Easy Money                                                                   10 October 2019

The Sheikh Zayed Housing Programme has approved 522 housing assistance applications for Emirati citizens, totalling US$ 111 million; the initiative is in conjunction with housing institutions around the UAE. Encompassing three residential districts, the project includes 341 residences in Dubai’s Tolerance Village, as well as two others in Ajman and Ras Al Khaimah.

Last year, Gulf Sotheby’s UAE operations acquired SPF Realty; this month, an exit agreement sees the firm back in the hands of Ranjeet Chavan. He has been joined by three other founding members and plans to revive the brand and has targeted a sales volume of US$ 204 million in the first year of relaunch, focusing on inward investments, preferably at the premium end. Whilst acknowledging that real estate prices may continue heading south, Chavan is certain that the market will see a turnaround and a return to new peaks at some point.

Indeed, employment figures released by the Central Bank reiterates the importance of the real estate – and associated – sectors to the country’s economy. It is estimated that the realty and construction sectors account for 45.7% of the country’s workforce and that in Q2, these two sectors grew by 5.0% and 8.2% respectively, well up on the 4.4% and 4.9% growth returns seen in Q1.

Dubai Municipality has launched a PPP (private-public partnership), with French company Veiola, to build a high-tech biogas power generation plant. The Warsan Sewage Treatment Plant will use biogas to produce clean energy and aims to reduce CO2 emissions by 31k tonnes annually, equivalent to 7k homes that will convert 58k cu mt per day of biogas into electricity. Work on the 25-year project, which will reduce the annual operating costs of the sewage treatment plant by using the biogas, will commence in 2021.

Dubai residents will soon be able to hire a driver for their vehicles at an hourly cost of US$ 11; the requisite DTC app should be running by the end of the month. Another new service will allow users to request an electric Tesla vehicle, a family limo, a vehicle for people of determination, a dedicated limo for ladies or a standard limo; costs will be lower than local rivals, Uber and Careem.

This November’s Dubai Air Show expects to host 87k aerospace trade professionals and an 8.3% increase in exhibitors to 1.3k, with some major announcements expected. However, already troubled Rolls Royce has indicated that there is little likelihood of a US$ 21 billion engine order for seventy new A350 and A330s, (as well as restructured engine orders for the remaining A380s on order), being announced at the show in  November; the UK engine-maker cites the main reason being concerns involving the price and the performance of the planes. This comes after Emirates indicated that it would no longer accept jets that did not meet specifications given by Airbus, Boeing and their engine providers. It also has forty Boeing 787s on order and the airline is concerned about the engines’ reliability and that ongoing issues had not been resolved.

It is estimated that the air transport sector contributes 13.3% to the UAE GDP, equating to US$ 47.4 billion, and adding 800k jobs. IATA estimate that if the government continues with its current positive agenda for the sector, the market could generate an extra US$ 80 billion to the GDP and add a further 620k new jobs by 2037.

The Federal Tax Authority will introduce an excise tax on smoking devices and sweetened beverages as from 01 December 2019; it has requested that producers and importers register early to avoid late registration fines. In October 2017, the FTA introduced a tax on harmful goods, (encompassing 1.7k items), such as soft and energy drinks and tobacco – with duties of 60%, 14% and 26% respectively.

H1 saw Dubai post a 5.0% hike in non-oil foreign trade to US$ 184.2 billion (and 87% higher over the past decade). Despite a tough global trading environment, Dubai has managed to increase both exports (17.0% higher at US$ 20.7 billion) and reexports, up 3.0%, at US$ 57.2 billion. Imports rose 4.0% to US$ 106.3 billion. Trade volumes climbed 31.0% in H1 to 56 million tonnes, with exports, reexports and imports higher by 46%, 39% and 26% at 10 million, 9 million and 38 million tonnes.

It is reported that the UAE, along with Switzerland and the Marshall Islands, will soon be removed from an EU blacklist of countries deemed to be tax havens. It was only last March that the country was returned to the list, first drawn up in 2017, much to the dismay of the government. According to local officials at the time “this inclusion was made despite the UAE’s close cooperation with the EU on this issue and ongoing efforts to fulfil all the EU’s requirements”.

A US$ 436 million Etihad Railway contract has been awarded to Hitachi Rail, relating to systems and integrations work for the UAE’s national railway’s second phase. It involves design and build of the power distribution network and electronics subsystems, that runs for 800 km. This the latest major contract seen this year following March awards totalling US$ 409 million to extend the network by a further 605 km and deals of US$ 1.2 billion in July for lines stretching 216km and 94 km, connecting the network to Khalifa Port and Khalifa Industrial City, as well as to Jebel Ali Port.

To celebrate, and in keeping with, the UAE’s Year of Tolerance, the Ministry of Human Resources and Emiratisation has cancelled fines, prior to 01 August, involving 27k companies and 12k workers. Furthermore, Jebel Ali Free Zone came to the party, by waiving US$ 10 million in fines owed by businesses within the free zone.

Troubled Arabtec Holding has secured a US$ 76 million contract through its wholly owned subsidiary, Target Engineering. The Saudi Aramco deal involves the expansion and upgrade of a water disposal facility at its Qatif’s gas oil separation plant.

The bourse opened on Sunday 06 October and, having shed 93 points (2.5%) the previous three weeks, gained 49 points (1.8%) to 2810 by 10 October 2019. Emaar Properties, having declined US$ 0.12 the previous fortnight, nudged up US$ 0.01 to US$ 1.24, with Arabtec, gaining US$.0.03 the previous week, losing that gain and down US$ 0.03 to US$ 0.43. Thursday 10 October saw improved trading of 175 million shares, worth US$ 43 million, (compared to 80 million shares, at a value of US$ 24 million on 03 October).

By Thursday, 10 October, Brent, having shed US$ 6.63 (10.7%) the previous fortnight, regained some of that loss, up US$ 1.23 (2.1%) to US$ 59.10. Gold, having shed US$ 9 (0.9%) the previous week, was US$ 5 (0.4%) lower, closing on Thursday 10 October at US$ 1,501. 

US sanctions are beginning to hurt the Iranian economy, as China National Petroleum Corp pulls out of a US$ 5 billion deal to develop a portion of Iran’s massive South Pars offshore natural gas field; the 2015 agreement came after the global nuclear deal  and initially involved Total SA, CNPC and Iran’s PetroPars, with shares of 51.1%, 30.0% and 19.9% respectively. Total had earlier withdrawn from the agreement over US sanctions so now there are no international parties to support this venture. This latest episode is bad news for the sector that needs international partnership to utilise the fact that it has the world’s second-largest known reserves of natural gas and fourth-largest oil reserves.

Samsung Electronics has announced an expected 56.2% slump in Q3 profits to US$ 6.4 billion, (on the back of a 5.3% fall in revenue), driven by a dismal performance in the global chip market. With the decline in semiconductor prices, and weakened demand for its mobile devices, this will be the fourth straight quarter of profits heading south. It still has a 23% share of the global smartphone market and is ahead of Huawei, Oppo and Apple in fourth. Although the company gained some market share, because of the US trade ban on Huawei with its mid-to-low Galaxy A handsets, and increased demand for its OLED display panels, it has suffered from a trade war between Japan and South Korea, stemming from World War II disputes.

A 40-year old independent family travel agency has agreed to acquire the 555 UK outlets of the fallen Thomas Cook Group; Hays has already recruited 421 of its former staff members, with many more expected to join their ranks. This comes the same week that the government completed the country”s biggest peacetime repatriation, returning 140k stranded Thomas Cook customers from overseas locations.

The week that many parties were set to sign an agreement to formally join Facebook’s controversial Libra Association, PayPal pulled out “to continue to focus on advancing our existing mission and business priorities”. This is a severe blow to Facebook Inc’s efforts to develop a digital currency which has already faced severe government pressure and criticism. Despite the withdrawal, the payments company remains committed “to remain supportive of Libra’s aspirations and look forward to continued dialogue on ways to work together in the future”. In other words, glad to get out when it can.

Having culled 4k posts in August, 2% of its labour force, (as well as seeing a political resignation of its chief executive, John Flint), there are reports that HSBC may be laying off a further 10k; much of this will see the loss of high-paid roles.  Like other banks, it is struggling with almost negative interest rates, the tariff war and even Brexit. Interim boss Noel Quinn thinks this is an opportune moment to reduce its cost base, a large proportion of which is payroll driven. All this is despite H1 profit jumping 18.6% to US$ 8.5 billion – what would have happened if profit levels had dipped? There has been recent downsizing by the likes of Commerzbank, Deutsche Bank and Société Générale with job cuts of 4.3k (10% of the payroll), 18k and 1.6k respectively.

India has cut interest rates for the fifth time (by a total of 135 bp) this year in a continuing bid to boost its slowing economy and to ensure that inflation levels remain within the 4% target; the 25bp reduction sees the benchmark repurchase rate at 5.15%. The central bank also reduced its 2019 growth forecast to a seven year low of 6.1%, down from a previous estimate of 6.9%. The markets were not impressed, as the benchmark stock index and the rupee fell, along with ten-year bonds rising to 6.65%. There is no doubt that further cuts are needed and will be seen in Q4.

One area of many concerns for the Indian economy is the lack of liquidity to fund construction of apartment complexes, not helped by last year’s default of one of the country’s shadow banking sector’s leading lenders, Infrastructure Leasing & Financial Services. Now the loans from the bloated shadow-banking sector, that were fuelling the property boom, have all but dried up, leaving a total of US$ 63 billion of stalled residential projects across the country. The end result sees an offload of properties at discounted prices, developers unable to fund construction and stalling on repayments as well as shadow banks failing, all because cash flow has dried up.

In September, figures showed that the US unemployment rate had fallen to a 50-year low – down to 3.5% from 3.7% – with a revised168k and 136k jobs created in August and September. It is argued that 100k new jobs are needed each month to keep up with growth in the working-age population. Although there was weak data, with manufacturing activity hitting a decade low, along with a sharp slowdown in services industry growth (at a three-year low), the employment figures were a counterbalance easing immediate recession worries. The US economy has been in continuous expansion for the past eleven years and to keep this trend going, it seems that a further interest rate cut is inevitable this year, with a possibility of a second one in December.

Several former colleagues have gone to war with Mario Draghi, criticising his latest monetary-stimulus initiative and the ECB’s stance to its inflation goal. They believe (quite rightly) that “interest rates have lost their steering function and financial stability risks have increased. The longer the ultra-European Central Bank President’s low or negative interest rate policy and liquidity flooding of markets continue, the greater the potential for a setback.” They do not agree with a myriad of issues, including the financing of governments, through asset purchases, which restarted last month, arguing that with low rates, it keeps weak banks and companies afloat. Other concerns include Draghi’s mistaken diagnosis and approach to complying with the price-stability mandate and the adverse effect of negative interest rates on the entire financial sector.

One has to agree with Oswald Gruebel, once a major figure in the Swiss bank fraternity, who has criticised negative interest rates. He reasons that negative interest rates point to the fact that “money is not worth anything anymore,” and that the financial industry will continue to shrink as long as such rates continue. The world’s economy is undoubtedly suffering – and will continue to do so –  from too much Easy Money!