Counting Airplanes                                                        04 October 2019

HH Sheikh Mohammed bin Rashid Al Maktoum has vowed to create 20k new jobs for Emiratis, over the next three years, in a wide range of sectors including aviation, banking, insurance, real estate and telecommunications. He also approved a US$ 82 million budget to train 18k citizens. In future, UAE nationals will be given priority for any position in 160 professions in all government, semi-government and private sector companies. The Dubai Ruler also added that the government will pay up to 40% of payroll costs of 800 new graduates and warned that those entities that do not achieve the required Emiratisation level will have to contribute financially to the government’s efforts. Sheikh Mohammed indicated that the government is set to introduce a national economic development plan to stimulate the economy, concluding that “My message to everyone is: ‘We will not stop as, in the UAE, we don’t like to do so’”.

Another initiative this week saw Sheikh Mohammed introduce a long-term ‘cultural visa’ for innovators, artists and authors. In a bid to position Dubai as a “global art destination”, and as part of a “new cultural vision”, it will utilise 6k arts and culture companies, five creative clusters, twenty museums, and more than 550 annual cultural events. The Dubai Culture & Arts Authority, chaired by the Ruler’s daughter, Sheikha Latifa, will play an important role. It was also reported that Dubai will launch a new “international literature season” with a book fair and events, expected to attract over two million visitors.

Two of Sheikh Mohammed’s sons were involved in separate launches this week. Sheikh Hamdan, Dubai’s Crown Prince, initiated an e-commerce strategy that involved slashing direct costs – such as storage, customs duties and VAT on transportation – by 20%. The primary target is to increase the sector’s contribution to the emirate’s GDP which will see it grow to US$ 3.3 billion by 2023 and also to increase the regional and global share of e-commerce companies operating in Dubai to US$ 6.5 billion. The plan is also to establish e-logistics distribution centres and encourage international companies to have a presence in Dubai that will in turn consolidate its position as a leading global e-commerce platform location.

Meanwhile his brother, Sheikh Maktoum, Deputy Ruler of Dubai, launched the region’s first ‘Virtual Company Licence’, which is part of a bigger strategy to build a ‘Virtual Commercial City’ in the emirate. This will enable most international investors to carry on business here without the need of a resident’s visa. Only verified non-resident individuals, tax resident in countries that have implemented the Convention on Mutual Administrative Assistance in Tax Matters, will be allowed to apply.  It will permit licence holders to work digitally and may be another unique selling point for the emirate in its bid to open new horizons for business competitiveness and growth in Dubai This is yet another innovative stride in the race to make Dubai one of, if not the best, business hubs in the world. To date, the emirate has always been one of the more tech-savvy international environments, with advanced and sophisticated infrastructures.

Every cloud has a silver lining and it would appear that the troubles in Hong Kong could have a positive knock-on effect here in Dubai. It is reported that there is an increasing demand for new residential passports, as protests continue to cast a cloud over the territory’s future. Consequently, according to various immigration agencies, there has been a marked increase in interest from Hong Kong residents in investor visa schemes. Costs of such visas vary wildly ranging from US$ 100k, in Antigua & Barbuda, to US$ 2.2 million in real estate investment for Cyprus. It is inevitable that Dubai would benefit from some of these residents deciding to move here.

By the end of 2019, Savills estimates that Dubai will become the world’s biggest market for “branded residences”, taking the number one position from New York which slips to second, followed by Miami.  On a global scale, there are at least 430 branded schemes comprising 65k units; 2019 has seen 9k (and 60 projects) been added to the portfolio, with a further 70 schemes expected to go live next year. Hotel branded schemes, led by Marriot International, whose brands include Ritz Carlton, St Regis and W, account for 86% of the completed projects and 96% of the pipeline supply. Globally, Accor now has the same size pipeline as Marriott and on a regional scale, Emaar Hospitality Group is growing fast under its Address and Vida umbrella.

UBS has indicated that, although Dubai property prices have yet to hit their bottom, it was a good time to buy at a “fair value”, adding that “affordability has improved even though incomes have declined amid slower economic growth”. Stating what everybody seems to know that the market is over-supplied, (with property prices down 35% from their mid-2014 levels), it pointed to the fact that Dubai had the highest population growth of all the locations in their ‘Global Real Estate Bubble Index’ and that “easier visa requirements and next year’s Expo should support the market.”

Despite all the problems, most of which are out of the airline’s control, Flydubai reported that H1 loss had decreased 38% year on year to US$ 54 million, driven by a shrinking fuel bill (17.3% lower) and the recent introduction of cost efficiencies. However, external problems including the grounding of the Boeing 737 Max (which meant the use of older, less efficient 737-800s), and regional geo-political problems, continue to dog the carrier. One other problem is that because of the new jets still grounded, and lease contracts on other planes expiring, the fleet will decline to 2014 levels; in H1, five jets were returned to lessors and a probable four more in H2. Because of these problems, capacity fell by 14.9% and passenger numbers dipped 5.0% to five million.

It is hard to disagree with the CEO of Majid Al Futtaim Holding when he said  “consumer confidence has been impacted negatively in the past three to four years and I think currently the regional instability, the volatility globally, the trade wars and so on are taking a toll on consumer sentiment.” Alain Bejjani is hoping that, over the next twelve months, negative consumer confidence will improve, aided by the fact that 50% of the regional population is under 25 with a comparatively high internet penetration rate. Not surprisingly, he estimates that domestic demand plays a more important role than tourist trade, by around 85:15, for MAF operations in fifteen countries.

Dubai Aerospace Enterprise has signed a US$ 300 million, seven-year unsecured loan – arranged by Abu Dhabi Commercial Bank, with a group of six banks – to repay secured debt and support the future financing needs of the company.  This brings the total liquidity it has raised since early 2018 to US$ 3.5 billion and will help the Dubai-based aircraft leasing company with its aggressive growth agenda.

One of Sheikh Saeed bin Ahmed Al Maktoum’s companies, SEED Group, has partnered with a leading Asian blockchain provider to bring its Aergo platform to the region. Blocko, a Samsung-backed company, has already established a presence in South Korea, the UK and Hong Kong and built 38 full-scale enterprise blockchain solutions for companies like Samsung, Cisco and Hyundai Motors. It is now hoping to replicate this success in the Gulf and particularly in the UAE where the government’s Emirates Blockchain Strategy 2021 aims to transform 50% of government transactions into the blockchain platform by 2021; if this happens, estimated savings will be in the region of US$ 3.0 billion.

The UAE’s Financial and Economic Committee – chaired by Sheikh Hamdan bin Rashid Al Maktoum – approved a 2.0% hike in the 2020 federal budget to US$ 16.4 billion, and the highest on record. The three biggest beneficiaries will be social development, education and the health sectors, receiving 42.3%, 17.0% and 7.3% of the total.

There has been a US$ 0.010 fall in the October price for Special 95 to US$ 0.578, whilst diesel nudged US$ 0.008 higher to US$ 0.657 per litre.

An RTA public auction of 100 car number plates raised US$ 7 million this week, with ‘T 50’ being sold for US$ 664k and ‘L 21’ for US$ 637k. Twenty of the plates auctioned, with codes starting from ‘H’ to ‘Z’, displayed the Expo logo for the first time.

As part of Emaar’s $2 billion bond issuance programme, Nasdaq Dubai listed the developer’s US$ 500 10-year million, 3.875% sukuk on Monday, with the money being used for both regional and international expansion plans. This is the third time that Emaar has tapped this market following a US$ 750 million 2014 listing by Emaar Malls and the same amount by Emaar Properties in 2016.

The bourse opened on Sunday 29 September and, having shed 93 points (2.5%) the previous three weeks, lost a further 37 points (1.3%) to 2761 by 03 October 2019. Emaar Properties, having shed US$ 0.12 the previous fortnight, dipped US$ 0.01 to US$ 1.23, with Arabtec, gaining US$.0.03 the previous week, coming in US$ 0.01 lower at US$ 0.46. Thursday 03 October witnessed trading at still dire levels of only 80 million shares, worth US$ 24 million, (compared to 78 million shares, at a value of US$ 45 million on 26 September). For the month of September, Emaar, having opened the month on US$ 1.35, closed US$ 0.09 lower on US$ 1.26, with Arabtec US$ 0.04 higher from its opening of US$ 0.44 to US$ 0.48.

By Thursday, 03 October, Brent, having shed US$ 1.76 (2.6%) the previous week, took a major hit, slumping US$ 4.87 (7.8%) to US$ 57.87. Gold, having gained US$ 8 (0.8%) the previous week, moved in the other direction losing US$ 9 (0.9%), closing on Thursday 03 October at US$ 1,506. 

The perilous sate of the global construction sector can be seen from this week’s announcement by the region’s largest, and the 17^th biggest globally, international contracting group. Athens-based Consolidated Contractors Company, with 70% of its work concentrated in the Gulf, is planning to send 2.5k of its core staff on extended leave until the market for new projects picks up; such staff total 13k that form part of the 145k employed by the Group. The family-owned company considered, that with next year’s revenue falling 40.5% to US$ 2.5 billion, a downsizing of staff was the only option available.

Just when it seemed that it had gotten over its 737 Max problems, Boeing has now been ordered by US aviation regulators to carry out inspections of Boeing 737 NG aircraft, after cracks were found on some planes. No numbers were readily available, but the manufacturer confirmed that the affected 737 NG operators have been contacted and that a recommended inspection plan for certain airplanes will soon be implemented.

As intimated in an August blog, Forever 21 has finally opted for bankruptcy protection, through a Chapter 11 filing in Delaware; its consolidated total liabilities could be as high as US$ 10 billion. The US fashion merchant, which plans to close most of its Asian and European locations, had already received funding of US$ 350 million, almost 80% of which was from JP Morgan and the balance from TPG Sixth Street Partners.

Over the Pond, another UK retailer in trouble is Ted Baker, whose share value slumped 35% on news that it had posted a H1 US$ 28 million loss, compared to a US$ 35 million profit over the same period in 2018; the main drivers, for falls in both retail and online revenue, were fierce competition, distressed discounting and unseasonable weather. Much of the same is expected for H2.

The European Court of Justice has ruled in favour of 500k indebted Polish homeowners, many of whom have gone bankrupt because they took out Swiss franc mortgages – at a much lower interest rate – some years ago, only to see the currency more than double. Now the court has ruled that they can ask Poland’s courts to let them convert their loans into the Polish zloty. With an estimated one in five Polish mortgages held in Swiss francs, this is a major victory for those homeowners (known as “Frankowitzes”), but a stunning blow for Polish banks, who will now face losses running into tens of billions of zloty. Other nationals, including Austrians, Croats and Hungarians, fell into the same trap.

When the plan was to make the country a “top 10” weapons exporter, it is strange to see that Australia has become the second largest global arms importer, behind Saudi Arabia. The Stockholm International Peace Research Institute also noted that the country’s position as a military exporter has dropped seven places to just 25^th in the world. (In contrast, the UAE ranks eighth (for imports) and seventeenth as an exporter. Despite last year’s introduction of a new loan scheme for exporting defence companies, it is unlikely that Australia will reach the top ten in the exporters’ league in the near future.

There was no surprise to see the RBA cut rates to below 1.0% – its third one in four months on the back of the Australian unemployment rate rising from 4.9%, at the beginning of the year, to its current level of 5.3%, along with low wage growth. The RBA also took notice that if the currency stayed at a relatively high level, exports may have become more uncompetitive on a global scale. Not all the rate cut will be passed on to customers, with the banks, having held back on about 20% of the 50 basis points from the June and July rate cuts, expected to hold back an even bigger percentage this time.

It seems that the four major Australian banks – ANZ, CBA, NAB and Westpac – continue to defy Treasurer Josh Frydenberg by not passing on this week’s full 0.25% rate cut on their home mortgages, with all of them holding back between 40%-50% of the 25 bp reduction; the “robbing” banks claim that they have to balance their own business performance with the country’s needs to stimulate the economy. It is estimated that because of the cut, the mortgagee, (depending on which of the four banks is used), has gained between US$ 258-US$ 298, whilst the bank has “gained” (and customer has “lost”) between US$ 197-US$ 216.

At the same time, NAB has more than doubled the cost (to US$ 1.4 billion) of compensating customers for a decade of misconduct, mainly for fees paid to self-employed wealth advisors between 2008-2019. More may be added to this figure because “until all customer payments have been completed, the final cost of such remediation matters remains uncertain”.

Meanwhile, CommInsure, CBA’s insurance arm, is facing 87 charges for “hawking”, by trying to sell insurance products through unsolicited phone calls, via its Simple Life brand. This is but the first major financial institution to be charged for insurance-related offences, since the banking royal commission.

S&P Global Ratings has slashed India’s 2020 growth projection by 0.8% to 6.3%, slightly lower than the Asian Development Bank’s amended forecast of 6.5%. This comes after Q2 growth was a miserly 5.0%, brought about by a slump in private consumption to just 3.0% which over recent years had been the engine of growth. Evidently, the recent tax breaks will have minimal impact on growth, having cost 0.7% of the GDP, unless it boosts business confidence.

There could be fireworks in India next week as Donald Trump visits after he has tweeted on several occasions that India’s tariffs are “unacceptable,” and has described the country as the “king” of tariffs. Indeed his concerns are mirrored by the WTO who stated that India’s tariff rates on other members of the organisation remain “the highest of any major economy.” It has estimated that India’s average tariff rate was a high 17.1% in 2018, compared to the rates of between 3.4% – 5.2%  found in the US, Japan and the EU; only one country was higher – Egypt at 19.1%. These figures are expected to move higher, as tariffs in 2019 have become more prevalent as a lever of global trade policy.

A ruling by the World Trade Organisation seems to have given the US carte blanche to impose tariffs of US$ 7.5 billion on EU imports; the US had claimed US$ 11.0 billion for EU illegal aid to Airbus. Goods affected will include a wide range from aircraft parts, Scotch whiskey and even shellfish and is the result of a fifteen-year tussle, involving supposedly illegal subsidies for the world’s two biggest plane makers, Airbus and Boeing. This battle has been won by Boeing but there is more to come when the WTO rule next year on whether the American plane maker has received illegal subsidies from US federal and state governments. Then we will see if both the US and EU are subsidising and Counting Airplanes.