will post its worst economic performance in 40 years, negating the region’s laudable efforts over this time to win the poverty battle. Last week, this blog mentioned net capital outflows from the region were causing major economic problems and, to the mix, much-disrupted supply chains, tourism coming to a stop and the demand for cheap garments falling away can only add to their woes. Now the World Body, noting that countries such as Bangladesh, Pakistan and Sri Lanka had so far reported relatively few coronavirus cases, but could become new hotspots, has slashed its pre-Covid 19 forecast for this year from 6.3% to as low as 1.8%. At least 50% of the region’s countries could fall into “deep recession”, none more so than the Maldives that could contract by up to 13%, as its high-end tourism sector lays in tatters. The region’s biggest economy, India, could see growth forecast down to 1.5% from initial 5.0% estimates.

The IMF estimates that the global economy will sink by 3.0% this year – at its fastest pace since the Great Depression of the 1930s – that will see US$ 9 trillion wiped off the global GDP before the end of 2021. The possible good news is that if Covid-19 abates in H2, global growth could bounce back 5.8% in 2021, as all major advanced economies will sink into recession. In January, the IMF forecast UK growth this year would be 1.4%, but this has now changed to negative 6.5%. (Following the GFC, the UK economy contracted by 4.2%). The US fared a little better with a 5.9% contraction expected this year, whilst unemployment will top 10%.  The global agency estimated that 81% of the global workforce of 3.3 billion people have had their workplace fully or partly closed. 

To assist 25 countries, mainly from Africa but also including Afghanistan, Nepal, Solomon Island and Yemen, struggling from the Covid-19 impact, the IMF has approved an immediate debt relief package. The fund’s revamped Catastrophe Containment and Relief Trust will provide about US$ 500 million in grant-based debt service relief, including the recent US$ 185 million pledge by the UK and Japan’s US$ 100 million. All member countries that fall into the category, of a per capita income below the World Bank’s operational threshold, are eligible for debt service relief; to date 85 countries have applied.

In a bid to solicit more international support for its fight against the economic impact of Covid-19, the African Union has appointed several other dignitaries as special envoys. Its chairman, the South African president, Cyril Ramaphosa, has indicated that the envoy team will follow up on pledges already made by organisations such as the EU and the G20  “to solicit rapid and concrete support” and to discuss factors not only of the promised stimulus package but also important matters, including deferred debt and interest payments. It is worrying to see that in the two years ending 2017, the African continent’s external debt payments doubled to 11.8% of government revenue; of that total, debts owed to multinationals and private lenders accounted for 35% and 32% respectively.

Governments and central banks around the world have rolled out monetary and fiscal initiatives to soften the impact of the coronavirus outbreak on businesses. It seems that so many countries have used up all their available fiscal and monetary platforms, as governments have thrown every conceivable measure, including rate cuts, wage protection schemes, loan guarantees, dedicated liquidity lines and even “helicopter money” directly to households.

Australia is just one country that is taking a massive hit from Covid-19, entering a recession, with its unemployment rate set to almost double, to over 10.0%, by the end of the quarter; this figure could have been worse had it not been for the government’s US$ 90 billion JobKeeper wage subsidy program. Business confidence in the lucky country has fallen off a cliff, driven by marked falls in employment, profitability and trading conditions. NAB’s latest index of business conditions sank to -21 points in March, whilst its measure of business confidence tanked to a record low of -66 points. The IMF has estimated that the country will lose 6.7% off its GDP and that the 2020 unemployment level would average around 7.6%. A survey, by Westpac and the Melbourne Institute, reported its worst ever monthly reading as the Consumer Sentiment Index fell 17.7% to 75.6. This inevitable collapse followed the WHO declaration that Covid-19 had officially become a pandemic whilst the number of infections jumped from 76 to 6.5k over the past month.

However, on Tuesday, the first trading day of the week after the Easter holidays saw the ASX 200 2.0% higher at 5,488 points, whilst the Aussie dollar reached its highest point in five weeks, trading at US$ 0.64 to the greenback. Some of the currency’s improvement has been attributable to the fact that the country’s Covid-19 curve has flattened more sharply than any other country, with the exception of China; however, its strict social-distancing protocol has meant that much of its business sector has had to close down, with a huge negative impact on the country’s economy which was still recovering from the fatal bush fires which finally ended in January.

Not that they were needed to show that the US economy (like the rest of the world) is in a deep recession, this week’s indicators just confirm the fact. March retail sales plunged a record 8.7% on the month and 6.2%, year on year, whilst factory production slumped by 6.3% – the most since 1946; housing starts slid by the most amount since 1984.The one-month sales decline of US$ 46.2 billion is just slightly lower than the US$ 49.1 billion fall during the GFC – the only difference being that this took sixteen months in 2008-2009. Over the past four weeks, over 22 million Americans have filed for unemployment benefits that has now wiped out all the 21.5 million jobs added to the economy since mid-2009.  There is no wonder that President Trump is keen to see a quick end to government lockdowns and business shutdowns; currently, it is estimated that 90% of the working population have been hit by local governments issue stay-at-home or shelter-in-place orders.

The world’s second biggest economy had its first quarterly contraction for decades in Q1 as its economy shrank by 6.8%, compared to a 6.4% expansion in Q1 2019. This is not just bad news for China but the knock-on effect on the global economy will raise concern as it is regarded as an economic powerhouse being probably the second global major consumer and the leading producer of goods and services. Some of this week’s key indicators see unemployment at 5.9%, retails sales tanking 15.8% and factory production 1.1% off. The IMF estimate that at best China will escape a recession this year and could see growth coming in at 1.2%.

There is no doubt that the longer the lockdown the longer the period of economic inactivity, but it is imperative that the containment measures take precedence over the temptation to resume economic activity; if this were to be implemented too early, the knock-on effect would be catastrophic. If taken too late, it could result in dire economic consequences, that could take years to resolve and inevitable social disorder. However, someone has to make the unenviable decision at some stage during this pandemic, and after carefully weighing up the associated social and economic costs and benefits, to decide what should be done. Because it is a totally new virus, it is impossible to gauge when Covid-19 will abate and on average pandemics can last for more than twelve months – for instance, swine flu was declared a pandemic in June 2009 and was deemed over in August 2010.  Wake Me Up When September Ends!

Posted in Uncategorized | Tagged , , , , , | Leave a comment