School’s Out Forever?

School’s Out Forever 21 May 2020

There are an estimated 245k companies in Dubai and now the world press is already writing eulogies for the emirate, based on the results of a survey of just 0.005% of that total. There is no doubt, in line with most of the world, that Dubai has seen – and will continue to see – a downturn. A University of Chicago that estimates that more than 40% of recent pandemic job cuts in the US are likely to be permanent.Although not as daunting as some other countries, the figures are horrendous but it is a fact of life that reality has hit home and positive steps are now in play to soften the impact for the economy and for the people.  More companies will close, people will leave and when this phase is over, both the economy and population will be smaller and will take time to return to pre-Covid levels. The economy will not bounce straight back and nobody knows what it will look like but it will be different and being Dubai, it will be smarter, more tech-oriented, forward-looking and a global leader.

Despite external reports, Emirates has yet to make any announcement on its future plans, in relation to aircraft and payroll numbers, currently numbering 269 and 105k respectively. As the global industry starts to come to terms with a new future for air travel, Emirates will undoubtedly be considering their various options, including cost cutting measures and a revamp of its assets. Recently, its Chairman, Sheikh Ahmed bin Saeed Al Maktoum, noted that the airline’s top priorities included conserving cash, safeguarding our business, and preserving as much of our skilled workforce as possible.

Today, 21 May 2020, Emirates restarted scheduled passenger flights to only nine selected destinations, with these return flights continuing until the end of June. These flights will include London Heathrow, Frankfurt, Paris, Milan, Madrid, Chicago, Toronto, Sydney and Melbourne. Depending on circumstances, there could be timetable changes. Any person flying into Dubai will require a Ministry of Foreign Affairs approval letter before entry is allowed, a mandatory DHA test on arrival and a compulsory 14-day quarantine.

A recent update to the Dubai SME guarantee scheme sees it extended to include not only 100% locally owned SMEs, that could apply for funding of up to US$ 213k, but now Dubai-based SMEs that are 50% owned and managed by Emiratis to seek funding up to US$ 114k, backed by a 50% capital guarantee; it also allowed qualified businesses to get a three-month payment holiday. The original aim of the exercise was for the government body, in association with lending platform Beehive, to facilitate funding of up to US$ 213k for locally owned start-ups.It is reported that local banks have already utilised US$ 10.2 billion of the US$ 13.6 billion of the interest free loans, as part of the Central Bank’s efforts to mitigate the negative impacts of Covid-19 on the country. In order to further facilitate the implementation of its Targeted Economic Support Scheme, the central bank has added clarifications on the deferral requests, recently issuing further guidance on how TESS operates to smooth its workings, so that more entities can claim. The options for granting postponements include deferring only the principal of a loan, deferring both interest and principal repayments or deferring interest and profits only.

As gaming is becoming more popular in the region, Riot Games MENA is set to introduce the Intel Arabian Cup which will see teams from thirteen MENA countries fighting it out for the League of Legends. The year-long competition will be split into two seasons of four months each. The first season will see each of the thirteen countries playing local games to find a national champion team, with a US$ 130k prize pool being made available to the top three teams in each country. All 13 leagues will be held and broadcast every weekend on the League of Legends Arabia Twitch channel. The second season will see the thirteen national champions play to be crowned the regional champion. to the KHDA, Dubai schools should reopen in time for the beginning of the academic year in September. The education regulator is still unsure what the reopening will look like and whether the date will change. All Dubai schools have been closed since mid-March and since then most of the students have been receiving e-learning programmes; it will be interesting to see how much impact on-line education has had on the traditional educational status quo.

Late in the week, Etisalat’s CEO, Saleh Al Abdooli, announced his resignation, citing “personal reasons”, after four years in the chair and 28 years with the telco. The board appointed its CEO International, Hatem Dowidar, as Group Acting Chief Executive Officer; a relative newcomer to the country’s biggest telecom operator, starting as COO in 2015, following a five-year tenure as CEO of Vodafone Egypt. Etisalat recently announced Q1 results, with revenue rising 1.0% to US$ 3.6 billion and a 2.0% profit decline to US$ 599 million, driven by forex losses, rising finance costs and higher depreciation.

A former top official at Pacific Controls – allegedly implicated in the loss of US$ 100 million of company funds – has been detained in Dubai, after he returned to divest some of his local properties. It seems that a complaint had been lodged against the former finance manager, Srinivasan Narasimhan, by the current Pacific Controls management that he and his team fraudulently created and operated bank accounts in the company’s name. Located in Jebel Ali,and founded by Dilip Rahulan, who is also under investigation, the company was a pathfinderin sustainability solutions but seemed to have lost its way four years ago when it was bedevilled with heavy bank debt. An audit at the time found that over US$ 100 million was unaccounted for and the company nearly folded. Since then the management has been trying to right the wrongs of the past and this latest development could be a major turning point for its future. Because of the quality of its data centre infrastructure and cloud computing services, it still has an enviable customer base including Dubai Civil Defence, RTA, Dubai Airport, Etisalat, and Mobily.

The principal arm of Dubai’s government, Investment Corporation of Dubai, has posted a credible 16.9% improvement in its 2019 annual profit to US$ 6.8 billion, although revenue dipped 1.9% to US$ 62.1 billion, with a decline in energy revenues and transportation income, offset by higher income in the financial sector; the main contributor being a US$ 1.2 billion gain on the partial disposal of Network International. The conglomerate’s asset base jumped 27.5% to a record US$ 305.2 billion, whilst liabilities were 35.6% up at US$ 237.0 billion.

Deyaar Development has posted a Q1 revenue of US$ 27 million and a profit of below US$ 1 million, after posting impairment charges of U$ 3 million, attributable to the impact of Covid-19. In February, Deyaar handed over Midtown, a six-building project comprising 570 units, the second phase of its Midtown development.

Because of a notable increase in Q1 volume, which boosted revenue, up 13.0% to US$ 24 million, Dubai Financial Market posted a 24% jump in net income to US$ 9 million. The two revenue sources were operating income and investment returns, contributing US$ 13 million and US$ 11 million respectively; operating expenses were 7.4% higher at US$ 15 million. With its main sources of revenue being fees and commissions, the bourse saw its quarterly trading value 19.0% higher at US$ 3.9 billion. DFGM has an 845k investor base, with foreign investors responsible for 51% of trading activity in Q1 as well as holding an 18% market cap. Because of the Covid-19 factor, and the increase in market volatility, the Securities and Commodities Authority lowered the threshold trigger, to stop a company trading for the day, from 10% to 5%.

The bourse opened on Sunday 17 May and, 133 points (7.0%) down over the previous fortnight, reversed its fortunes this week, trading 45 points higher (2.4%) to close on 1,939 by 21 May. Emaar Properties, having shed US$ 0.09 the previous two weeks, was US$ 0.01 higher atUS$ 0.66, whilst Arabtec, down US$ 0.02 the previous fortnight, was flat at US$ 0.17. Thursday 21 May saw the market trading at 252 million shares, worth US$ 101 million, (compared to 113 million shares, at a value of US$ 41 million, on 14 May).

By Thursday, 21 May, Brent, up US$ 9.05 (40.3%) the previous three weeks, nudged lower by US$ 0.08, to close at US$ 31.44. Gold, up the previous two weeks by US$ 50 (2.9%), was also down US$ 16 (1.0%) on the week to close on Thursday 21 May, at US$ 1,728.

Latest IATA data indicates that MENA carriers could lose more than US$ 30 billion in revenue, as departures tanked by 95%, quarter on quarter. ME carriers account for 80% (US$ 24 billion) of that total, with departures down 88%; the current estimate is US$ 5 billion more than its previous forecast of 02 April. The world body is calling for more government aid to support their airlines, in the way some have already initiated economic packages for SMEs and other businesses. It has concerns that with carriers facing major liquidity problems, with plans to slash payroll numbers and costs, government aid may come too late to save the estimated 1.2 million job losses in aviation and related industries.

Air Canada is the latest global airline to announce massive redundancies, as it cuts its workforce by 60%. The company is trying to save cash, as well as downsizing to adhere to what many believe will be the aviation sector’s position in the mid-term. To help the cash flow, it may mean flight staff going on a two-year sabbatical, with staff privileges, or reducing working hours. Like other global airlines, Air Canada is facing a short-term future where air travel has come to a standstill and most airlines facing inevitable bankruptcy, without state aid.

It is reported that Rolls Royce is planning to cut 9k, equivalent to 17% of its workforce, saving US$ 840 million, from its payroll, as it tries to slash total annual costs  by US$ 1.6 billion, in the Covid-19 era; the current slump, that has seen air travel sink by up to 90%, has resulted in  its maintenance revenue stream drying up and global airlines abandoning aircraft sales orders. Unfortunately, thecompany was a leading player in the larger aircraft and now as the travel sector will focus on the smaller, one-aisle planes in the future, it will be badly hit. Its production target has already fallen 44.4% to 250 plane engines.

Further to recent liquidations of a number of Australian retail chains, (even before Covid-19), Dutch brand G-Star Raw, with 57 national outlets, has entered voluntary administration. It is but one of many retailers that had already faced a difficult start to 2020, with chains including Bardot, Jeanswest and Harris Scarfe all closing. Like others, G-Star Raw’s main creditors are commercial landlords and if this were the problem prior to the pandemic, it is going to be a bigger problem coming out of lockdown, as customers have reduced discretionary spending due to growing uncertainty about job security and income.  Add in the fact that some retailers saw revenue fall up to 80% during lockdown,  and these losses have to be recovered from future profits, then it seems that landlords will have to consider easing rents..

Meanwhile in US, JC Penney, with 850 national outlets, has filed for bankruptcy, after 118 years of trading, but will be allowed to restructure, even though it is not in a position to pay its debts. In its latest statement, the company confirmed that it had a cash balance of US$ 500 million and access to a further US$ 900 million from lenders. The retailer, with an 80k payroll, has seen sales fall 39.5% over the past decade to US$ 10.7 billion and has closed hundreds of shops.

In the UK, Clarks is taking steps to still be a viable business, post Covid-19, and has already announced a 7% cut in its 13k global payroll and plans to close some of its worst-performing stores.  Currently, all of its UK and Irish stores remain closed because of the lockdown but some of its international outlets, including in China, have reopened. Even before the crisis, the 195-year company had posted a US$ 102 million loss as it sold 20 million pairs of shoes – 9.1% down on the previous year. Much of the production was moved to China in 2007, as it closed its Millom UK factory and last year it closed its only UK facility, which had only been operating for two years, when it failed to make set targets for making desert boots.

Despite no longer selling its talc-based Johnson’s Baby Powder in North America, Johnson & Johnson says it will continue to sell the product elsewhere in the world. The reason behind this move is that sales have shrunk there mainly because of adverse publicity arising from numerous court cases that has seen the company being ordered to pay out billions of dollars in compensation because of many claims, involving over 20k, that it causes cancer; to date,  all its appeals have been successful. (Talc is mined and can be found in seams close to that of asbestos). Currently, Johnson & Johnson is appealing against a 2018 court order that awarded damages of US$ 4.7 billion to 22 women who alleged that its talc products caused them to develop ovarian cancer.

Tesla’s Autopilot became 14.3% more expensive this week to retail at US$ 8k, with Elon Musk commenting that with improving technology, the price will continue to rise in the future; but in true Musk-style, he added that the technology it is adding will be worth more than $100k. Although not fully autonomous, it will add features such as automatic lane changes, parallel parking and a summon feature, which automatically parks and retrieves the car. With these new additions, the Tesla Model 3 will cost US$ 41.7k, as the base model retails for US$ 33.7k.

Following a massive dent in revenue (and profit), attributable to Covid-19, Fiat is in discussions with the Italian government about a possible US$ 6.8 billion state-back finance package; this would be the biggest European government-backed financing, eclipsing the US$ 5.5 billion sourced by Renault last month.  In Q1, the Anglo-Italian carmaker lost US$ 5.5 billion as new car sales slowed markedly but still managed to raise US$ 11 billion additional financing. The three-year credit facility would be “dedicated exclusively to financing FCA’s activities in Italy” and supporting about 10k national supply chain enterprises. Italy’s trade-credit insurer Sace SpA, Italy’s will provide a public 80% guarantee.

Having slashed 3k jobs earlier in the month, Uber Technologies will cut a further 3k jobs, as coronavirus-led restrictions have resulted in business being 80% lower. Over 65% of the business is generated in North America, where many locations had been in lockdown since mid-March. In other moves to reduce its costs, the ride-hailing firm has closed down 45 offices, as well as plans to move its regional Singapore hub to another yet unknown Asian city; it will also reduce investments in several non-core projects and is in discussions with GrubHub Inc to reinforce its food delivery business.

Japan’s SoftBank Group Corp posted a surprising US$ 14.0 billion loss, attributed to a US$ 18.0 billion deficit with its Saudi-backed Vision Fund, including almost US$ 10 billion on two of its high-profile investments – Uber and office-sharing firm WeWork. The US$ 100 billion fund, had already made two quarters of losses of which US$ 75 billion had been invested in 88 start-ups, now valued at US$ 69.6 billion and still heading south. Its founder, Masayoshi Son, has announced that the company will spend almost US$ 1.2 billion for a share buyback, using its stake in Alibaba. Coincidentally, as well as reducing its stake in the Chinese tech company, it has also seen the departure of its co-founder, Jack Ma, from its board.

In the US, delivery app DoorDash is evidently backed by SoftBank and if the following was a typical example, it might point to why the Japanese investment giant is in trouble. Last year, the owner of a pizza restaurant discovered that the delivery app, unbeknown to him, had his details on their app and was selling his premier pizza US$ 8 cheaper than his US$ 24 retail price. As he had been receiving complaints about deliveries, even though his outlets did not deliver, he decided to order ten pizzas for a friend; he paid DoorDash US$ 160 and received US$ 240 from the app. It appears that this was a “demand test” by the app whereby they have a test period where they scrape the restaurant’s website, not charging any fees, so they can then contact the restaurant with positive order data so as to convince them to sign up.

According to AdColony, ME mobile game downloads jumped 28% in March, just as many countries started imposing lockdown regulations; daily time spent on mobile gaming per user rose 24% month on month. A December report from Newzoo forecast that the ME industry would show a 25% annual growth over the next two years to US$ 4.4 billion – bound to be on the low side because of its increased usage since the Covid-19 onset. Also, the launch of Playstation 5 console and Microsoft’s Xbox X later in the year will also give a further boost to the gaming sector and maintain it as the most profitable form of global entertainment. By the end of 2022, the worldwide market is expected to generate US$ 187.8 billion, of which US$ 159.3 billion will be spent by an estimated 2.7 billion gamers.

China surprised Australian officials by imposing an 80% tariff on the country’s barley, which currently earns about US$ 1 billion a year and now sees the close of a lucrative expanding market. It seems that Australia will not take retaliatory action, but it did follow Chinese claims of local subsidies and that the sales prices were below the cost of production. It may onlybe a coincidence, but the introduction of tariffs came just after Australia’s call for an independent inquiry into the origins of COVID-19.

Now there are fears that China is tightening the screws further, after new rules, regarding the inspection of Australian iron ore, have been introduced; they change the current method of inspecting such imports, from batch by batch, to inspecting on the request of the trader or importer. Although it is claimed that the new process would “streamline” inspections at Chinese ports, some see it as another warning to Australia not to meddle in Chinese internal affairs.

On Sunday, the chairman of the Federal Reserve noted that the US economy could “easily” contract by 20% – 30% and that the economic downturn might last a further eighteen months. However, Jerome Powell reiterated that the economy would recover, as he called on the country’s legislators to pass more economic stimulus and extra relief packages; to date they have already approved nearly US$ 3 trillion in spending, equivalent to 14% of the country’s economy. In a more positive note, the Fed Chair was confident that, since the financial system was healthy, the US could avoid a depression as long as there was not “a second wave of the coronavirus”.

The ongoing labour crisis in the US continues unabated with more than 2.4 million applying for unemployment benefits last week, bringing the total to 38.6 million since the crisis started in mid-March; this figure already equates to all of the initial claims filed during the Great Recession. The latest figures, based on the number currently receiving unemployment insurance, points to an unemployment rate of 17.2%. The figures are even worse when those in the gig economy, who are not included on the current labour data, as they are self-employed, are considered. This week’s claims, via the federal Pandemic Unemployment Assistance, totalled 2.2 million and continuing claims under the program were at 6.1 million at the beginning of the month. What is really worrying is the forecast from the University of Chicago that estimates that more than 40% of recent pandemic job cuts are likely to be permanent.

The IMF is soon likely to downgrade its most recent forecast for the global economy to a 3.0% contraction this year and only a partial recovery in 2021, not the 5.8% rebound initially expected. The recent data is a lot more serious than first thought and “that means it will take us much longer to have a full recovery from this crisis,” according to its Managing Director, Kristalina Georgieva. This comes a week after the Asian Development Bank warned the global economy could face economic damage of up to US$ 8.8 trillion – and even this could be on the low side.

Meanwhile three of the global economic powerhouses are looking straight down the barrel of a gun. The US posted its worst quarterly figures since the Great Depression, down 4.8% in Q1, with anything up to negative 15% expected in the current period. China fared even worse in Q1, mainly because it was impacted by Covid-19 a lot earlier, 6.8% down and probably marginally worse in Q2. Europe’s biggest economy, Germany, actually fell into recession in Q1, with expectations that the current quarter could contract by up to 22.0%.

In Q1, Japan’s economy contracted 3.4%, despite the fact that the country is not going into full lockdown, although it did issue an April state of emergency which has had a dire impact on its supply chains and businesses. Because in Q4, it registered an even bigger fall of 6.4%, driven by an October sales tax hike from 8% to 10%, the country is in technical recession (based on posting two successive quarterly declines). The outlook is even worse despite the government pumping in US$ 1 trillion, the central bank expanding its stimulus measures and the lifting of the state of emergency in 39 out of its 47 prefectures. Some analysts forecast that the world’s third largest economy could tank again in Q2, declining by as much as 22%.

After the feast, came the famine in Australia; following record 8.5% hike in March, driven by panic buying at the lockdown onset, retail sales slumped 17.9% in April – the steepest monthly fall on record; sales of non-perishables came in 23.7% lower (after a massive 39% uptick in March). However, it seems that the “loss” in retail sales could have been offset by a similar hike in on-line revenue. This could continue into this month as a raft of factors are working against any improvement, including higher household debt, declining house prices, slumping wage growth and rising job insecurity driving consumer confidence downwards. Meanwhile, April turnover in cafes, restaurants, clothing and footwear retailers was 50% lower, year on year.

In a desperate bid to tighten the EU – and also help in its recovery cycle from Covid-19 – Germany and France have agreed to support a US$ 500 billion aid package, with Angela Merkel confirming her agreement that bonds issued by the EC would be repaid from the EU budget, with her country being its main provider of funds. However, it still has to be ratified by all 27 states and it is likely to face opposition from the likes of Austria, the Netherlands, Denmark and Sweden, which are against increasing aid to the areas worst hit by the pandemic. This new proposal will see money distributed through grants whereas the “Frugal Four” would prefer utilising loans. The German change of heart is probably the last roll of the dice by the Germans to keep the bloc in situ.

Rishi Sunak has warned the UK public that Itis “not obvious there will be an immediate bounce back” for the economy, once the pandemic abates. The Chancellor has reiterated that although some countries were beginning to ease containment restrictions, it would take time to see a full recovery to some sort of normalcy. In April, the UK had 2.1 million claiming unemployment benefits – 69.3% higher month on month.  Nobody knows how long the process will take – what is certain is that the longer the recession lasts the more damaging the economic scarring will be.

The World Economic Forum foresees a possible increase in economic distress and social discontent if there is a prolonged recession and no global governmental action is taken. There seems no doubt that the number of bankruptcies will skyrocket, as millions of companies fail mainly driven by lack of liquidity. The knock-on effect will see households struggling and could well result in major bouts of social discontent. Furthermore, government debt levels will jump to almost 100% of GDP, as trillions of dollars have been “thrown” at efforts to mitigate the negative impact of Covid-19, leaving a massive build-up of public debt that has to be repaid. There is a chance that xenophobia may have its day in the sun especially when international travel is severely curtailed and supply chains are still being restructured. The study puts the Covid-19 economic loss at US$ 26.8 trillion, and especially when international travel is severely curtailed and that global GDP will shrink by 5.3%.

Education will be a big Covid-19 loser, as many of its revenue streams have been drastically cut because of the pandemic. There is no doubt that the number of fee-paying students – and especially overseas student registrations – will slump, with a knock-on effect on accommodation charges. Add to these, there will be less conferences and perhaps the value of endowments from wealthy alumni will decline. Probably the biggest revenue driver for say UK, US and Australian universities are the fees received from overseas students. In the UK, standard “domestic” fees of US$ 12k are dwarfed by fees of up to US$ 70k for those from outside the UK and the EU. Now with such undergraduates being sent home and many courses going on-line, it will be harder to charge such a high premium in the future. It is estimated that overseas students in US and Australian universities add US$ 45 billion and US$ 20 billion to their respective economies every year – and that does not include the indirect benefits generated for the local economies around university locations. Not many are hoping that School’s Out Forever?

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