No Turning Back! 09 April 2020.

The Dubai week started with the much-expected announcement that the curfew would be extended for a further two weeks and that any individual would only be permitted to leave their home for stipulated purposes, including one person allowed out for essential shopping.  Any person, having to leave their residence, will need to wear a mask and gloves and keep the social distance of two metres. Dubai’s Supreme Committee of Crisis and Disaster Management confirmed the extension of the sterilisation programme to 24 hours a day, across all areas and communities in the emirate, to protect the health and safety of the residents. During this period, the Metro will remain closed, whilst reduced public bus services will be free of charge and taxis will offer a 50% discount. Furthermore, extensive medical tests will be conducted across densely populated areas of Dubai to ensure members of the community are free from Covid-19 infection.

The UAE has had to bow to the inevitable by officially requesting a one-year postponement of Expo 2020 Dubai until 01 October 2021, due to the coronavirus pandemic. It is highly likely that the required two-thirds majority of the Paris-based Bureau International des Expositions will rubber stamp this request at a virtual meeting on 21 April  to discuss “options for a change of dates” and to approve the continuance of the official name – ‘Expo 2020 Dubai’.

The seasonally-adjusted IHS Markit UAE Purchasing Managers’ Index – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – dropped, month on month, by 3.9 to 45.2 in March; this was the third successive month of declines, driven by marked falls in output  and new orders, with notable delays to supplier deliveries. Covid-19’s negative impact on the tourism sector, consumer demand and exports has exacerbated the problem. A reading above neutral 50 level indicates economic expansion and below points to a contraction.

Tabreed has agreed to pay US$ 675 million for an 80% stake in Emaar’s Downtown Dubai district cooling services; Emaar will keep hold of the 20% remaining shareholding. Part of the deal will see the utility company “exclusively” provide up to 235k RT (refrigerated tonnes) of cooling to the Emaar master-development, including the Burj Khalifa, and sees Tabreed become a major player in the world’s largest district cooling operations. The utility company, that now moves up two places to become the second leading player in the Dubai market, confirmed that the deal had been fully financed. Following this majority acquisition, its Dubai capacity has jumped to 279k RT and, through its operations in six countries, total capacity is now 126% higher at 1.3 million RT from 83 plants.

Many local banks are now ruing the day they extended credit to BR Shetty’s NMC Group, as their total exposure to the troubled healthcare provider nears US$ 2.2 billion. The seven most exposed banks comprise ADCB (owed US$ 981 million), DIB (US$ 425 million), Emirates NBD (US$ 291 million plus the equivalent of US$ 31 million sukuk exposure), ADIB (US$ 291 million), EIB (US$ 181 million) along with Noor Bank and CBI (both for US$ 116 million). Furthermore, insurer Dar Al Takaful is reportedly owed US$ 300 million, in medical insurance, and Aramex US$ 91 million in logistic fee payments.

Earlier in the week, the UAE Central Bank cut the reserve requirements for bank demand deposits and increased its economic stimulus package to US$ 70 billion to mitigate the Covid-19 impact. In addition, reserve requirements for demand deposits for all banks were halved to 7%. The rationale behind this move was to inject US$ 16.6 billion into the banking system to free up more liquidity in the market and further support lenders. The country’s banks were permitted to defer the principal amount of loans and interest for affected retail and corporate customers, as the Targeted Economic Support Scheme was extended to the end of 2020.

Embattled Arabtec announced that it had won two contracts, valued at US$ 57 million, in Abu Dhabi. One is, for its Target Engineering subsidiary, relating to work on an Adnoc offshore facility to be completed by the end of 2021 and the other is for the construction of a 19-floor commercial building, Sunset Square, worth US$ 34 million; handover is expected by Q4 2022.

The bourse opened on Sunday 05 April and, 1,144 points (39.9%) lower over the previous six weeks, posted a welcome weekly rise of 103 points (6.2%) to close on 1,830 by 09 April. Emaar Properties, having lost US$ 0.04 the previous week, was US$ 0.06 higher at US$ 0.65, whilst Arabtec, US$ 0.10 down over the past three weeks, was up US$ 0.03 to US$ 0.15. Thursday 09 April saw the market trading at 230 million shares, worth US$ 57 million, (compared to 150 million shares, at a value of US$ 54 million, on 02 April). 

By Thursday, 09 April, Brent, up US$ 2.47 (9.4%) the previous week, regained even more of its recent losses, US$ 2.67 (9.3%) higher, to close at US$ 31.48. Gold, down the previous week by US$ 25 (1.5%) was up US$ 118 (7.2%) on the week to close on Thursday 09 April, at US$ 1,753 – a seven-year high – as many investors baulk about the future of the global economy. By Thursday, Opec+, (Opec members and other non-Opec producers), had agreed to cut May and June production by ten million bpd (around 10% of current global supplies), with another five million bpd reduced by other nations. Prices have started to recover from the eighteen-year lows witnessed last month.

It is ironic that, with the recent low energy prices, two of the fuel (ab)users, airlines and cars, have experienced historically low usages. This week, global flights are down 59%, compared to the same week last year, with total capacity falling to 39 million from 109 million. All over the world, the number of flights is much lower – in a range of between 47% (North America) and 83% (Europe) – year on year. In the US, Rigzone reported that US gasoline demand has collapsed, as stay-at-home orders have kept drivers off the road; sales at retail stations were down 46.6% – seemingly bad but not compared to say Italy and Spain were gasoline demand was down about 85%, (with the UK 66% lower). The US Energy Department forecasts Q2 gasoline demand will decline by 2.3 million bpd, compared to a year earlier.

The latest – but not the last – UK retailer to hit the buffers is New Look, as it announced that it has indefinitely suspended payments to suppliers for stock which they can collect; it has also cancelled orders for its Spring and Summer clothing lines. One leading supplier, having no business links with New Look, said this behaviour was “totally out of order” and that events like this would “devastate smaller companies down the supply chain, at a time when they need help the most”.

The Aussie bourses started the week confidently on Monday, with the ASX200  trading 4.3% (219 points) to the good at 5,287 despite oil prices heading south on news that the OPEC+ meeting had been delayed and the fact that global coronavirus cases continued to climb; the market clawed back most of the previous week’s losses. Other Asian bourses were in positive territory, with Japan, South Korea and Hong Kong all up – by 4.5%, 3.4% and 2.3% respectively. However, it must be remembered that the Australian market is ensconced in bear territory and still 27% lower than its late February high.

Following a good Wednesday on Wall Street, (partly attributable to Bernie Sanders leaving the US presidential race), Australian shares moved higher on Thursday, with both the ASX200, 3.5% higher on Thursday’s session to close on 5,387 and the All Ordinaries index up 3.4% to 5,439. The Ozzie dollar was boosted by the enactment of the Federal Government’s US$ 80 billion wage subsidy package and closed Thursday on US$ 0.623. The Nikkei 225 had a flat day, closing on 19,346, whilst the Hang Seng moved up 1.4% to 24,300. Meanwhile, the Kospi gained 1.6% on the day to close on 1,826 and has now advanced 26% since its March low.

European markets followed the upward Asian trend on Monday with most bourses in the green – the FTSE 100 3.1% higher at 5,582, the FTSE 250, 5.1% to 14,812, Cac 40, 4.6% to 4,346 and the DAX leading the pack up 5.8% to 10,075. The US markets performed even better on the day with all three bourses posting gains of more than 7% – the Dow Jones by 7.7% to 22,680, Nasdaq 7.3% at 7,913 and S&P 500 by 7.0% to 2,664. By Thursday, the S&P 500 was 12% higher on the first four days of trading and had recorded their biggest weekly gain since 1974 despite the bleak economic outlook.

In line with other major hotel chains, Accor has not only cancelled its planned 2019 US$ 300 million dividend but also announced the closure of 67% of their worldwide properties in the coming weeks. This move will see 200k employees (equating to 75% of the workforce) put into furlough, or temporary unemployment. Accor confirmed that it had a US$ 2.7 billion cash balance and a US$ 1.3 billion revolving credit facility that has yet to be utilised.

As the aviation industry has been one of bigger casualties of the pandemic, it is not surprising to see Boeing close its South Carolina plant and suspend its 787 Dreamliner production from Wednesday until further notice; earlier, it had closed its plants in Washington state, including one at Pugit Sound,  where it produces its 777 wide-body aircraft. With global airlines facing a mega cash shortage, as air travel has been almost grounded, they are seeking ways to save cash flow by deferring orders and down payments.

For similar reasons, Airbus has advised employees that there will not be a return to full operations, in the short term, because of parts shortages and the inability (or unwillingness) of struggling airlines to take delivery of new aircraft. It has asked its European employees to take ten-day vacation breaks, up to mid-May, so it can meet demand if business resumes. IATA’s latest Q2 estimate indicates that airlines’ revenue will slump by 68%, during which time, they will burn up cash reserves of US$ 61 billion. One of its main suppliers, Rolls Royce has reported that it would cut back on all but essential activities, at its UK civil aerospace facilities, whilst one of its main customers, EasyJet, is considering a cancellation of a US$ 5.5 billion order for its narrow-body jets.

Despite slower sales in its consumer business, Samsung Electronics posted a 2.7% hike in Q1 operating profit to US$ 5.2 billion, driven by a slight recovery in the chip market; however, the quarter on quarter figure was 10.6% lower. The world’s biggest smartphone and memory chip maker’s revenue was US$ 44.7 billion – up 4.9% on the Q1 2019 return but down 10.6% compared to Q4 2019. The arrival of Covid-19 had one minor benefit for Samsung – the increased demand for laptops, because of the need for many more to work from home, drove to a stronger chip sales revenue stream. It did suffer from a downturn in its smartphone business in Q1, as many potential customers delayed new phone purchases. Indeed, in February, overall smartphone shipments saw their biggest ever plunge due to the coronavirus pandemic, as global shipments fell by 38% to 61.8 million, compared to nearly 100 million in February 2019.

Having closed its Fremont factory three weeks ago, Tesla has now shut down all its operations and have reduced staff pay, (mostly a 10% cut), to the end of June, and put non-essential workers on furlough; “barring any significant changes”, it hopes to resume operations early in May. Government money will temporarily pay workers – who have no work to do at this time – so the company can utilise them once operations recommence. Prior to the pandemic’s outset, Tesla was looking at “comfortably exceeding” production of 500k vehicles.

Prime Minister Shinzo Abe has announced not only a state of emergency, for Tokyo and five other prefectures, but also a record US$ 994 billion, (equivalent to 20% of Japan’s GDP), stimulus package in an attempt to shield the economy from the damaging impact of Covid-19. There is every chance that the economy will contract by 20% in Q1, badly hit by its export business flatlining and the postponing of the summer Olympics. The measures will see large subsidies for companies to retain workers and to cut corporates costs, so as to keep businesses from closing down for good, by deferring income and regional tax payments for a year. When the worse of the pandemic is over, the Prime Minister will bring in another stimulus package to increase consumer spending and speed up the recovery process.

The US Federal Reserve has instigated a US$ 2.3 billion package to boost local governments and SMEs to keep the economy on track in the middle of the coronavirus. Part of the strategy is for the Fed to allow four-year bank loans, (ranging from US$ 1 million to US$ 150 million), to companies of up to 10k employees and also, through its Main Street Lending Facility, to purchase the bonds, totalling US$ 600 billion, of states and more populous counties. The agency’s immediate highest priority is “to provide as much relief and stability as we can during this period of constrained economic activity”. The Fed’s action is probably best summed up by an Axicorp analyst’s comment that “it looks like the Fed are on a mission to blow holes in every dam that stops the flow of credit. And it sure sounds like they have plenty more dynamite if needed.” This week saw a further 6.6 million first-time claims for jobless benefits, bringing the total to almost 17 million over the past three weeks since the pandemic gained traction.

Another major problem for emerging markets is the fact that foreign capital flows could be reduced by more than 50% this year, driven by the double whammy of Covid-19 and lower commodity prices. The Institute of International Finance (IIF) projects that this year’s figure will be lucky to reach US$ 444 billion, as US$ 20 trillion has been wiped off the global bourses, with the travel sector almost closed down, allied with major disruptions to worldwide trade and supply chains. Last month, it has been estimated that emerging markets saw outflows of US$ 83 billion, whilst YTD there have been recorded portfolio equity outflows of US$ 72 billion and debt outflows of US$ 25 billion.

Fissures are forming within the EU as European leaders are considering a number of conflicting initiatives to help bailout the devastated economies of several member nations. The two countries, most badly hit by Covid-19, Italy and Spain, are urging the bloc to commit to “recovery bonds”, better known as Corona Bonds, to replace state-by-state borrowing which, it is argued, would reduce the cost of debt and avert a failure to find financing. However, it seems that Germany would prefer direct loans to those countries that need them, indicating that Italy and Spain could benefit by US$ 42.1 billion and US$ 30.2 billion respectively. However, the counter argument is that this mechanism will not be enough to overcome the impact of the shutdown of already debt-laden European economies, as the new EC president, Ursula Von der Leyen, takes a different approach, pushing for an expansion of the bloc’s budget to lead the recovery. Any hope would have to see a change of heart – and policy – from the “Frugal Four”, Germany, Netherlands, Austria and Finland, who are against the specific issue of “corona bonds”. Italy’s prime minister has said that the EU risks failing as a project because of the coronavirus crisis and must act in an adequate and co-ordinated way to help countries worst hit by the pandemic. Giuseppe Conte is leading the fight to push frugal members of the bloc to issue so-called “corona bonds” – sharing debt that all EU nations would help to pay off. As usual, last minute discussions saw an unsatisfactory conclusion on Thursday, with EU finance ministers agreeing to a mishmash US$ 550 billion rescue package which was smaller than what the ECB wanted and did not accede to Franco-Italian demands to share out the cost of the crisis by issuing corona bonds.

The WTO is the latest global body to come out with forecasts predicting a severe decline in international commerce this year, with a possible contraction of up to 32%, depending how long the pandemic lasts. Whatever happens, it is a comfortable guess to say that the impact will be greater than that felt following the GFC more than a decade ago. Very little can be done until the health crisis abates and that must take priority over any economic issues which will see marked declines in trade and output; it could take years for a complete and lasting recovery. It must be remembered that global trade, driven by the US-Sino trade tariff war, was in slowmo, even before Covid-19.

There was an interesting study out of Australia that probably would come up with similar results in most other countries of the developed world. The report by AlphaBeta noted that, in the last week of March, households had boosted their spending on groceries and other “essential” supplies, as money spent on on-line retail and food delivery was almost 67% higher; spending on pets jumped 28%. These marked boosts were offset by falls of 95%, 78% and 42% for gym usage, public transport and cafes. The report also noted a 67% hike in online gambling, with the alcohol/tobacco spend 33% higher.

Some experts are looking at 2022 before the world recovers to it pre-Covid-19 levels and that assumes the present downturn is short-lived; early estimates – probably on the conservative side – are  that the world will shed US$ 5.5 trillion in “lost” growth; this equates to almost 8% of GDP through the end of 2021, and this despite the unprecedented levels of monetary and fiscal stimulus ploughed into the economic system by governments. Gross domestic product is unlikely to return to its pre-crisis trend until at least 2022. Policymakers are treading a thin line and timing is of the essence – they need to ensure that there is just enough stimulus to keep their economies afloat before the decision is made to reopen their economies. If this is too early, there is always the likely risk of the pandemic returning and, if too late, missing the boat and giving their competitors a head start, as well as knocking domestic consumer confidence. Whatever anyone says, there is no chance of a coordinated global approach to this huge problem – just look at the disunity shown at this week’s EU finance ministers’ meeting – and that leads to a possibility of a W-shaped recovery, which would result in even more trouble for the world’s population.

What is happening to the UK economy is a reflection of what most advanced economies are facing, with a global slump bigger than the Great Depression almost ninety years ago. Bearing in mind that any reading below 50 indicates contraction, latest UK figures, reported by IHS Markit and the Chartered Institute of Procurement and Supply, are a cause for concern, with a March reading of 36.0, compared to 53.0 a month earlier. This could be a portend for a 15% decline in Q2 economic output. The composite figure for the manufacturing and services sectors in the eurozone was even worse, down from 51.6 in February to 29.7, whilst the US fell from 49.6 to 40.9, which points to the economy contracting 5.5% in an election year – not good news for the incumbent President. There is no doubt that Covid-19 is turning economics on its head, as countries hunker down and are being forced through a deep and speedy slowdown in the global economy. Whether they have the tools to turn the financial taps on, at the same speed they were turned off, remains to be seen but there’s No Turning Back!