Goodbye Yellow Brick Wall

Tiananmen-SquareThere is no doubt that tourism is a major driver for the Dubai economy, epitomised by January’s  hotel occupancy, which rose to a giddy 89.6% –  helped along by the success of the month-long Dubai Shopping Festival which this year attracted 4.7 million visitors. All figures headed north with Average Room Rate up 5% to US$ 359.39 and Total Revenue per Available Room at its highest level ever of US$ 522.92. RevPAR and F&B were both up 10.2% (US$ 321.85) and 6.5%. This year will see an 8.3% increase in the room inventory to 58,800 with a massive 16.7% jump to around 69,000 hotel rooms by the end of 2014.

The second ‘T’ in Dubai’s growth is travel with the aviation sector generating almost US$ 40 billion equivalent to 14.7% of UAE’s GDP.  January IATA figures indicate how well this sector is performing when compared to European carriers and other global airlines. As is the norm these days, the region had the fastest worldwide growth in terms of passenger numbers with 14.3% compared to Europe that grew at a paltry 2.1% and globally at 2.7%. At the same time, available capacity grew at 14.4%, 0.4% and 2.2% respectively. More of the same is expected for the rest of the year.

With the retail sector accounting for an estimated 12% of GDP, Dubai has launched the first virtual mall,Tejuri.com, in the region. The fact that on-line shopping is still in its infancy here can be gauged from the income of only US$ 280 million generated in the UAE compared to say the UK where the industry is 170 times bigger at US$ 47.8 billion. There is no doubt that internet retail trading will be a growth sector for the local economy.

The end of March will see the phase 1 completion of the US$ 40.8 million new Dubai Zoo located in Al Warqa 5. The 400 hectares site will include a safari park, golf course and recreational facilities. In line with Dubai’s philosophy, the aim is to make the safari park the best centre for wildlife in the world. Dubai Municipality is also planning a crocodile park which will be set up in the near future.

An interesting development this week came with appointment of Douglas Kirkman as CEO of ICD-Brookfield Management Limited running a US$ 1 billion fund, targeting Dubai real estate assets. The Investment Corporation of Dubai, the government’s investment arm, has joined with the Canadian conglomerate to finance future major developments in the emirate.

Another government entity, Dubai Industrial City, is now home to 471 companies having seen a massive 82% increase (212) in the past year. DIC is a specialised industrial and logistics hub for light to medium manufacturing and is one of the main drivers that help to make the industrial sector the second largest contributor to the country’s GDP.

With an improved lending environment and historically low rates, Emirates becomes the third government-owned entity this year to opt for a sukuk financing option. This will be the airline’s second bond issue in 2013 following a rather complex structured US$ 750 million one in January; DEWA and the Dubai government have already raised finance of US$ 750 million and US$ 1.25 billion.

Emaar again hit the jackpot as it saw its third major project in three months sell out in less than one hour last Saturday. Investor interest in the Address Residence Sky View was worldwide with interested buyers from seventy-five countries which just shows the increasing pull of Dubai as a place to live. According to a recent survey, it has just become the seventh most desirable global living place for high wealth individuals.

Another massive development was announced this week – Damac Towers by Paramount. Located in Down Town, the US$ 1 billion project – with a movie based theme – will comprise four towers (all over 250 metres) and include a 540-room hotel and 1,400 serviced apartments. Construction has already started with completion expected by the end of 2015.

Meanwhile Nakheel is planning to construct two-storey villas in Jumeirah Village Circle and has issued a tender for potential bidders to develop the site. As the name implies, the development will see all ninety units built in a circle.

As one of the bedrocks of the local economy, it was not unexpected to see Dubal’s 2012 Net Profit increase by 6.5% to US$ 430 million on a 11.2% jump in Revenue to US$ 2.66 billion. Dubai Aluminium started operations in 1979 and has seen a sevenfold increase in annual production to over I million tonnes. Apart from being a shareholder in the Abu Dhabi-based Emal (Emirates Aluminium), the company has projects in Brazil, Cameroon and Guinea.

The Dubai Gold and Commodities Exchange has had a good start to the year  with record trades of over US$ 44 billion (1.16 million contracts) recorded in February. Despite its title, DGCX’s strongest sector remained currencies which accounted for US$ 40 billion of trades – a year on year increase of 126%. Gold and silver futures registered gains of 77% and 38%.

With its tier one ratio standing at a relatively high 13.9% at the end of 2012, Dubai Islamic Bank is taking measures to reduce this to below the 12% regulatory limit. The largest sharia-compliant financial institution in the country is holding investor meetings prior to a proposed US$ 500 million issue of a hybrid Tier 1 perpetual sukuk. If this goes ahead, it will help strengthen the bank’s tier one capital and bring it more in line with the Basel III global standards.

In regard to these standards, Moody’s has put the subordinated debt (amounting to some US$ 4 billion) of four UAE banks – ADCB, Emirates NBD, First Gulf Bank and Mashreq – with eight other Gulf banks on review for a possible future downgrade. The warning does not apply to any other aspects of the banks’ operations.

Whilst most global bourses were continuing their upward trend, the Dubai Financial Market Index edged 2.3% lower this week closing on 1882 from its Sunday opening of 1927. This drop into negative territory is largely the result of the 31.5% fall (from US$ 0.81 to US$ 0.56) in the price of Arabtec shares over the past week. This was precipitated by the company’s decision to raise a further US$ 1.8 billion that would obviously dilute the current value of shares. Despite the weekly fall, the Index has still risen by 16.0% so far in 2013.

Dubai’s CPI increased by 0.53% in January attributable to price rises in transport (1.61%), housing (1.44%) and health (0.83%) whilst certain sectors witnessed falls including clothing (1.47%), food (1.02%) and communications (0.86%). Abu Dhabi’s inflation increased only by 0.16%, even behind Sharjah (0.29%) and RAK (0.24%). Overall the UAE consumer price index rose by 0.43% to 117.41. Official figures indicate that 2012 inflation for the country was at a relatively low 0.6%. With the current property and tourist boom, it does not take a genius to see that 2013 inflation rates may well be a lot higher with 3.0%+ a top end estimate.

A sign of the times saw 366k less internet users as an increasing number of users turn to tablets and smart phones in 2012. The new boy on the bloke, du, is rapidly catching up with Etisalat as it takes 60% of the share of the two million new GSM subscribers last year. It now boasts 49% of the total market of 13.77 million. At 167.8%, the country now has one of the highest penetration rates in the world.

The World Bank has placed the UAE as the easiest place to do business in the Arab world and 22nd globally. Covering 185 countries, the Ease of Starting Business Index confirms that the country has moved up 24 places in the past year. Singapore. Hong Kong and New Zealand filled the top three places.

In the UK, HM Revenue and Customs have produced a list of their top tax criminals as part of their US$ 1.5 billion crackdown on tax evasion. Included on the list are seven Brits involved in smuggling 20 million cigarettes into the UK from Dubai and  a UK jeweller who bootlegged gold from the emirate to evade VAT of US$ 11.2 million.

The EU has fined Microsoft US$ 733 million for antitrust violations in not ensuring that up to 15 million consumers had a choice of browser – rather than defaulting to their own Internet Explorer. The US company had already been penalised US$ 2.08 billion for previous ‘skirmishes’ with this powerful authority. Other major IT companies may be next on the EU’s hit list.

It is sobering to see how the BRICs have fared recently after they were highlighted as the future economic powerhouses not so long ago. It is a sad refection of how  the world economy has been so badly hit in recent times.

Brazil was forecast to see 4.5% growth in 2012 following a 2.7% improvement a year earlier which took it past the UK to become the world’s sixth biggest economy. The economy struggled to make 0.6% growth last year (to US$ 2.2 trillion) and its was pushed back one place to be overtaken by the UK; that sums up how bad things are as the country’s debt burden begins to cause a cut back in consumer spending.

Russia’s economy grew by 3.4% last year – its lowest level since the GFC.   In 2013 a 3% expansion to the GDP would be good news because of low consumer confidence, a slowdown in investment, high inflation at 6% and a weakening global economy. At the expected level of growth in 2012, the country is actually going backwards.

India has again been rocked by another financial scandal – no surprise there. Adidas has had to take a US$ 200 million hit due to accounting irregularities at Reebok India Co. Evidently its former MD, Subhinder Singh Prem, and COO, Vishnu Bhgat, have been implicated in a fraud; both men deny the charges. On-going corruption is one of the main reasons why the Indian economy will never reach its full potential whilst red tape and flat manufacturing are lags on real expansion. When some analysts indicate that the country needs a minimum 8% growth rate just to keep up with its burgeoning population, it is of great concern that India saw only a 6.5% increase in GDP last year – down from 8.6% a year earlier. In the current year, anything over 5% would be a bonus.

The indicators from China are worrying with a marked slowdown in factory growth and the services sector. In 2012, the country grew at 7.8% – its lowest level this century – and is targeting a 7.5% expansion in GDP this year. Any official figures emanating from Beijing are best described as wobbly. Some think that its housing bubble may burst in 2013 – and that would have a detrimental effect not only in China but globally.

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