Wake Me Up When September Ends!                                                          16 April 2020

Q1 property handovers were 27.5% lower at 5k, compared to the same period last year – a possible indicator that the year-end total will be less than 2019’s 32k and a lot less than the 60k figure bandied around by analysts at the beginning of the year. This could prove beneficial to the Dubai property sector, as it could narrow the current supply/demand imbalance into more of a state of equilibrium. A new report by Core expects “future handover volumes to come down as construction timelines and supply chains are impacted along with softened demand”. It also saw the Dubai Expo 2020 postponement giving developers more time to take stock of their immediate priorities and adjust accordingly. Not helped by the current pandemic, the consultancy also noted that property prices continued to head south and that “we have seen more double-digit drops than previous quarters.” Furthermore, the fact that rents continue to decline, at a faster rate than sale prices, sees many potential buyers sitting on the fence in the short-term and probably delaying decisions to see the outcome of the eventual economic fallout from Covid-19.

Despite the impact of Covid-19 on the local economy, Dubai real estate transactions in March reached US$ 190 million, with total transactions of 3.1k and 10.2k in Q1; this was partly attributable to recently introduced government policies including the Central Bank’s initial US$ 27.2 billion economic stimulus package, followed by an additional  US$ 42.5 billion; at the same time,  the regulator reduced reserve restrictions on bank deposits and expanded its Targeted Economic Support Scheme markedly, whilst  federal government introduced a US$ 34.3 billion economic boost. Property Finder estimated that March witnessed 1.2k mortgage registrations, the highest monthly number in six months, and 24.8% higher than a year earlier.

Because of a change in the economic environment, brought about by the onset of Covid-19, many project promoters are insisting that UAE contractors go through the whole price negotiation process again. There is the urgent need that this has to be done because most clients will insist on some sort of reduction in contract values which in turn will see further falls in margins for a sector that has been going through tough times for at least three years. Covid-19 prevention measures – including 50% capacity on transport buses and the numerous site anti-contamination processes – have seen the number of shifts and site hours being cut; these delays will necessarily cost money in both extra direct costs and “running expenses”, incurred by projects running over schedule. Luckily, the prices for key material, including cement and steel, have remained constant.

The latest initiative from the Dubai Land Department sees a reduction in service charges, as part of its strategy to lower the associated costs involved in owning a home in the emirate. Furthermore, those property owners that have been fined for not paying their service fees for the past fifteen months will have them waived and, in future, service charges can be paid in instalments.

UAE businesses are expected to be US$ 31 million better off this year, following the Ministry of Economy announcing reduced fees for 94 of its services pertaining to trade, innovation, business, investment and production. This move will support those sectors reeling from the impact of Covid-19, by reducing the cost of carrying out of business and stimulating the moribund local economy temporarily laid low by the pandemic. Other fees that have been reduced include those relating to commercial registrations, trademark/intellectual property services, commercial agencies and auditors. Meanwhile, there were 25% fee reductions for the collective management licence, annual renewal and replacing a lost licence of US$ 20k, US$ 10k and US$ 20 respectively. These are but the latest moves by the government and come on the back of free zones, such as DP World and the Dubai Multi-Commodities Centre, slashing business-related fees.

The Dubai Airport Show has been moved from its original June date to late October, as the pandemic gains traction, leaving the air travel industry unravelling in its tracks. Last year, it hosted 351 exhibitors and 7.1k attendees, from 89 countries, with a 20% jump in visit numbers expected this year. IATA has estimated that if travel restrictions were to continue for more than three months, 25 million global jobs would be at risk.

According to Abdulaziz Al Ghurair, chairman of the UAE Banks Federation, local financial institutions do not need more stimulus from the central bank to deal with the Covid-19 impact, after the federal agency had injected US$ 70 billion in stimulus measures, as well as extending the duration of the Targeted Economic Support Scheme. Tess allows banks to let its retail and corporate clients defer the principal amount of loans and interest, at until the end of the year. The aggregate value of all capital and liquidity measures totals US$ 69.2 billion, including buffer reliefs in capital and zero-cost funding support (both at US$ 13.6 billion), along with a US$ 25.9 billion liquidity buffer relief. Currently, 62.5% of the total bank lending of US$ 436 billion is loaned to individuals and commercial entities.

It is reported that UAE banks want to ensure that there is a smooth flow of funds within the construction sector and to try to end the ongoing problem of delayed payments, which has bugged the industry for some time. This drag effect on liquidity has been a perennial problem and has become even more so because of Covid-19 and now, it seems, the banks want to break the cycle which has had such a negative effect on the local economy. With a little “encouragement” from the government, banks are becoming more open to giving more flexibility on loan paybacks, extending repayment terms and helping free up the liquidity bottleneck. It is reported that banks’ exposure to the construction sector is in excess of 15%, whilst there are currently over US$ 700 billion of building and civil engineering projects currently planned or underway in the country.

On Thursday, the number of new coronavirus cases in the country totalled 432 bringing the number of UAE patients to 5.8k, with thirty-five fatalities to date.  On a global basis, there have been 2.17 million cases,, of which 550k have recovered as deaths continue to rise and now stand at 146k) .In recent days, the UAE has boosted its testing capacity and has conducted over 650k tests to date; only this week, fourteen drive-through screening centres opened, each capable of testing up to 600 people a day.

Having received its ADGM licence last October, TransferWise is now set to start operations in the country. The global low-cost digital money transfer service will introduce fully online money transfers to the UAE, the third largest remitter in the world after the US and Saudi Arabia. It is estimated that US$ 46.1 billion left these shores in 2018 and obviously the new fintech is keen to get some of the action to add to its current global portfolio of US$ 60 billion annual payments, to over eighty countries, from its seven million customer base. The UK-based company, with fourteen global offices, operates a platform that customers use to transfer money online, using 49 currencies, at the mid-market exchange rate, with the only charges being an upfront, transparent fee.

Gateway Partners has acquired a 40% stake in Apparel Group’s Gulf franchise of Tim Hortons which currently has 141 stores in the ME. Financial details of the investment, by the Dubai-based private equity firm, have not been made but it is expected that money raised will fund future expansion plans by the coffee and breakfast chain in the GCC, Egypt and India. Prior to the arrival of Covid-19, Apparel had plans for a further 300 Tim Hortons outlets prior to the end of 2022.

The newly appointed administrators for NMC Health have confirmed, in a letter to 15k staff members, that the embattled and debt-ridden company is not going into “liquidation”. It will be administered by Alvarez & Marsal, with the aim of trying to stabilise the business and keep it functioning, more so because of its importance to the UAE’s healthcare system. The message reiterated that “all hospitals, medical centres, care facilities and distribution services will be unaffected by the appointment… so their current activities will not change”. It also stated that “the problems with the business .  .  .  . are not related to the day-to-day operations, or with the hospitals and clinics”.

The Al Ghurair family-controlled Mashreq Bank reported a Q1 28.0% drop in net profit, on the back of declining rates and slowing economic activity not helped by the coronavirus pandemic. Revenue fell 3.0% to US$ 414 million, as investment income doubled to US$ 35 million, whilst net interest income and income from Islamic financing, was 16.5% lower at US$ 213 million. Impairment losses were 56.5% up to US$ 111 million. There were also increases in the bank’s assets and loans/advances, up 2.0% to US$ 44.3 billion and 2.8% to US$ 213 million respectively; customer deposits were 2.7% off at US$ 24.1 billion.

The bourse opened on Sunday 12 April and, 103 points to the good (6.2%) over the previous week, nudged 30 points higher (0.2%) to close on 1,860 by 16 April. Emaar Properties, having gained US$ 0.06 the previous week, was US$ 0.01 higher at US$ 0.66, whilst Arabtec, US$ 0.03 higher the previous week, was flat at US$ 0.15. Thursday 16 April saw the market trading at 268 million shares, worth US$ 55 million, (compared to 230 million shares, at a value of US$ 57 million, on 09 April). 

By Thursday, 16 April, Brent, up US$ 5.14 (19.5%) the previous fortnight, went back to its old ways by falling US$ 3.66 (12.6%), to close at US$ 27.82. Gold, up the previous week by US$ 118 (7.2%) was also in negative territory, losing US$ 36 (2.1%) on the week to close on Thursday 16 April, at US$ 1,717. It looks as if April could be the worst month ever in the history of oil, as further shutdowns see its demand plunge so much so that the industry is running out of storage. Brent crude lost 6.0% on Wednesday to US$ 28.00, with West Texas hovering around the US$ 20 level. There is an urgent need for Opec+ to bring in more production cuts, as the pandemic has driven demand so much lower.

Vision Fund, SoftBank’s U$S 100 billion tech start-up financing vehicle, is set to lose up to US$ 16.7 billion on the back of some bad investment decisions which will see the biggest global technology investor post its first loss in fifteen years. The Japanese conglomerate also put the blame on a “deteriorating market environment”, caused by the coronavirus pandemic. This has resulted in slumping revenue (and profit) on some of its investments in consumer spending, travel and transportation, including Uber, hotel chain Oyo, along with fast-growing ride-hailing apps Grab and China’s Didi Chuxing. It has also suffered from investing in the likes of WeWork, satellite operator OneWeb and US telecoms firm Sprint.

With slowing business because of Covid-19, Adidas is set to receive a syndicated US$ 3.3 billion German government-backed loan, comprising US$ 2.76 billion from KfW, (the country’s state-owned development bank) and US$ 667 from another consortium. One of the loan conditions ensures that the company will suspend any dividend payments, with the sports company adding that it decided to forgo its 2020 short- and long-term bonuses.

This week, Boeing announced a further cancellation of 75 of its 737Max, (including 35 of a 130 order from Brazil’s Gol), in addition to the same number being cancelled earlier by Irish leasing company Avolon. As it continues to rectify two new software issues, Boeing remains in talks with regulators seeking approval to return 737 Max to service. Q1 saw the plane maker post 49 new orders (or a negative 147 planes after cancellations) and handed over fifty planes – its lowest ever quarter results since 1984 and well down on the 149 posted in Q1 2019.  Airbus joined Boeing in cutting production, as the demand for new planes plunged on the back of liquidity problems being felt by all major airlines (potential buyers) and logistical difficulties in delivering aircraft. The US administration has agreed a US$ 25 billion rescue package, (including a range of low-cost loans and direct grants), for the country’s ten biggest airlines, with the money being used for mainly payroll.

Two hundred have lost their jobs, whilst a further 1.8k staff have been furloughed, as Oasis and Warehouse, owned by Kaupthing, call in administrator, Deloittes; the Icelandic bank had been looking for a buyer before coronavirus. The group, which also includes The Idle Man and Bastyan Fashions, have had to shut their 92 stores whilst it also maintains 437 concessions in department stores including Debenhams and Selfridges.

Australia’s finance industry is still paying for its past sins and the fall-out from a royal commission more than two years ago. One of the bigger offenders, Westpac, has indicated that its H1 earnings will be almost US$ 1 billion lower, mainly because of a potential US$ 700 million fine relating to the Austrac money laundering scandal; it is alleged that the bank failed to prevent  a staggering 23 million breaches of anti-money laundering and counter-terrorism financing laws. Another Big-4 bank, CBA, has already been fined US$ 420 million for failing to report 54k suspicious transactions, whilst HSBC has admitted to the regulators breaching anti-money laundering laws. Little wonder to see Westpac shares trading 38% lower since late February.

A major winner from Covid-19 is Amazon, after the demand for online shopping went through the roof as well as boosting its share value, to a record high, climbing 5.3%. It is estimated that because of this, its founder and 11% shareholder, Jeff Bezos has seen his wealth grow by 21.1% to US$ 138 billion. Two other beneficiaries from the current crisis are Eris Yuan, founder of Zoom, with his fortune doubling to US$ 7.4 billion, and the Walton family, whose wealth has risen 5% to US$ 169 billion, making them the richest family in the world. But not everyone has been able to cash in on the coronavirus – Bloomberg estimates that the world’s 500 richest people have lost US$ 553 billion already this year.

The World Bank came up with a gloomy forecast that South Asia, with a 1.8 billion population, will post its worst economic performance in 40 years, negating the region’s laudable efforts over this time to win the poverty battle. Last week, this blog mentioned net capital outflows from the region were causing major economic problems and, to the mix, much-disrupted supply chains, tourism coming to a stop and the demand for cheap garments falling away can only add to their woes. Now the World Body, noting that countries such as Bangladesh, Pakistan and Sri Lanka had so far reported relatively few coronavirus cases, but could become new hotspots, has slashed its pre-Covid 19 forecast for this year from 6.3% to as low as 1.8%. At least 50% of the region’s countries could fall into “deep recession”, none more so than the Maldives that could contract by up to 13%, as its high-end tourism sector lays in tatters. The region’s biggest economy, India, could see growth forecast down to 1.5% from initial 5.0% estimates.

The IMF estimates that the global economy will sink by 3.0% this year – at its fastest pace since the Great Depression of the 1930s – that will see US$ 9 trillion wiped off the global GDP before the end of 2021. The possible good news is that if Covid-19 abates in H2, global growth could bounce back 5.8% in 2021, as all major advanced economies will sink into recession. In January, the IMF forecast UK growth this year would be 1.4%, but this has now changed to negative 6.5%. (Following the GFC, the UK economy contracted by 4.2%). The US fared a little better with a 5.9% contraction expected this year, whilst unemployment will top 10%.  The global agency estimated that 81% of the global workforce of 3.3 billion people have had their workplace fully or partly closed. 

To assist 25 countries, mainly from Africa but also including Afghanistan, Nepal, Solomon Island and Yemen, struggling from the Covid-19 impact, the IMF has approved an immediate debt relief package. The fund’s revamped Catastrophe Containment and Relief Trust will provide about US$ 500 million in grant-based debt service relief, including the recent US$ 185 million pledge by the UK and Japan’s US$ 100 million. All member countries that fall into the category, of a per capita income below the World Bank’s operational threshold, are eligible for debt service relief; to date 85 countries have applied.

In a bid to solicit more international support for its fight against the economic impact of Covid-19, the African Union has appointed several other dignitaries as special envoys. Its chairman, the South African president, Cyril Ramaphosa, has indicated that the envoy team will follow up on pledges already made by organisations such as the EU and the G20  “to solicit rapid and concrete support” and to discuss factors not only of the promised stimulus package but also important matters, including deferred debt and interest payments. It is worrying to see that in the two years ending 2017, the African continent’s external debt payments doubled to 11.8% of government revenue; of that total, debts owed to multinationals and private lenders accounted for 35% and 32% respectively.

Governments and central banks around the world have rolled out monetary and fiscal initiatives to soften the impact of the coronavirus outbreak on businesses. It seems that so many countries have used up all their available fiscal and monetary platforms, as governments have thrown every conceivable measure, including rate cuts, wage protection schemes, loan guarantees, dedicated liquidity lines and even “helicopter money” directly to households.

Australia is just one country that is taking a massive hit from Covid-19, entering a recession, with its unemployment rate set to almost double, to over 10.0%, by the end of the quarter; this figure could have been worse had it not been for the government’s US$ 90 billion JobKeeper wage subsidy program. Business confidence in the lucky country has fallen off a cliff, driven by marked falls in employment, profitability and trading conditions. NAB’s latest index of business conditions sank to -21 points in March, whilst its measure of business confidence tanked to a record low of -66 points. The IMF has estimated that the country will lose 6.7% off its GDP and that the 2020 unemployment level would average around 7.6%. A survey, by Westpac and the Melbourne Institute, reported its worst ever monthly reading as the Consumer Sentiment Index fell 17.7% to 75.6. This inevitable collapse followed the WHO declaration that Covid-19 had officially become a pandemic whilst the number of infections jumped from 76 to 6.5k over the past month.

However, on Tuesday, the first trading day of the week after the Easter holidays saw the ASX 200 2.0% higher at 5,488 points, whilst the Aussie dollar reached its highest point in five weeks, trading at US$ 0.64 to the greenback. Some of the currency’s improvement has been attributable to the fact that the country’s Covid-19 curve has flattened more sharply than any other country, with the exception of China; however, its strict social-distancing protocol has meant that much of its business sector has had to close down, with a huge negative impact on the country’s economy which was still recovering from the fatal bush fires which finally ended in January.

Not that they were needed to show that the US economy (like the rest of the world) is in a deep recession, this week’s indicators just confirm the fact. March retail sales plunged a record 8.7% on the month and 6.2%, year on year, whilst factory production slumped by 6.3% – the most since 1946; housing starts slid by the most amount since 1984.The one-month sales decline of US$ 46.2 billion is just slightly lower than the US$ 49.1 billion fall during the GFC – the only difference being that this took sixteen months in 2008-2009. Over the past four weeks, over 22 million Americans have filed for unemployment benefits that has now wiped out all the 21.5 million jobs added to the economy since mid-2009.  There is no wonder that President Trump is keen to see a quick end to government lockdowns and business shutdowns; currently, it is estimated that 90% of the working population have been hit by local governments issue stay-at-home or shelter-in-place orders.

The world’s second biggest economy had its first quarterly contraction for decades in Q1 as its economy shrank by 6.8%, compared to a 6.4% expansion in Q1 2019. This is not just bad news for China but the knock-on effect on the global economy will raise concern as it is regarded as an economic powerhouse being probably the second global major consumer and the leading producer of goods and services. Some of this week’s key indicators see unemployment at 5.9%, retails sales tanking 15.8% and factory production 1.1% off. The IMF estimate that at best China will escape a recession this year and could see growth coming in at 1.2%.

There is no doubt that the longer the lockdown the longer the period of economic inactivity, but it is imperative that the containment measures take precedence over the temptation to resume economic activity; if this were to be implemented too early, the knock-on effect would be catastrophic. If taken too late, it could result in dire economic consequences, that could take years to resolve and inevitable social disorder. However, someone has to make the unenviable decision at some stage during this pandemic, and after carefully weighing up the associated social and economic costs and benefits, to decide what should be done. Because it is a totally new virus, it is impossible to gauge when Covid-19 will abate and on average pandemics can last for more than twelve months – for instance, swine flu was declared a pandemic in June 2009 and was deemed over in August 2010.  Wake Me Up When September Ends!