Stuck With U                                                                                              15 May 2020

An unnamed errant Dubai real estate agency was fined US$ 13k by RERA for violating laws relating to their escrow account and permits of real estate advertisements. The fine covered a number of violations, including receiving amounts outside the escrow account and launching a promotional campaign, without obtaining the necessary permits. It was warned that if the agency committed any other infringement, it will face a licence suspension, office closure, and criminal prosecution.  The legislator has introduced these regulations to protect potential customers and safeguard the interests of all stakeholders.

ASGC, with an annual turnover in excess of US$ 1 billion and an 18k payroll, have spent US$ 31 million for a 15% stake in Costain, as it tries to expand its international presence; this formed part of the UK contractor’s US$ 124 million cash raising share issue. The Dubai-based company is confident that Costain is well placed to take advantage of an expected increase in UK public spend, including billions in healthcare infrastructure, roads, railways and housing, as part of the Johnson’s government’s promise to spend over US$ 700 billion in capex over the next five years.

The UAE has set out its strategy to deal with Covid-19 in a two-prong attack. The short-term, already under way, involves the gradual reopening of the economy and has already seen US$ 80.0 billion pumped into the economy, with the aim of getting money into those sectors, including SMEs, in most need. In the longer term, and in a much-changed economic environment, the government is looking at the value of investment in “sectors of high potential”, including digital, renewables and food security. This paradigm shift will put the local economy more in line with the more mature global economies, with a marked emphasis on the digital sector, which will include 5G, IoT, AI, blockchain, robotics biotechnology, 3D printing etc, and marks a move away from what the UAE was like prior to Covid-19. In some ways, this pandemic can be seen as a vehicle that has pushed the economy in a way in which it was heading but at a much greater speed.

After Ramadan, it has been announced that the emirate’s malls will return to normal working hours (12 hours a day and 14 at the weekend). Nevertheless, the current social distancing rules will remain, and malls can only utilise 30% capacity; only those aged between 13 and 59 will be allowed to enter. At the same time, wholesalers and retailers will again be able to offer promotions.

In a bid to expand its global presence, Emerging Markets Property Group, has bought out Lamudi Global’s operations in the Philippines, Indonesia and Mexico; no financial details were made available. This acquisition will give the Dubai-based parent company of property portal Bayut a marketplace of almost 500 million, with a commission potential of US$ 2.3 billion on the back of annual sales transactions totalling US$ 55.1 billion. Last year, the company acquired Lamudi’s Middle East and Pakistan businesses and three months ago bought Thailand’s property portal Kaidee. In April, EMPG, which also owns Dubizzle in the UAE and several other on-line marketplaces, sourced a further US$ 150 million in funding, valuing the company at US$ 1 billion.

Emirates Group, comprising Emirates (the airline) and dnata, posted their 32^nd consecutive profit – at US$ 456 million – for the year ending 31 March 2020 on the back of lower revenue of US$ 28.3 billion; at the end of the year, it had a cash balance topping US$ 7.0 billion. Although Emirates revenue dipped 6.0% to US$ 25.1 billion, (attributable to a planned 45-day runway closure earlier in the financial year and latterly, in Q4, to the impact of Covid-19), its annual profit was 21.0% higher at US$ 288 million. Passenger numbers fell 8.0% to 58.6 billion ATKMs in 2019 because of the 45-day runway closure last May and the recent advent of Covid-19. Fleet numbers were flat at 280 aircraft, following the addition of six A380s and the retirement of four Boeing 777-300ERs, its last 777-300 and a 777 freighter. There will be no dividend this year, compared to the US$ 500 million declared to the shareholder, International Corp of Dubai, last year.

As global trade softened – not helped by the US-Sino tariff war and the onset of Covid-19 in Q4  – so did Emirates cargo division’s revenue – down 14.0% to US$ 3.1 billion, with tonnage declining 10.0% to 2.4 million tonnes, as one plane was retired leaving the fleet standing at eleven Boeing 777F freighters.

Boosted by a US$ 59 million gain from the sale of its shareholding in Accelya, an IT company, dnata showed a US$ 168 million profit on the back of a 2.0% rise in revenue to US$ 4.0 billion, driven by international business accounting for 72% of the total. There were major impact costs that slowed profit growth including Covid-19 (US$ 75 million), goodwill impairments of US$ 45 million and the failure of Thomas Cook (US$ 26 million).

Following the shenanigans at Abraaj and NMC, which left several local banks with sizeable impairments for bad loans, it is reported that the liquidation of Phoenix Group could result in further local losses. The company, one of the largest global rice trading firms worldwide, is estimated to owe financial institutions US$ 1.6 billion, of which local banks have up to US$ 400 million exposures; this is a lot less than the estimated US$ 6 billion plus they had with NMC. By the end of the week, local banks had confirmed exposure in the region of nearly US$ 140 million, but as others have yet to do so, this will inevitably rise. To date, FAB is the largest “casualty” having declared a figure of US$ 73 million outstanding. It appears that the group’s problems emanate from its Dubai subsidiary, with one of its commodity traders exceeding his authority and undertaking some extremely risk currency hedging deals, in a vain attempt to recover losses incurred earlier in the year. The situation was further exacerbated by the onset of Covid-19 which could be the final nail in the coffin of a very successful company which posted a 2019 gross profit of US$ 152 million, on the back of a US$ 3 billion plus turnover.

The bourse opened on Sunday 10 May and, 104 points (5.1%) down over the previous week, nudged a further 29 points lower (1.5%) to close on 1,894 by 14 May. Emaar Properties, having shed US$ 0.07 the previous week, was US$ 0.02 lower atUS$ 0.65, whilst Arabtec, down US$ 0.01 the previous week, fell US$ 0.01 to US$ 0.17. Thursday 14 May saw the market trading at 113 million shares, worth US$ 41 million, (compared to 182 million shares, at a value of US$ 51 million, on 07 May).

By Thursday, 14 May, Brent, up US$ 7.31 (32.5%) the previous fortnight, continued moving north, US$ 1.74 (5.8%) higher, to close at US$ 31.52. Gold, up the previous week by US$ 36 (2.1%), nudged US$ 14 higher (0.8%) on the week to close on Thursday 14 May, at US$ 1,744.

With the auto sector sinking by the day, Nissan has unveiled a three-year plan to take the drastic action of cutting US$ 2.8 billion in annual costs, as well as booking restructuring charges, the total of which has yet to be ascertained. The plan will also include phasing out the Datsun brand, slashing marketing and research budgets and shutting down one production line. The Yokohama- based company has still not come to terms with having to rejuvenate an ageing vehicle line-up and a management still recovering from the arrest of former Chairman Carlos Ghosn. It is expected that Nissan will declare a loss when it publishes its annual results next week, as well as posting a 12.0% fall in revenue to US$ 95.3 billion.

In order to ease financial pressure on his other investments, including Virgin Atlantic, it is reported that Richard Branson is selling a stake in Virgin Galactic. The US$ 500 million raised will be usedsupport its “leisure, holiday and travel businesses” hit by “the unprecedented impact” of Covid-19.

It seems that Airbus will follow Boeing’s lead from last week and start preparing its workforce for staff cuts of up to 10% of its 134k payroll, as the fall in demand leads to lower production numbers; figures indicate that aircraft deliveries have nosedived by 35% since the onset of Covid-19. Even before the pandemic, it was evident that there was a shift away from the wide body plane option, so this sector would bear the brunt of cuts, as compared to the helicopters and defence divisions.  After a decade of impressive growth, the wheels have fallen off as the pandemic has decimated air travel and put most of the global carriers in dire financial distress. Measures have already been taken such as slowing the ramp up of the A220 single aisle plane, postponing a new A321 assembly line and cancelling the tie up with RR for hybrid-electric powered aircraft.

Following a US$ 8.5 billion 2019 deficit, Uber has posted a Q1 US$ 2.9 billion loss, as its overseas sectors started to get battered by Covid-19, with its global core business, ride hailing, down by more than 80%. It has also sold its loss-making bike and scooter business, Jump, to Lime. On a positive note, Uber Eats has seen a surge in business, posting a 53% hike in revenue, and there have been early signs of markets picking up, as lockdowns start to ease in many countries. The loss was exacerbated by the fact that the value of its investments in Chinese ride-hailing giant Didi, Singapore-based Grab and others plummeted by US$ 2.1 billion, as demand collapsed in those regions.

As a bellwether for the German economy, Siemens Q2 (ending 31 March) 21.0% fall in profit to US$ 634 million reflects the perilous state of the country’s economy going forward. Because of the nature of Covid-19 – and the unknown factor of when the economy will return to some form of normalcy – the Munich-based conglomerate has abandoned its full-year earnings forecast. Although it managed to keep its factories operating, its revenue was badly dented because of the lockdown affecting some of its customer base.  With industrial production declining 9.2% in March, with worse to come in April as Covid-19 tightened its grip, the company is seeking a new credit line of US$ 3.3 billion to help tide it through these trouble times. The problem facing Siemens, and probably most other global entities, is that nobody knows when the pandemic will end, and Europe’s powerhouse economy will not be immune from the fallout.

The Australian investment bank, Macquarie, has posted its first annual loss in seven years, with net income dipping 8.0% to US$ 1.8 billion for the year ending 31 March, attributable to an almost doubling of impairments to US$ 667 million and Covid-19 towards the end of their year. Because of the uncertainty surrounding the pandemic, the bank did not post their usual earnings outlook, because it was “unable to provide any meaningful” guidance for this year.

Australia, like most developed countries, is facing major economic problems, with current forecasts pointing to a post Covid-19 US$ 235 billion hole in the Federal Budget and unemployment taking four years to return to below 5.0%; annual deficits over the next four financial years are expected to reach US$ 93 billion (by June 2020), US$ 86 billion, US$ 34 billion and US$ 22 billion by June 2023. The economy will be suffering a “hangover from the traumas of the moment” for years to come that will result in the national income falling US$ 22 billion below the official projections in December’s mid-year budget update, 2019-20 and by US$ 130 billion in the following year, ending June 2021.

The government coffers will be badly hit as reduced personal income tax and company tax receipts result in much lower than expected federal revenues. With interest rates almost at  zero, and inflation heading south, the RBA is fast running out of monetary policies to get the post Covid-19 economy up and running. One way that could be considered is to introduce long awaited and badly needed tax reform that could see GST receipts heading north, (maybe doubling or expanding the base by adding more “exempt” items to the tax list), with stamp duty heading in the other direction, and perhaps to the tax history books. It is reported that parliament has already approved US$ 200 billion of tax cuts. As consumer spending is of such importance to any economy, it makes sense for the government to ensure that more money is in the hands of the general public. This will get the money cycle moving quicker than say government pumping money into major infrastructure projects and will result in businesses – and the economy – returning to some sort of normalcy a lot quicker.

To bolster falling public revenues as a result of the pandemic (and slumping energy prices), the Saudi Government has decided to triple its VAT rate to 15% from July, discontinue COLA (Cost of Living Allowance), cancel or postpone capex for some public agencies and reduce provisions for a number of initiatives from its Vision 2030. It is expected that these measures will save US$ 27 billion as the Kingdom tries to ameliorate the double whammy of a fall in public revenue and a necessary increase in public spending. More cuts are expected within thirty days when the results of a ministerial committee study into the financial benefits paid to all stakeholders, not subject to Civil Service Law in government ministries, institutions, authorities, centres and programmes, are published.

With its President opposing any lockdown and claiming that the fallout from social-distancing measures could be worse than the actual pandemic, it is no surprise that Brazil is on the verge of collapse. Despite Jair Bolsonaro’s protestations, statistics show that Covid-19 has worsened in the country, which has registered 132k confirmed cases and 9.1k deaths. Now Economy Minister Paulo Guedes has warned there is a possibility that production may seize up, state emergency subsidies for the poor will dry up, and there will be a lack of food in the shops by the end of May. The President is keen to take early steps to bring the economy out of “intensive care”, despite some municipal governments defying the official advice of full lockdowns. There is no doubt that the economy is buckling under the pressure with the rial trading at record lows.

Following Brazil’s economic malaise worsening, Argentina joins its neighbour with news that it has extended a deadline, by ten days, to restructure a US$ 65 billion debt package, requesting private bondholders to markedly reduce the agreed interest rates and to defer payments to 2023. With most creditors rejecting this offer, the government finds itself in a dilemma – it patently cannot afford to repay the debt on the agreed terms and if it does not it will find it very difficult to source future funding, particularly with its dismal track record. The relatively new Alberto Fernández government has not been helped by a fall in the peso, (making any debt repayment in US$ more expensive), and the country’s exports not generating enough foreign currency to repay the massive debt. By the end of last year, public debt, at US$ 323 billion, was equivalent to 88% of GDP. If the US$ 500 million interest payment is not made on 22 May, the country will once again go into default and will then face even more pressing economic and political troubles.

The latest estimate by Lloyd’s of London is that Covid-19 claims could already be as high as US$ 4.3 billion – slightly less than the 9/11 US$ 4.7 billion payout and the 2017 hurricanes’ US$ 4.8 billion. However, if this pandemic goes into Q3, claims could be double these figures. Not surprisingly to any observer is the fact that some insurers – as is their want – are refusing to settle many would-be claimants finding the virus is not covered by their policies, although Lloyd’s chief executive John Neal confirmed that it was paying out on “a very wide range of policies” to support business and people affected by the pandemic. However, some insurers are not paying out on business interruption claims  resulting from Covid-19. Up to 30% of total claims are expected to arise because of the cancellation or postponement of major global events.

To help mitigate some of the impact of Covid-19, and get the country on the go again, India is planning to introduce a US$ 265 billion package, equating to 10% of the country’s GDP.  In April, it was estimated that 122 million Indians had lost their jobs, as a significant economic package was implemented to help Asia’s third largest economy recover from weeks of lockdown that have been in place since mid-March. Apart from the monetary aspect of Modi’s package, the government also included tax breaks for new plants and incentives for overseas companies. The Prime Minister has been criticised that the package is not big enough and that his dilatory behaviour has resulted in millions of migrant workers being stuck in the cities and unable to return to their villages.

The UK Chancellor, Rishi Sunak, has extended  the scheme to pay  80% of wages (up to US$ 3k) of workers on leave because of coronavirus for the next four months; however, he did add that from August companies will be asked to “start sharing” the cost of the scheme. It is estimated the government is “subsidising” 7.5 million people, from 935k businesses – or 25% of the country’s workforce – costing US$ 16.8 billion a month that could top US$ 120 billion by October.

With a further three million Americans claiming unemployment over the past week, the number of new jobless claims has climbed to 36 million since mid-March – equivalent to almost 25% of the total workforce; unfortunately, the minority and low-income households continue to bear the brunt of the job losses.  Covid-19 is still causing havoc, as shutdowns weigh heavy on the US economy, but some analysts believe that this could be the bottom of the cycle, as an increasing number of states start to ease lockdowns and hiring will start to pick up.

The US has already approved nearly $3tn (£2.5tn) in new spending packages, worth an estimated 14% of the country’s economy. The Fed has also taken radical steps to shore up the economy, pumping trillions of dollars into the financial system. Meanwhile, Federal Reserve chair, Jerome Powell, has reiterated that the recovery is going to be slow and would be even if slower if government funding is not forthcoming, as well as unemployment levels remaining at elevated levels, compared to the 50-year lows seen just three months ago in February. The Fed has also pumped in billions of dollars but more money may have to be injected into the economy but there has to be a limit, as the country’s public debts nears a record US$ 26 trillion.

In 1989, David Gower, the then captain of England, was struggling with his form, whilst the team were being battered by the Australians. The opening pair, Mark Taylor and Geoff Marsh, were nearing a 300 partnership on the first day at Trent Bridge when a tired and disgruntled Gower called on the 12th man and started pointing to the press box. Evidently, he was asking him to go up to see the reporters and ask them what they would do with the field position and the bowling – he wanted to know there and then and not read in tomorrow’s papers what he should have done.

Likewise, 99.99% of analysts, and economists did not see this disaster coming and will only be able to advise what went wrong when this crisis is over. Not many have any idea how this pandemic will unfurl but these experts may do worse than pick a Scrabble letter and use that to solve the problem. Most letters could be used but L, U, V and W would be beneficial. Whatever happens, without positive – and the right – steps taken by governments and central banks, this recession could turn into a major depression. An example of an L-shaped recession was the bursting of Japan’s speculative bubble in 1990 and the country has never returned to its previous 5% levels. This is a possible outcome that should be considered. Then there is the U-shaped curve, when the economy collapses and remains in the doldrums for some time; return to work might take more time than expected, with many companies going into liquidation, whilst those that do survive taking maybe years to recover. For example, following the 1973 oil crisis, economies only started recovering two years later.

Then there is a chance of a V-shaped recovery, with the dramatic fall matched by an almost similar recovery path; this looks highly unlikely, as economic activity cannot fully return until containment is lifted, by which time the economic damage has already seen liquidations and most other businesses struggling. The W-curve would involve an initial rebound before declining – a possibility if the “second wave” occurs. When there is a further recovery, it might not be as high as the earlier rebound and could easily turn into more of an L-shaped curve. A recent example is the Russian experience which saw a massive recovery in 2010, followed by another decline and then a slight improvement in the economy. Although many other letters can be used, maybe we will be Stuck with U.