It’s About Change                                                                                          23 April 2020

Ramadan Kareem!

There was welcome news at the end of the week, with the Dubai authorities easing some of the restrictions as from tomorrow, Friday 24 April. For the first time in three weeks, people will be able to move more freely, being allowed out between 6am and 10pm without a permit. Masks will still have to be worn and the two-metre distancing rule applied but the use of gloves will be optional. Residents can now leave home for up to two hours to exercise with  a maximum of two others (within their area of residence) and can visit “first and second-degree” relatives (of no more than five people). They can also leave home from 6am to 10pm for essential journeys. Shopping malls, markets and commercial outlets, operating at only 30% capacity, will be open daily to the public from 12:00 pm to 10:00 pm, whilst restaurants and shops are allowed to operate with a maximum 30% capacity at the shopping malls. Temperature checks will be mandatory for anyone entering and separate entrances and exits will be introduced.

Arabian Travel Market  has been rescheduled to run after Eid next year, from 16 – 19 May 2021; it had earlier been changed from its April 2020 date to the end of this June but after intense discussions, involving all stakeholders, it has been moved to next year and will remain at its established home, the World Trade Centre. Before its postponement, the event was forecast to attract more than 39k professionals from the global travel industry, generating about US$ 2.5 billion of new business.

The Central Bank has advised all local banks not to terminate their UAE national employees as part of any job cuts in response to the Covid-19 outbreak, adding that the 2020 targets for Emiratisation have been postponed, provided that the Emirati staff are retained and their services not terminated, as a result of the pandemic. The banks have also been requested to notify the regulator of any planned amendments to the positions or roles of their UAE national staff.

The Central Bank has indicated that UAE lenders have utilised 60% of the US$ 13.6 billion Targeted Economic Support Scheme facility set up to assist businesses and individuals through the Covid-19 outbreak. The regulator is keen to “protect impacted individuals and ensure continuous operations of private corporates and SMEs” during the crisis and sees TESS as a positive move by the government. Furthermore, the Central Bank relaxed banks’ capital buffers, allowing them to increase lending by a further US$ 13.6 billion.

There seems to be a lot of smaller F&B outlets, thought to number around 150, unhappy with the fees being charged by online food ordering and delivery portal, who are considering a plan not to take orders from platforms – including Zomato, Deliveroo and Uber Eats – for three days. They disagree with the size of these portals’ charges that include up to 15% for booking the orders and then up to another 15% for delivery. It is estimated that between 60% – 80% of the orders are serviced through these third-party operators and that indicates that the F&B outlets’ margins continue to be impacted at a time when they have lost what used to be normal walk-in custom. The newly formed Middle East Restaurant Association recognises the importance of both sides coming to some sort of middle ground – if not both sides could lose out.

Travelex, owned by BR Shetty’s UK-listed holding group Finablr, is up for sale as it tries “to maximise value for its stakeholders”. The currency exchange group, which was hit by a cybersecurity breach on New Year’s Eve, went public twelve months ago and started trading on the London Stock Exchange with a market cap of US$ 1.3 billion. Following this breach, it was found that over 50% of its shares had been pledged as security when one of BR Shetty’s companies, BRS Investments, had taken loans to buy out Travelex in 2014. In March, its share trading was suspended, at which time the company was valued at US$ 77 million, some 94.1% lower than a year earlier.

Etisalat Group’s Q1 consolidated revenue nudged 1.0% higher to US$ 3.6 billion, whist net profit was 2.0% lower at US$ 599 million, on the back of increased competition and slower economic activities, especially in March, when Covid-19 became a reality for the local market. Although its UAE revenue was 3.0% down, at US$ 2.1 billion, its international revenue was up 4.0% to US$ 1.4 billion following the strong performance of Etisalat Misr and the consolidation of Tigo Chad into Maroc Group. The board approved a US$ 0.068 interim dividend bringing the total pay-out to US$ 0.218 per share for the year. Its total capex was 32.0% lower at US$ 300 million, of which 5G capital expenditure accounted for 45.5% of the spend at US$ 136 million. The telco has 150 million subscribers, up 5.0% on the year, with the UAE market nudging 1.0% higher to 12.7 million.

Du posted a 21% decrease in Q1 profit to US$ 91 million on the back of revenue 4.8% down to US$ 815 million, attributable to a 13.5% dip in mobile subscribers (to 7.4 million) and the March impact of Covid-19. Other revenue, which excludes income from its fixed line and mobile businesses, fell 3.2% to US$ 230 million, as the number of fixed-line subscribers increased by 7.9% to 224k. The fifteen-year-old telco has three main shareholders – Emirates Investment Authority, Emirates International Telecommunications and Mubadala Investment Company, with stakes of 50.12%, 19.70% and 10.06% respectively.

Although Emirates NBD turned in a 3.0% hike in Q1 profit to US$ 572 million, year on year profit was 24.0% lower, mainly attributable to higher impairment charges but despite this credit quality remained stable. Total income remained flat at US$ 1.9 billion, as total assets were US$ 188.6 billion, 1% higher on the year, as loans increased 1%. Positive signs were seen in marked increases in net interest income and non-interest income by 45% and 48% respectively.  The bank’s cost cutting exercise has borne fruit, as expenditure fell 18.0% to US$ 556 million, on the back of lower staff and marketing expenses. Due to higher Stage 1 and 2 ECL allowances, Q1 impairment charges of US$ 695 million were 24% higher, quarter on quarter, and 349% on the year.

Commercial Bank of Dubai posted a 7.3% decrease in net profit to US$ 86 million, (and a 2.3% drop in operating income to US$ 206 million), driven by low interest rates, weaker business conditions and Covid-19; quarterly impairment charges were at US$ 65 million, mainly attributable to future potential losses expected from Covid-19, as the coverage ratio fell 16.5%, year on year, to 66.6%.  The non-performing loan (NPL) ratio increased to 6.59% from 5.94%. Total assets, net loans/advances and customers’ deposits all moved north – by 2.1% to US$ 24.5 billion, 3.6% to US$ 16.4 billion and 0.9% to US$ 17.4 billion respectively.

The bourse opened on Sunday 19 April and, 133 points higher (7.7%) over the previous fortnight, nudged up 31 points (1.7%) to close on 1,891 by 23 April. Emaar Properties, having gained US$ 0.07 over the previous two weeks, was US$ 0.01 higher at US$ 0.67, whilst Arabtec, US$ 0.03 higher the previous fortnight, was up US$ 0.01 to US$ 0.16. Thursday 23 April saw the market trading at 318 million shares, worth US$ 87 million, (compared to 228 million shares, at a value of US$ 55 million, on 16 April). 

By Thursday, 23 April, Brent, down US$ 3.66 (12.6%) the previous week, had a tumultuous trading week ending, with a further US$ 5.35 (19.2%) loss, to close at US$ 22.47. Gold, down the previous week by US$ 36 (2.1%) regained US$ 28 (1.6%) on the week to close on Thursday 23 April, at US$ 1,745. 

According to reports, Facebook has paid US$ 5.7 billion to snare a 9.99% stake in cut-price Indian mobile internet company Reliance Jio. The move will give the US interloper a position in the country, where it already has WhatsApp being used by 400 million Indians, with more in the pipeline, as it launches its payment service. There are plans for WhatsApp to increase collaboration with Reliance’s e-commerce venture, JioMart, that will enhance connections with domestic businesses, shops and purchase products. The owner of the Reliance Group, Mukesh Ambani, has seen his liabilities jump from US$ 19 billion, four years ago, to its current level of US$ 65 billion and is keen to cut this to zero within a year. Deals like this will help.

Debenhams has struck deals with 85% of landlords of its 142 stores, and is in “advanced talks” with the remainder, to keep most of them open, this after it fell into administration last week.  However, seven stores (affecting over hundred staff) will close after discussions broke down without any agreement. All its outlets remain closed, in line with current government guidelines, (with a majority of staff furloughed) but most will be ready for business when restrictions are lifted. Arcadia – which has chains including Miss Selfridge and Top Shop – is also in negotiations with its landlords for rent reductions. Currently, over 90% of its 16k employees are being paid through the government furlough scheme.

Oil is not the only product that is running out of storage capacity, with many global retailers now requesting shopping companies to push back deliveries. So far this year, it is estimated that container shipments are 15% lower, year on year, but this could soon rise to over30% if countries do not start to open up their economies. The current situation sees shoppers staying at home, many shops remaining closed and retail sales nosediving, resulting in some container ships now running at 20% capacity. The main questions to answer are when will “normal” demand return to the market and has the pandemic changed how future global trade will be carried out?

IATA’s latest data has amended its previous US$ 19 billion forecast loss for ME airlines to US$ 24 billion because of their enforced service disruption. For the UAE, the estimated loss is put at US$ 6.8 billion, plus a US$ 23.2 billion loss to the country’s GDP, as well as putting 379k direct and indirect jobs at risk. The world body estimates that, at best, airlines will only have a maximum three months cash reserves and that government support is of prime importance. The Dubai government is on record that it would support its two airlines – Emirates and flydubai.

It seems that the South African government is either unwilling, or cannot afford, to save the country’s 86-year old national airline. SAA, which last made a profit in 2011, plans to lay off all its 4.7k payroll, with compensation being one-month pay per year of service. It was only a matter of time before the inevitable happened because the airline had for years been living off bailouts and state-guaranteed debt agreements; the advent of Covid-19 proved to be the final nail in its coffin. SAA, not helped by so many episodes of corruption and mismanagement, as well as nine chief executives in a decade, had recently only been flying cargo and chartered flights and had already given up on its “normal” flight schedule.

Already indebted by US$ 3.2 billion worth of long-term debt, Virgin Australia has finally gone into administration, leaving the country’s aviation sector in tatters, without a second airline. This comes after the Morrison government refused a request for an interim US$ 888 million loan but later announced a US$ 570 million support package for all local airlines. Its downfall would see the loss of 1k direct positions and 6k indirect jobs. The airline, which has the UAE government, Singapore Airlines, China’s HNA, and Sir Richard Branson’s Group among its shareholders, is now seeking new investors. Over the past twenty years, many companies – Ansett, East West, Compass, Ozjet and Impulse – have tried but all have crash landed. Virgin’s demise confirms the belief that the Australian market has no room for two airlines but needs more than one to keep Qantas “honest”. There is no doubt that a strong second airline would put pressure on Qantas to keep fares competitive, so the big losers, apart from the shareholders, are the Australian public who will also see certain local routes reduced. Things may have been different if Virgin has focused more on its core market – as a low-cost carrier – rather than compete with Qantas on its traditional turf, as an international player.

The RBA has warned the country that it will be facing its biggest ever contraction since the Great Depression, as there will be a 10% decline in Australia’s GDP and the unemployment will be around the 10% mark come 30 June. There is no doubt that the introduction of the government’s JobKeeper wage subsidy has helped to keep unemployment rates in some sort of check. As with every other country afflicted by the pandemic, authorities have to be careful not to lift population containment too early, as Covid-19 could easily reappear with an even more devastating impact on lives, incomes and jobs. Expect that by tax year end, 30 June, Australia will be posting negative inflation on the back of historically low energy prices and the introduction of free childcare.

As stockpiling deceases and more shops extend shutdowns, April should see a downturn in Australian retail turnover from its record level of an 8.2% surge the previous month, with supermarket and grocery sales rising 22.4%. A more detailed analysis shows that turnover doubled for items such as toilet paper, rice, pasta and flour as canned food, cleaning products and certain medicines recorded 50%+ rises. It is expected that April will be ‘payback time’ that could well result in the “largest decline ever recorded”. The other side of the coin shows large falls for food outlets and clothing, with 20%+ declines in cafes, restaurants and takeaways, as well as similar percentage falls in clothing, footwear and personal accessories; year on year vehicle sales were 18% off. Following a solid start to the year, new home sales slumped 23.2% in March.

The motor vehicle industry is another sector that is almost out for the count because of Covid-19, with data from both sides of the Atlantic confirming sales have fallen off a cliff and production is struggling. European sales sank to their lowest level in over thirty years, with new registrations down 56.2% to 570k, compared to March 2019. The sector is considered a bellwether for the bloc’s economy, as it accounts for 9% of total factory workers, employing 2.6 million. Considering that most car dealers were open for half of March, it points to numbers really tanking this month; Italy took the biggest punch, as March car sales were 85% lower. With Germany being one of the first countries easing lockdown restrictions, Opel reopened its dealerships in that country on Monday, but the great unknowns are how sales will pan out after coronavirus has abated and whether manufacturers can make up for lost revenue. What is known is that consumer confidence has been shaken, incomes reduced and many jobs lost.

Even before the arrival of Covid-19, the industry was showing signs of weakness with double digit annual contractions. Last month, Fiat Chrysler sales plummeted 77% to 27k in the EU plus UK and Switzerland, whilst PSA, (whose brands include Peugeot, Citroën and Opel), posted a 68% fall in sales. Although slightly less than those of their European rivals, but probably more worrying, the three German powerhouses – BMW, Daimler and Volkswagen – saw declines of almost 50%. That country’s economy relies heavily on exports from this sector and if such figures continue, it will have a negative impact on the country’s future progress, post Covid-19.

Meanwhile, all is not well with the industry in the US, as Ford raised US$ 8 billion, from corporate debt investors, following an estimated Q1 US$ 2 billion loss, as Q1 sales dipped 21%.  Unsurprisingly, the issue was five times over-subscribed as rates on offer were around 9%, at a time when rates are hovering around zero. It is not the only car maker taking a beating from the pandemic which has wreaked havoc on all sectors within the industry. GMC has availed a US$ 2.0 billion 364-day revolving credit agreement, backed, like the Ford arrangement, by certain assets as security, to be solely used by its financial services business.

On Thursday, the US Congress passed its fourth aid bill (of US$ 484 billion) in response to the pandemic which will be used for small business aid and hospital funding. The country has 845k confirmed cases and 46.8k reported deaths. With a further 4.4 million Americans applying for unemployment benefits last week, the total over the past five weeks has topped 26.5 million – its steepest downturn since the Great Depression. The latest figures point to an April potential rate of 20% – more than double the 10% mark that followed the 2009 GFC.

Covid-19 has helped to speed up the everyday use of contactless mobile payments in the US, as an increasing number of people now see it as a safer way to pay, whilst also using mobile apps tied to payments for pickup orders. Some experts see an additional 20% of future transactions making use of this technology. Already, 27% of U.S. small businesses have reported an increase in customers using services like Apple Pay, according to a survey of 361 companies released in April. For example, Safeway’s rush delivery service noted, that at the beginning of March, less than 50k of their customers were active mobile users – last week this number topped 670k. At the beginning of the month, Walmart’s self-checkout system, Walmart Pay went completely contactless.

By the end of the week, European economic data was published and if anything the figures were even worse than expected. IHS Markit PMI for April saw the private-sector activity in the euro area tank to 13.5 from 29.7, a month earlier, as Germany’s April figure of 17.1 was well down, month on month, from 35.0. France performed even worse as their PMI slumped to just 11.2, from 28.9, (with 50 being the threshold between expansion and contraction). To add to their woes, there were further decline in confidence, as well as record job cuts.  

Ahead of Thursday’s EU Leaders’ meeting, the Central Bank president, Christine Lagarde, had warned them that the euro-area economy could shrink by as much as 15% and there is the danger that they risk doing too little, too late. Although Chancellor Angela Merkel was talking about a massive US$ 2.2 trillion stimulus package, the meeting agreed to a US$ 1.1 trillion recovery fund, closely tied to the bloc’s seven-year budget and confirmed that US$ 600 billion would be released through existing mechanisms from 01 June. There is no doubt that there is still much disunity within the bloc which will not help with efforts to deal with a certain sharp recession, as government restrictions leave companies unable to raise any revenue whilst incurring on-going running costs. Likewise, EU revenue will be severely disrupted at a time when so much money is being spent by authorities to combat the impact of the pandemic.

Not to be outdone, horrific returns in the UK saw its PMI slump to just 12.9 and questions have to be asked whether the money is reaching businesses quick enough – it looks not. On the back of this, the UK economy will contract by more than 13% in Q2. Because of the money being “thrown” at the current Covid-19 economy, the UK budget deficit could top US$ 320 billion; by the end of the UK tax year, 05 April, the deficit was at US$ 59 billion, more than US$ 11 billion higher, (and equating to 2.2% of the GDP), over the year. The government has already announced spending increases and tax cuts which has already added US$ 120 billion to the figure. Even the most optimistic of analysts cannot visualise that the economy will be in any better shape within two years as it was at the beginning of 2020. Until the end of June, the government will have issued gilts, government bonds, totalling US$ 270 billion. In this perfect storm, the government loses out from both sides – it has to spend more, (e.g. furloughing may end up costing more than US$ 100 billion), and will incur a massive loss in its tax revenue – less payroll-related taxes and VAT receipts, along with corporation tax revenue stream drying up; then when things return to normalcy, many companies will be able to offset prior losses against current profits – again leading to less money going into the government coffers. Then, of course, this money spent on Covid-19 incurs interest rate charges and has to be repaid.

After posting a historic high in UK employment in February, at 33.1 million or 76.6%, (and unemployment at 4.0%), Covid-19 will turn these figures on their head when latest data is soon released. In February, pay continued to rise quicker than inflation – 2.9% to 1.8% – so that real wages moved in its upward spiral. Initial figures point to nearly a million new claims of universal credit and this, in itself, will lead to a massive increase in unemployment. There is every chance that unemployment could more than double to 9% in Q2 as it is estimated that 36% of all UK jobs will be highly impacted by the pandemic. Inflation, which had been heading upwards towards the BoE’s 2.0% target, slid to 1.5% by March with the inevitability of falling even further to 0.5% by year end, on the back of lower energy prices, loss of consumer confidence and falling employment. The declining inflation level is a sure indicator that the economy is heading for a steep recession.

History was made this week when the price of oil turned negative for the first time ever, as expectations rose that capacity would soon be unable to cope with the supply. There had been reports earlier in the month that low grades of West Texas Intermediate were in negative territory – now it has been confirmed that the US oil benchmark, WTI, fell as low as minus US$ 37.63 a barrel. The sector is in an impasse as it weighs up the consequences of falling demand and disagreements within Opec+ about balancing the supply requirements in a market producing too much oil. It will take a recovery in demand to really turn the market around and that will depend on when different governments decide to ease restrictions that continue to choke the global economies.

There are two professional sectors that will be changed forever because of Covid-19. Economists have always excelled at explaining what has gone wrong in the past and what should have been done at the time. Likewise, auditors have always been regarded as historic record-keepers so that shareholders could derive some comfort that the past figures presented a true and fair value. Both professions seem to be run by the older generation. With the onset of Covid-19, and the serious impact it has had – and will continue to have – on global economies, businesses and people, it is essential that both spend more time focussing on what is happening and what will happen in the future. It may be time to bring in tech-savvy younger leaders, with fresh and modern ideas. Accounting 101 and Economics 101 will never be the same again. It’s About Change!