Throwing it All Away
Because of the slowing construction and realty sectors, Moody’s expects that bank loan losses will inevitably grow, based on the fact that lending to real estate entities has increased to 20% of their total lending book (compared to 16% in 2015) but economic conditions have deteriorated. Because of falling demand and increased supply, Reidin have come out with some frightening data that Dubai prices are 23% lower since 2018. With the influx of lower paid workers entering Dubai, and employers reluctant to boost staff numbers, there are fears that the bottom of the market has still not been reached. However, it did estimate that Q4 annualised sales were 8.4%, up from the 7.3% recorded in Q3 – this comes as S&P forecasts a 5%-10% decline this year, due to oversupply and tepid demand; this follows a 25%-33% decline in the Dubai property sector since 2014.
However, a lot could (and will) change when the 25%-30% home buyer deposit is relaxed, and energy prices hover around US$ 70. More tinkering, such as cutting the 4% transfer fee and facilitating visa requirements, will further help the cause.
Emaar, the world’s largest property company outside China, will become one of the first in the world to offer its customers (and partners) referral and loyalty tokens that will give them access to an existing US$ 10 billion operational ecosystem. The plans to leverage blockchain technology, based on the Ethereum blockchain and the ERC20 token framework, could possibly see billions of internet users gain access to the Emaar experience. Furthermore, an initial coin offering in Europe (ICO) could be on the cards within a year.
Flydubai has had to cancel fifteen daily flights following the grounding of its thirteen Boeing 737 Max aircraft, following the global decision to take the model out of operation, as a precautionary safety measure. This comes after 157 passengers and crew were killed on Sunday when an Ethiopian Airlines Boeing 737 Max 8 aircraft crashed on its way to Kenya. The Dubai carrier currently has 237 Boeing 737 MAX aircraft on order, with 46 Next-Generation Boeing 737-800 in operation. (Because of new evidence, Boeing later grounded its entire 371-global fleet of 737 Max aircraft, following the US Federal Aviation Administration’s much delayed closure decision because new evidence, “made it clear to all parties that the track of the Ethiopian Airlines [flight] was very close and behaved very similarly to the Lion Air flight”).
Package A of the Etihad Rail second stage tender has been awarded to a JV between China State Construction Engineering Corporation and South Korea’s SK Engineering and Construction. The US$ 410 million contract includes all design and build, civil and track works for 139 km of the track. Stage two, when complete, will run for a total of 605 km from Ghuweifat to Fujairah; the total length of the network will be over 1.2k km, linking all the country’s import/export points.
Sheikh Hamdan bin Mohammed Al Maktoum has approved a new strategy to create economic and creative free zones in universities. The aim of the exercise is to support students with education and research so that they can graduate not as students, but successful entrepreneurial employers. This is part of the 50-Year Charter to ensure that Dubai will become the best city in the world.
The UAE is rightly not happy with the EU for adding the country to a ten-country tax haven blacklist set up in 2017 to battle tax evasion. It was included in the first listing but was later removed. According to UAE officials “this inclusion was made despite the UAE’s close cooperation with the EU on this issue and ongoing efforts to fulfill all the EU’s requirements.” As can be seen from their past actions, the EU does not always follow its own rules and is not the easiest body to deal with.
The emirate’s 2018 external non-oil trade neared US$ $353 billion, despite a global growth slowdown, as direct trade reached US$ 206.3 billion and trade through free zones grew 23.0% to US$ 145.0 billion. Of that total, re-exports were 12.0% higher at US$ 109.5 billion, with imports and exports totalling US$ 209.8 billion and US$ 34.6 billion respectively. China still remains Dubai’s leading trading partner, followed by India and the US – with total trade values of US$ 37.8 billion, US$ 31.5 billion and US$ 22.0 billion. (When it comes to FDI, the US is Dubai’s foremost foreign investor with 121 deals totalling US$ 3.9 billion).
Meanwhile Moody’s indicated a 2.8% country forecast for 2019 and estimates that growth was 2.6% in 2018. The ratings agency predicted that non-oil growth would be 0.5% higher at 2.9% but that headline growth would be “constrained” because of previously agreed OPEC cuts.
The February Emirates NBD Dubai Economy Tracker Index sent out mixed signals, with employment in Dubai’s non-oil private sector falling at the fastest rate since January 2010, whilst business conditions maintained a seven-month high at 55.8. Although there has been growth in the volume of output and new work, this has been at the expense of continued price discounting, resulting in on-going lower margins; this has seen a tenth successive month of firms cutting their selling prices, even though input costs have increased over the same period. One of the obvious casualties has been employment, with no increased hiring and job growth in the private sector.
Probably because of the slowing economy, Q4 expat remittances were 7.7% lower at US$ 10.9 billion; 76.2% of the transfers were through money exchanges and the balances through the banking system. The top five destinations, accounting for 62.2% of the total, were India (34.2%), Pakistan (9.4%), Philippines (7.2%), USA (5.9%) and Egypt (5.5%).
Announcing that it will close up to 50% of its branches in 2019, Mashreq Bank, controlled by the Al Ghurair family, will spend US$ 136 million over the next five years replacing physical infrastructure with digital ‘branches’. It seems a logical move particularly when 97% of the bank’s transactions are on-line. Its Chief Executive, Abdul Aziz Al Ghurair, an early pioneer of digitisation, has warned that “the industry is changing, and the banks will have to come out of their comfort zone”.
Network International processed almost 680 million transactions whilst handling US$36 billion in transaction volume. The payments solutions provider, 51% owned by Emirates NBD, is active in over fifty markets in both the Middle East and Africa. Currently, it sees Saudi Arabia – where previously the market was restricted to locals – as a great potential and is ramping up its operations there. The company may well have a 25% IPO on the London market by the end of the year.
DP World posted a 10.2% hike in 2018 profit to US$ 354 million on the back of annual revenue climbing 19.1% to US$ 1.53 billion, driven by acquisitions such as Drydocks World and consolidation of its portfolio. The Dubai company saw the number of TEUs (20’ equivalent units) increase by 1.9% to 71.4 million. The world’s fourth-largest port operator’s capex reached US$ 908 million, lower than the expected US$ 1.4 billion, in 2018, as spending was contained because of the uncertain global trade environment; however, it has spent US$ 2.5 billion on new acquisitions.
Dubai Refreshment Company posted a 26% decline in revenue to US$ 176 million and a 54.0% slump in 2018 profit to US$ 12 million, some of which is attributable to the introduction of 5% VAT which impacted on 60% of the company’s net local revenue and higher prices. The situation was exacerbated because the tax was only applied to carbonated drinks and not to other sugary non-carbonated drinks.
Following the sale of its 10% stake (valued at US$ 164 million) in Aramex by Australia Post, Aramex’s shares jumped 9.1% on the DFM; this was its biggest increase since December 2014, as it opened up the market for overseas buyers. The delivery company is only allowed to have foreign ownership of 49% and its stock was almost at this regulatory limit.
The bourse opened for trading on Sunday 10 March, on 2595, and having shed 41 points (1.6%) the previous week ended 21 points (0.8%) lower by Thursday, 14 March, on 2574. Emaar Properties, having shed US$ 0.23 the previous fortnight lost a further US$ 0.04 to US$ 1.25, with Arabtec flat at US$ 0.58. Thursday 14 March saw increased trades of 342 million shares, valued at US$ 133 million, compared to a week earlier of 103 million shares at US$ 15 million.
By Thursday, 14 March, Brent traded US$ 1.20 (1.8%) higher to close on 67.23; gold also clawed back some of the previous week’s US$ 29 fall (2.2%) to end US$ 9 (0.8%) up at US$ 1,295.
There is no doubt that OPEC’s market presence will be hit by a double whammy – falling production in two of its members (Iran and Venezuela) and increased shale activity in the USA. It is ironic that what was the cartel’s biggest customer is now the world’s biggest crude producer. The situation will not improve if one believes that the US could be producing 25 million bpd by 2030.
Volkswagen is to go ahead with payroll cuts totalling at least 7k this year, with the aims of achieving a US$ 6.6 billion profit by 2023 and shifting to electric and self-driving cars. The VW brand, which accounts for about 50% of the group’s total deliveries, employs 185k and have been actively reining in excessive expenses which have resulted in the carmaker’s margins being much lower than those of its competitors; last year, its return on sales fell to 3.8% from 4.2%. Over the past three years, the company has made US$ 2.7 billion in savings and has seen a reduction of more than 6.3k positions.
LK Bennett, the womenswear chain, which trades from 200 outlets across the UK and in overseas markets, has called in administrators after a failed attempt to partially sell the business to fashion new investment. Five stores have already closed and a number of staff have been laid off. This comes just eighteen months since the founder, Linda Bennett, regained full control of the 29-year old business after selling out in 2008.
With mounting debts of over US$ 850 million, it seems highly likely that Interserve will soon go into liquidation. Its directors were planning a debt swap for new shares but with the major 27% shareholder, US hedge fund Coltrane, against any such deal, the plan quickly lost traction. The private provider of public services, which employs 45k, will most likely sell the entire company to the current lenders for a nominal amount. This seems to be Carillion all over again.
Despite an annual 4.0% growth, air cargo contracted in January, posting its worst performance in the past three years – the eleventh straight month when growth in capacity has outstripped demand. The main driver behind the disappointing results was the trade tension caused by tariffs and other protectionist measures. Only two of the six global regions bucked the trend with growth seen in both North America (with a 3.3% increase in demand) and Africa. ME freight volumes contracted 4.5% in January, whilst capacity was 4.1% higher.
With a 2.4% contraction in Q4, following a 1.6% decline the previous quarter, Turkey has gone into a technical recession, driven by a trade war with the US which has sent the lire nosediving (falling 30% last year). The trade impasse has resulted from Turkey’s plan to buy Russian missile defence systems and the US not happy with the way that Turkey is fighting the Islamic State Syria and how the Erdogan government has dealt with plotters of a failed 2016 coup which attempted to topple the President. Although the economy did grow 2.6% in 2018, this was a lot lower than the previous year’s 7.4%. Analysts see little chance of any major improvement in 2019.
Germany’s economy continues to struggle with January industrial production down 0.8% on the previous month and 3.3% over the year. The non-adjusted trade surplus, at US$ 16.4 billion, was lower than market expectations, whilst the US$ 20.7 billion current account surplus was 20.8% lower than the December return. Imports grew by 1.5%, after a 0.7% rise in December, whilst exports remained flat
President Trump’s latest budget points to a 3.2% hike in GDP this year, with 3% plus growth over the next five years. December figures show that business inventories climbed 0.6%, whilst the same for wholesale and retail inventories were 1.1% and 0.9% higher. There were falls in the three main sales sector, retail, wholesale and manufacturing – down by 1.8%, 1.0% and 0.2% respectively. The visible trade deficit climbed 20.1% to US$ 17.1 billion, compared to a year earlier.
The state of the UK economy surprised many by expanding at a faster-than-expected rate in January, driven by upward movements in the manufacturing, services and construction sectors – up by 0.8%, 0.3% and 2.8%. Month on month GDP growth was at 0.5% (following December’s disappointing 0.4% decline) and up 0.2% quarter on quarter.
However, there is no doubt that the economy would be in a much better shape if politicians had managed to arrange a Brexit arrangement – one way or the other. The shenanigans at Westminster are an embarrassment to both the country and democracy. In the absence of any political leadership and statesmanship, it seems that the country is in danger of Throwing It All Away.