Exercise Caution In Your Business Affairs, For The World Is Full Of Trickery – Desiderata 02 April 2020

Damac Properties posted a US$ 10 million loss last year – a major slump from preceding years’ profits of US$ 314 million and US$ 752 million in 2018 and 2017; this fall, and a 28.3% drop in revenue to US$ 1.2 billion, was down to softer market conditions throughout the industry, both in the emirate and globally. The developer also took impairment hits on development properties and trade receivables of US$ 34 million and US$ 11 million respectively. By the end of the year, it had delivered 14.6% more units, year on year, at 4.7k, although booked sales dipped 17.4% to US$ 845 million.

Following Emaar’s decision to close three more of its hotels, the Meydan Hotel and Bab Al Shams Desert Resort and Spa have also closed their doors until 15 April, as a result of the coronavirus restrictions.

Another casualty of the pandemic was the inaugural Emirates Loto draw having to be rescheduled to 18 April from its original first draw on 28 March. The draw will have a US$ 9.5 million weekly jackpot and to enter contestants need to buy a collectable for US$ 10 – either from a retail outlet or online – and then register six numbers from 1 to 49. If four numbers “come up”, the winner will receive US$ 82 and five numbers up to US$ 2.7 million.

There is no doubt that Emirates will receive Dubai government support to help the world’s largest long-haul airline deal with the fall-out from the ongoing Covid-19. This week,  Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai, confirmed, “As a shareholder of Emirates airlines, the Government of Dubai will inject equity into the company, considering its strategic importance to the Dubai and UAE economy and the airline’s key role in positioning Dubai as a major international aviation hub.” The airline had already suspended all passenger flights and temporarily reduced employee wages by 25 to 50% as part of efforts to preserve cash. On Thursday, the airline confirmed that it had received approval from the Civil Aviation Authority to resume ‘special’ flights to selected destinations.

Every cloud has a silver lining and it is estimated that air cargo has witnessed a 20% surge, driven by the increased demand for essential goods, such as food and medical supplies, as a direct consequence of Covid-19. For example, Emirates SkyCargo, in the first eleven weeks of 2020, transported more than 225k tonnes, of which 55k tonnes were food items and more than 13k tonnes were pharmaceutical cargo. The airline has decided to operate all of its cargo operations from Dubai International Airport after temporarily suspending operations at Al Maktoum airport from Wednesday.

The Ministry of Energy and Industry announced month on month falling fuel prices for the month of April. Having seen March fuel prices fall – and with oil prices tanking due to the coronavirus – it was no surprise that April will see Special 95 retailing 11.8% lower at US$ 0.490 per litre, with diesel down 8.4% to US$ 0.561.

This week, Abdulhamid Saeed has replaced Mubarak Rashid Al Mansouri, who had been in charge since 2014, as the new UAE Central Bank governor. The move comes at a time when Covid-19 is gaining local traction and a week after the bank had announced a US$ 27 billion stimulus package to boost the local economy.

Earlier in the week, Dubai Free Zones Council launched an economic stimulus package, in tandem with the emirate’s government, to overcome the current Covid-19, in addition to the previous week’s package of reducing business costs and fees. The new measures cover a raft of initiatives, including the cancelling of fines for both companies and individuals, postponing rent payments for six months, refunding security deposits/guarantees and facilitating instalments for payments. Furthermore, free movement of labour between companies operating within the free zones will be allowed. The many Dubai Free Zones contribute about a third of the emirate’s GDP, with their 45k companies providing 389k jobs.

There are reports that Abu Dhabi Commercial Bank could be one of the most exposed financial institutions, with more than US$ 1 billion of exposure, relating to troubled hospital operator NMC Health, with other banks – including HSBC, JPMorgan Chase and Standard Chartered -also having  large outstanding loans. The latest known debt is estimated to be US$ 6.6 billion, more than triple its June 2019 balance of US$ 2.1 billion, but even this may not be the final figure as investigations have already found evidence of suspected fraud. This week, the group is planning a potential US$ 300 million sale of its NMC Trading unit which distributes products for Nestle, Pfizer and Unilever, as well as marketing foreign brands of medical equipment and office supplies in the country.

In a move to improve its current liquidity problem, exacerbated by the closure of its theme parks, DXB Entertainments has agreed to defer a “significant proportion” of the interest on a US$ 1.14 billion syndicated loan over the next fifteen months. The operator of Dubai Parks and Resorts will obviously be materially impacted by Covid-19, as its operations at Legoland, Motiongate and Bollywood Parks remain closed. Its latest contingency plans, which will result in further cost savings this year, comes on top of a 2019 cost efficiency and optimisation plan which delivered a 24% cut in expenses of US$ 47 million.

It is reported that Limitless World LLC is in the throes of its third debt restructure, as it is “unable to pay accrued profit at the end of March.” The troubled developer has written to its creditors as a “first step toward finding a solution for all stakeholders,” as it still tries to get out of a decade-long financial mire emanating from the 209 GFC. Its earlier deal in 2016 was to repay a US$ 1.2 billion Islamic loan and the current one involves rescheduling loans of US$ 600 million and obtaining further bank facilities of US$ 129 million.

The bourse opened on Sunday 29 March, and 1058 points (37.1%) lower over the previous five weeks, posted yet another weekly loss, down 86 points (4.8 points) to close on 1723 by 02 April. Emaar Properties, having regained US$ 0.02 the previous week, was US$ 0.04 lower at US$ 0.59, whilst Arabtec, US$ 0.10 down over the past fortnight was flat at US$ 0.13. Thursday 02 April saw the market trading lower at 150 million shares, worth US$ 54 million, (compared to 265 million shares, at a value of US$ 95 million, on 26 March).  Over the month of March, the bourse shed 819 points (31.6%) to close on 1,771 from its month opening of 2,590. Emaar started the month at US$ 0.95 and shed US$ 0.36 to close at the end of March on US$ 0.59, with Arabtec losing US$ 0.07 to close on 31 March at US$ 0.13.

By Thursday, 26 March, Brent, having slumped by US$ 22.54 (44.2%) the previous fortnight, regained some ground, US$ 2.47 (9.4%) higher, to close at US$ 28.81. Gold, down US$ 211 (12.5%) the previous week, shed a further US$ 25 (1.5%) on the week to close on Thursday 02 April, at US$ 1,635. For the month of March, Brent had retreated from its month opening of US$ 50.50 to close 47.8% lower on the month to US$ 26.35, whilst gold nudged slightly higher (0.6%) from its 01 March opening of US$ 1,586 to close on US$ 1,596.

There is every chance that oil prices will belatedly head north, with US President Donald Trump expecting Russia and Saudi Arabia to announce supply cuts “as high as” 15 million barrels after speaking “to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia”.

In April, the UK Treasury plans to raise US$ 55 billion in gilts – a record issuance of UK government bonds – almost triple the anticipated figure when compared with the forecast US$ 20 billion at the time of the Budget earlier in March. The biggest portion of the funds will head for the Coronavirus Job Retention Scheme, at a time when the government would have been collecting various taxes that have now been delayed. The government’s borrowing is currently on the same level as it was following the GFC.  At the levels of current spend, UK budget deficit could be as high as US$ 245 billion which equates to 10% of the country’s GDP.

Kuwait-based Alshaya has seen its revenue stream almost dry up by 95% over the past two months with its previously total of 4.5k stores, cafes and restaurants, now operating with only about 200 outlets open. With 75% of its 60k workforce based in the region, the company has had to make drastic changes to its normal opus operandi and has prepared a “detailed action plan” which comprises eliminating unnecessary expenditures, renegotiating all contracts, stopping recruitment and working with brands to reduce orders in the short-term; this will also include reducing “people costs”.

Huawei posted a 19.1% surge in 2019 revenue to US$ 123.0 billion, resulting in a 5.6% rise in profit to US$ 9.0 billion but is expecting a tough 2020 on the back of the coronavirus outbreak and the continuing restrictions preventing US companies from trading with it. Almost 55% of revenue came from its consumer business (US$ 66.9 billion), with a further US$ 42.5 billion and US$ 12.8 billion from its carrier and enterprise businesses respectively. Last year, it invested 15.3% of its revenue on R&D. The company confirmed that its production in China had generally been restored and there will be no problem in their short-term supply. Another problem facing Huawei is that, based on security concerns, the US has been pushing its allies – including UK, Australia, Canada and Norway – to exclude the Chinese company from 5G network deals; despite this, the company had managed to secure 77 5G contacts globally by the end of last year.

On Friday, India cut its lending rate by 75 bp to 4.4% – its lowest lending rate in a decade – as banks try to boost a flagging economy by pushing liquidity into the hands of businesses and individuals. It comes at a time when the Indian rupee continues to hover around its lowest ever level at between US$ .0.75 to 0.76. The country has now fired its two major salvos in the war against Covid-19, with the RBI cutting the interest rate on the monetary side whilst the Modi government has introduced a US$ 22 billion stimulus package. The markets spoke with a thumbs down by dropping on Friday by 549 points.

Reflecting the devastating impact that Covid-19 has already had on the US economy is the stark reality that the number of Americans applying for unemployment benefits surged for a second week to ten million, as 6.7 million joined the 3.3 million who filed in the previous week. There is every likelihood that the country’s unemployment rate, (now at 2.1% from 1.2%), could soon top 20%, with this figure equating to the total of the first six and half months of the 2007-2009 post GFC recession. Jobs lost in the past fortnight negates all the job additions made by the economy over the past five years. The data also shows that the crisis has gone far beyond the initial hit, borne mainly by the hospitality and travel sectors, and is fast spreading into other areas such as health, factories, retail and construction.

As many of the Global Wealth Funds are “cashing in” some of their invested funds to pay for their respective country’s fights against Coronavirus, asset managers will undoubtedly suffer by losing out on substantial former pieces of business. The industry’s global association, the Institute of International Finance, estimates that the returning funds will top US$ 300 billion this year – and this could only be the start. This latest setback comes on the back of lower energy prices and a slowdown in global trade which were making such a negative impact even before the onset of the current pandemic. It is thought that the ME GWFs could be worth more than US$ 2 trillion, some of which have been invested in global stock markets and other investment platforms such as both government and corporate bonds.

With global air travel demand set to shrink by 38% this year, and to lose US$ 250 billion in revenue, IATA has pressed governments to support the aviation sector, otherwise the industry will face irrecoverable damage. (Last week, the US Senate passed a US$ 58 billion aid package for its airline industry, which included cash for paying pilot, crew and staff salaries). The global body emphasised its integral position that the industry will play in facilitating the recovery of the global economy. Most airlines are currently paying out more in refunds than in new booking revenues which has resulted in a rapid cash flow deterioration for many of the global players. If no action is forthcoming, it is thought that most carriers will fold by the end of May, even those thirty or so, with a current relatively strong balance sheet.

A technique, established by Edward Altman sixty years ago, known as the Z-score, looks at five variables – liquidity, solvency, profitability, leverage and recent performance – and has an accuracy rate of almost 90% when looking at potentially future bankruptcies; this does not take into account any government assistance or other sources of finance. Scores of 1.8 or below indicate a risk of bankruptcy and scores over 3 suggest sound footing. In the former camp are mainly Asian carriers but also the likes of Norwegian Air Shuttle, Air France-KLM, American Airlines. and SkyWest Inc. Aircraft manufacturers are not immune, with Boeing Co. requesting billions of dollars in state support and Airbus extending credit lines and cancelling its dividend.

As a direct consequence of the slump in air travel, John Menzies has announced that it has had to shed 17.5k jobs, (more than half of its workforce), from its payroll. Over the previous two weeks, the Edinburgh-based company, which provides ground handling and cargo handling services at 200 airports, has seen flights fall by more than 60% and cargo volumes by about 20%.

Coronavirus is threatening to close the Italian restaurant chain Carluccio’s that could see 2.2k joining the ever-growing dole queues. Administrator FRP said it was working with Carluccio’s to “consider all options” for the restaurant’s future. (It appears that its ME operations will continue as the restaurant chain was bought by Dubai’s Landmark Group in 2010). With a backdrop of government restrictions closing all cafes, pubs, clubs and restaurants, the hospitality industry is facing thousands of closures.

Blaming Coronavirus for its inability to raise further funding, another high-tech company has hit the ropes – this time OneWeb has filed for bankruptcy protection in the US. The three-year old high-profile UK satellite start-up had raised US$ 3.2 billion to implement its project to build a global network to deliver broadband and had recently launched its 74^th satellite in a constellation planned to have at least 648 spacecraft.

Friday was a bad day for many of the global markets, despite a day earlier G20 leaders agreeing to throw in US$ 8.2 trillion to boost the global economy, and a day after the US injected a US$ 2 trillion economic rescue plan, still to be approved by Congress. In line with other markets that had seen gains the previous three days, Australia got the ball rolling, with the ASX 200 dropping 5.1% to 4,874. With consumer confidence slumping and more than three million Americans filing for unemployment benefits, the Dow Jones slid 4.0% lower, the S&P 500 fell more than 3.3% and the Nasdaq dropped 3.8%. Across the water, London’s FTSE 100 tumbled more than 5%, while main indices in France and Germany also fell.

The IMF has confirmed that Europe has gone into deep recession as major economic sectors close for business. The world agency noted that the nonessential services, already closed by governments, account for some 33% of the continent’s output and that for each month the closure continues equates to a 3.0% fall in annual GDP. It concluded that “a deep European recession this year is a foregone conclusion”. A week ago, the ECB introduced a US$ 870 billion stimulus package, including a temporary asset purchase to address the downturn across the eurozone. However, the EC bureaucrats realise that this is not nearly enough to be of any use and it will have to put a lot more money in the kitty in its fight to help the bloc recover from this mega economic catastrophe.

The OECD has endorsed the Australian government’s proposal that the global economy should go into “economic hibernation” during the Coronavirus pandemic but disagreed with Prime Minister Scott Morrison’s opinion that economies will “re-emerge very, very quickly” once the virus dissipates. The world body not only criticised the lack of coordination between countries but also amended its early March forecast that annual global growth would halve to just over 1% – now it expects growth to fall by over 5%. It is obvious that, in the absence of rigid international coordination, the demise of the pandemic will be delayed (and the longer this nightmare goes on the more people die) and that the economic recovery will take longer; the state of the global economy will also be in worse condition. It is thought that for every month Covid-19 has not been contained, there will be a 2% reduction in GDP growth and that 33% of households would fall into poverty if they were to lose only three months of income. On top of that, there is always the real potential of widespread social unrest and the breakdown of civil order on a global scale.

By the end of the week, global bourses and economies, including that of Australia, were still reeling. On Thursday, the ASX was 2.3% lower at 5,135, with the All Ordinaries index 1.9% lower, as bank stocks took much of the heat, including NAB 5.3% off and CBA and Westpac both shedding over 4%. Ratings agency Moody’s, recognising that rising loan losses and slow interest rates will translate to lower profits, has downgraded the country’s banking system to negative from stable. Airline stocks fared even worse, with Qantas and Virgin down 5.2% and 8.9% respectively.  The Ozzie dollar recovered somewhat to close at US$ 60.85.

Most global stock markets  would have been more than happy to see the end of Q1, as they drowned in a sea of red, which saw the likes of  the Dow Jones Industrial Average (23% lower) and London’s FTSE 100 (down 25%) suffering historic losses, (amid a massive sell-off tied to the coronavirus and a steep decline in energy prices), last seen in 1987. Most observers reckon that the damage caused by this pandemic, (an estimated 2.8% contraction), will be worse than the 1.7% drop that followed the 2009 GFC. The actual impact will vary from country to country, with the worst hit being emerging markets, less developed countries, as well as Italy and Spain, with the UK facing a possible 4.5% growth downturn whilst China may escape with actual growth of around 2.0%. The US faces the real possibility that up to 47 million may lose their jobs which would see its unemployment rate climb from recent historic lows to over 32%.

There is no surprise that UK banks seem not to have come to the party despite, that just two weeks ago, Chancellor Rishi Sunak saying that businesses would be able to walk into bank branches and discuss Coronavirus Business Interruption Loans (CBILs) of up to US$ 6 million to help them survive the shutdown. Many firms are on record stating that banks have refused them emergency loans, indicating they were following the rules set out by the government. What has happened is that so many businesses either cannot get through by phone or, when they do, told they were not eligible. A recent survey found that 20% of UK’s SMEs were unlikely to get the cash they need to survive the next four weeks, resulting in the closure of up to one million businesses. This situation will be replicated globally, initially impacting on the poorest before climbing up the social scale to affect the more affluent members of society. It is essential that governments try and get a handle on the situation and ensure that those who do not have the cash or resources to buy food do not go hungry.

In these troubled times, it is an unfortunate fact of life that the number of scams will rise, with all sorts of offers that are always too good to believe. It is still a surprise that so many people appear to be taken in but in desperate times some resort to desperate measures. The people you want to avoid are the email and phone scammers usually offering huge sums of money for basically doing nothing; for these wheeler dealers, Christmas has come nine months early. Then there are the perennial financial advisers who historically have had a reputation of feathering their own nests before those of their clients. That is not to say that there are some good and honest advisers to be found but remember, in these troublesome times, to Exercise Caution In Your Business Affairs, For The World Is Full Of Trickery – Desiderata.