Goodbye To You My Trusted Friend. 15 October 2020
There are signs that Dubai’s property pipeline is likely to contract in the coming years and more so in the villas and townhouses segment. For example, Core is looking at a residential units’ supply of only 32k by 31 December – about 35% less than the 49k widely forecast at the beginning of the year. With 21.5k units added to Dubai property portfolio in the first nine months of the year, the total residential stock now stands at 571.5k. Allsopp & Allsopp also noted that over the past three years, 334 projects have been completed in Dubai, with almost half that, 176 projects, scheduled for handover over the next five years. Core estimated that property transactions in many areas are 35% down on their 2014 highs, with prices at a cyclical low. Even before the onset of Covid-19, new developments were slowing down markedly, as the market tried to rebalance its over-supply conundrum. Indeed Covid-19 may be the catalyst that pushes the property cycle into some form of equilibrium, as the supply side slows.
Damac Properties has awarded a US$ 49 million contract to Trans Emirates Contracting, LLC, to start main work construction of its Zada development, a 26-storey building located in Business Bay. Some may consider this a brave move in the current economic climate, as the sector has been battered by the impact of Covid-19. However, recent reports have indicated a slight uptick in the market, along with a notable increase in first time buyers. For example, the DLD reported an 11.3% increase in sales, compared to the same month in 2019, with sales valued at US$ 1.3 billion; various reasons have been expounded why this has happened including historically low mortgage rates, attractive/relatively competitive pricing by the banks and pent up demand.
Seven Tides have decided to rebrand its US$ 272 million JLT development from Seven City JLT to Golf Views Seven City to “fully appreciate” its views overlooking the twin Majlis and Faldo courses. This is its first mixed-use development and, with 2.6k apartments across 14k sq mt of retail space, a hotel and restaurants, its largest to date.
Accor has announced that it is to manage the Rixos resort at the upcoming Jewel of the Creek, after signing an agreement with Dubai Developments. The 770-key property will also house a 3k sq mt conference centre, a commercial zone, sports facilities, as well as the usual accoutrements.The global hospitality group, which currently operates four Rixos properties in the UAE, will have sixty-five properties (18k keys) in the country, following this latest addition, with twenty-nine more projects (7.9k keys) in the pipeline. The actualJewel of the Creek project is a one million sq mt, mixed-use development, featuring residential, commercial, hospitality, sports, entertainment, recreational and marina components; they are connected to the main city area with seven tunnels and almost 7k parking spaces.
Nakheel has indicate that the four-star Riu Dubai, in a JV with Spain’s Riu Hotels and Resorts, is set for a December opening. The 800-key hotel, located on Nakheel’s Deira Island coastal city, will have ten F&B outlets, three pools and a conference centre and is in the final stages of construction and landscaping work under way.
According to Knight Frank Middle East, Dubai prime office rents fell by an average 6.5% during the first nine months of 2020. Prime rents fell 4.7% to US$ 205 per sq ft, grade A rents by 6.1% to US$ 130 per sq ft and average citywide rents by 7.7% to US$ 100 per sq ft. It is obvious that many companies are suspending any expansion plans and adopting a wait-and-see approach until there is more positive news on the pandemic. There are others who are taking advantage of the current economic environment by either negotiating cheaper rents or upgrading. Q4 will see the delivery of additional supply especially in the prime sector, whilst next year, the vast majority of supply scheduled to be delivered is of Grade A quality. It is estimated that there are 25 active projects, valued at US$ 7.6 billion, in the emirate, with delivery dates up to 2024, which are either being executed or in the study or design phase. Office vacancy levels will increase, as latest data, from the Dubai Statistics Centre, forecast a 7.4% contraction in its GDP and not expected to recover to its pre-pandemic level until 2022; furthermore, employment is set to contract by 9.1% this year, with 6.7% and 5.1% growth rates over the next two years.
The IMF, not known as one of the world’s better forecasters, has projected that the UAE will have negative 1.5% inflation this year, with its current account balance staying in positive territory – 3.6% this year and more than double to 7.5% in 2021. The world agency also predicts a 6.0% contraction this year, followed by growth of 3.3% growth in 2021 for the oil-exporting ME and Central Asian countries, with forecasts of minus 1.1% contraction in 2020 and 2.5% expansion next year for oil importers. On a global scale, 2020 and 2021 will see a contraction of 4.4% and growth of 5.2%, whilst the advanced economy growth is seen at minus 5.8% and a positive 3.9% this year and next. Location-wise, the US, Eurozone, UK and India will all contract in 2020 by 4.3%, 8.3%, 9.8% and 10.3%, with 2021 growth figures of 3.1%, 5.2%, 5.9% and 8.8%; China will grow over the two years by 1.9% and 8.2%. As a rider, the forecasts are reliant on the pandemic being contained and a workable vaccine is globally available.
This in contrast to the Washington-based Institute of International Finance that has forecast a 5.7% contraction to the UAE’s GDP this year followed by 3.1% growth in 2021. Because of its exposure in the tourism and aviation sectors, the emirate could be looking at an increased weakening in its GDP this year. Despite the 2020 decline in economic activity, its external position should remain strong, whilst its current account surplus, although narrowing, will still remain significant. The report noted that employment has fallen by some 10% since the onset of Covid-19. Interestingly, it commented that a more diversified and knowledge-driven economy is needed and that privatising non-strategic GREs and enforcing competition laws and regulations would improve efficiency and raise productivity. The report posted a bleak picture of the real estate market, citing that the price slump since 2014 has been caused by oversupply, weaker consumer sentiment in the context of prolonged low oil prices, and recently Covid-19. It failed to mention that recent figures indicate that a rebound is on the cards because of historically low mortgage rates, the supply pipeline slowing appreciably, attractive sales promotions and pent up demand.
As it had met its aim to ensure liquidity in the banking system, one of its mandate pillars, that of regulating cash flows and withdrawing cash surplus in order to retain economic resilience, the Central Bank of the UAE withdrew US$ 3.0 billion out of excess liquidity during August; this resulted in increasing the cumulative total of certificates of deposits at the end of July to US$ 42.8 billion. At the beginning of the pandemic, it had injected a considerable amount of funds, before starting to remove excess liquidity as from June.
A new scheme to allow professionals to live in Dubai, while employed by overseas businesses, has been introduced, so as to facilitate such a class to relocate to the emirate; those availing of this new facility will be able to utilise all services available to permanent residents in Dubai, including phone and internet, utilities, and schooling. The annual government fee is US$ 287 plus medical insurance with valid UAE coverage. Other requirements include passport, with at least six-month validity, proof of employment with a current one-year contract and a minimum monthly salary of US$ 5k. This comes a month after the government unveiled a five-year visa that allows residents of other countries to retire in Dubai as long as they are over 55 years old and have valid UAE health insurance. One other condition was that applicants must fulfil one of these three requirements: earn a monthly income of over US$ 5k; have US$ 272k in cash savings; or own US$ 544k worth of property in Dubai.
At the first meeting of the country’s General Budget Committee, the federal budget spending and cash flow for the 2020 fiscal year, in light of the repercussions of the Covid-19 pandemic were discussed. Last month, the cabinet had increased the size of its 2020 budget by 2%, exceeding the largest budgetary plan it unveiled 2019, on top of the US$ 16.4 billion the government had allocated for 2019. The meeting, chaired by Sheikh Hamdan bin Mohammed Al Maktoum, also discussed the draft budget for next year and the cash flow impact of the pandemic on its forecast spend.
Standard Chartered is planning to cut more than one hundred of its 1.7k staff positions in the country, with reductions being centred on its retail and global banking division. It is reported that termination payments will include their equivalent of their salary until the end of year, along with their severance pay. The UAE is the biggest market of Standard Chartered’s MEA business, with the region’s H1 profits tanking by 80% after a slump in oil prices. Other international banks, including Nomura Holdings and Credit Suisse Group, have also been reducing their Dubai presence.
Figures from the UAE Central Bank show that YTD, to the end of August, the Cheque Clearing System dealt with a total of 14 million cheques worth US$ 177.0 billion, being handled by the Cheque Clearing System; this equates to 53% of the total cheques handled in the whole of 2019. The impact of the pandemic can be seen from comparing Q1 data with Q2 when 6.3 million cheques, valued at US$ 82.1 billion, were much higher than the Q2 figures of 4.3 million cheques, worth US$ 52.5 billion. Another surprise is the high volume of cheques, in these days of online banking, that are still being used in a country which has a high level of IT penetration. Total withdrawals from the CBUAE were valued at US$ 36.7 billion, with deposits reaching US$ 40.8 billion.
A recent KPMG report points to the fact that the H1 profit of the ten leading UAE banks declined by an average 38.9%, driven by higher-than-expected credit losses on loans and advances, which increased by 125.8%, year on year. Over the first six months of the year, the banks’ non-performing loan ratio rose from 3.8% to 4.1%, as they continue facing the double whammy economic challenges from low energy prices and historically low interest rates. The local banks have received support from the Central Bank of the UAE, including a US$ 70 billion stimulus package, as there has been an unprecedented demand for greater liquidity, as well as relief from capital norms and certain accounting guidelines. Do not be surprised if the industry were to see further mergers and acquisitions in the country’s banking sector over the next twelve months.
With a strategy of “achieving a smoke-free future for the GCC”, Philip Morris International has opened UAE’s first IQOS Boutique at Dubai Mall. This comes after the UAE officially legalised the sale and use of electronic cigarettes in April 2019, ensuring that the nicotine components of vaping are 95% less harmful than traditional cigarettes. In the US, the FDA (Food and Drug Administration) has authorised and granted for the first time the marketing of IQOS devices, an electronic alternative to cigarettes. Over the past twelve years, PMI, which has invested US$ 7.2 billion in developing, evaluating and producing reduced-risk alternatives to smoking, has seen the number of global IQOS users jump from zero to fifteen million. PMI estimates that 70% of its investment, and 20% of its generated revenue, are now in smoke-free products; it also aims to see forty million adult smokers switch to PMI’s smoke-free products over the next five years. Furthermore, the global market for e-cigarettes, or vapes, is expected to be worth US$ 53.4 billion by 2024.
Shuaa Capital has recently launched its fourth investment vehicle this year – a $200 million fund, targeting special situations across Gulf countries, has already attracted US$ 68 million in commitments from investors. This is the Dubai investment banking firm’s first dedicated Sharia-compliant financing vehicle aimed, at GCC corporates and developers, Despite the challenges facing any investment bank, Shuaa is still confident that there are opportunities that will result in appropriate risk-adjusted investor returns for its investors, ”in key sectors including healthcare, real estate, hospitality, construction and shipping.” Shuaa currently manages US$ 13 billion and is aiming to boost this figure to US$ 20 billion over the coming years.
September saw Dubai’s non-oil private sector continue with its recent improvement, with the seasonally adjusted HIS Markit PMI, moving 0.6 higher, month on month, to 51.5, helped by the wholesale and retail recording another sharp rise in new orders. Compared to August, activity and new business rose at faster rates. Unsurprisingly, Q3 only posted a moderate recovery, with the PMI over 50 – the threshold between expansion and contraction – as the gradual easing of restrictions resulted in a marginal rise in business activity. The rate of sales growth posted a ten-month high with higher client demand and the starting of new projects. Travel and tourism remained in the doldrums and although it continued to soften, it did so at the slowest pace since February. Dubai has now opened its borders to overseas visitors. What did continue was the continuation of discounting but at a marked slower pace and although firms continued job cutting, this was also done at a slower rate. There was a general consensus that there would be further growth, mainly linked to a recovery in sales as the pandemic-related restrictions are eased, but firms continue to exercise caution in their business affairs, being wary of expanding too quickly.
More disturbing news continues to pour in from the ongoing administrators’ investigation into the shenanigans related to NMC Healthcare. It seems that a number of financers could be implicated in potential collusion, with the previous management that resulted in billions of dollars in losses to the company. The investigations, whilst also trying to trace stolen property, has compiled evidence which shows that the audited accounts have been misstated since 2012. The administrators are concerned that “money and property was misappropriated from NMC, the perpetrators sought to make NMC liable for debt of which it never received the benefit, or sufficient benefit, and NMC’s losses are likely to be in the region of billions of dollars”. The investigation is expected to be completed within six months, at which time claims will be launched against the perpetrators.
With a US$ 325 million cash injection, NMC Healthcare is now able to meet short-term payment priorities, including salary obligations for its 13k strong workforce and operational expenses, as well a further US$ 65 million to part pay its creditors; most of this funding came from its main creditor, ADCB, and was released under the mandate of the ADGM. Creditors will be offered a minimum allocation of US$ 1.4 million, while the upper limit must not exceed 20 per cent of their exposure in the old debt, if they have no ongoing legal action against NMC or if they have to agree to a freeze or remove any actions to be eligible. This sets the stage for the administrators to sell its UK healthcare assets, that could bring in an estimated US$ 75 million, and the whole of the Barcelona-based Clinica Eugin’s global assets, that could be worth US$ 850 million, to raise further funding.
There are two apparent options facing the company’s creditors to fully exit from administration. Firstly, go for a reorganisation, sell the non-core assets and focus on the local business which is a viable going concern; run the business for up to five years and then divest, with the facility then being more profitable and more valuable. The end result would be that creditors would receive far more in the future than they would from the other option of a fire sale at today’s prices. The former option would see a much bigger return for creditors than the estimated US$ 0.15 to the dollar, if divested now. Despite a US$ 6.0 billion debt, NMC is still a professionally run local medical operation, with YTD revenue to August of US$ 916 million, with earnings before one-offs and restructuring costs of US$ 51 million. It is a pity that some of the management and shareholders saw a quicker way of obtaining their investment return – by systematic looting and fraudulent action.
This week, Arabtec Holding, in the throes of liquidation, has requested banks for a three-month standstill on debt repayments for its subsidiary Target, that specialises in oil and gas projects and marine work with operations in the region. Creditors have been advised that this subsidiary is a sustainable business and should be protected from the collapse of the wider group. By the end of H1, Arabtec, which had total liabilities of nearly US$ 2.8 billion, including US$ 500 million to banks, had accumulated losses of almost US$ 400 million.
With Arabtec liquidation now in process, it does not take a financial guru to see that shareholders will receive zilch, considering that there is a 37.4% difference between the developer’s liabilities of US$ 2.8 billion to assets of US$ 2.0 billion. If the liquidators decide on a bulk sale then it is a given, the market value will be much lower. Arabtec, which had seen the highs and lows during its years with good and bad management periods, was already in trouble even before the arrival of Covid-19; last year, it posted a US$ 211 million deficit attributable to weaker income from its construction business amid tighter liquidity in the construction sector. Some of its assets are already pledged to creditors so will not be thrown into the mix when the actual assets are collated; for example, a US$ 91 million Mashreq loan is backed by land it owns in Dubai valued at US$ 155 million.
Union Properties seems to have had success with its turnaround strategy, as it finally posted a quarterly profit of US$ 139 million, compared to a US$ 22 million loss during the same period last year; its revenue slowed 15.0% to US$ 25 million. The main factor that resulted in this impressive turnaround was the US$ 224 million gain on fair valuation of investment properties. A statement by the embattled developer noted that “in the span of three months, we have restructured the bulk of our debt, substantially reduced our operating costs and reinstated our credit reputation.” YTD, the company posted a nine-month profit of US$ 95 million, compared to a US$ 45 million loss over the same period in 2019. By the end of last month, its assets were 5.1% higher at US$ 1.7 billion and it had “cleared all losses for 2019 as well as for the first and second quarter of 2020 and reduced its accumulated losses below the critical threshold of 50.0% to 41.8%”.
After receiving shareholders’ approval, the National Central Cooling Company (Tabreed) has advised the Dubai Financial Market that it will raise US$ one billion, through the issuance of bonds or sukuk in one or more tranches over the next twelve months. Finance raised will be used for funding acquisitions or for general corporate purposes. This move comes six months after Tabreed acquired an 80% stake in Emaar’s Downtown Dubai district cooling business for US$ 675 million which then expanded its business by 12.6% to 1,338,602 RT from 83 plants.
The bourse opened on Sunday 11 October and, 52 points (1.9%) lower the previous week, lost a further 19 points (0.9%) to close on 2,195 by 15 October. Emaar Properties, US$ 0.09 lower on the previous three weeks, remained flat at US$ 0.72, whilst Arabtec is now in the throes of liquidation, with its last trading, late last month, at US$ 0.14. Thursday 15 October saw the market trading at a low of 214 million shares, worth US$ 45 million, (compared to 135 million shares, at a value of US$ 31 million, on 08 October).
By Thursday, 15 October, Brent, US$ 2.86 (7.0%) higher the previous week shed US$ 0.44 (1.0%) to US$ 42.78. Gold, US$ 38 (2.0%) higher the previous two weeks, slipped US$ 4 (0.2%) to close on US$ 1,911, by Thursday 15 October.
In order to obtain EU approval for its US$ 27 billion Refinitiv deal, the London Stock Exchange Group has consented to sell Borsa Italiana, to Euronext and two Italian lenders, (Cassa Depositi e Prestiti, a state-backed lender (7.3%), and Italy’s biggest bank Intesa Sanpaolo (1.3%), for more than US$ 5.1 billion in a deal that will create the largest listing venue in Europe. This move will see Euronext handle 25% of all equity trading in Europe and 28 of the Euro Stoxx 50 companies will be listed on its markets, giving the bourse a clearinghouse for the first time as well as a securities depository, stock exchange and bond platform.
IBM has announced that it will split into two public companies – one to cover its higher-margin businesses like cloud computing and artificial intelligence and the other focusing on its legacy IT infrastructure which will be renamed and spun off next year. Last year, the world’s first big computing firm acquired cloud company Red Hat for US$ 34 billion and now it will be focussing on trying to join the two leaders – Amazon Web Services and Microsoft – in the growing market for cloud services. Its shares closed nearly 6% higher after the announcement.
In a sign of things to come – not only in Saudi Arabia but also regionally – the US$ 15 billion merger between the Kingdom’s Commercial Bank and Samba Financial Group has created the country’s largest lender and the Arab world’s third largest bank by assets, totalling US$ 223 billion. Samba shareholders will receive 0.739 newly issued shares of NCB in exchange for each Samba share they hold. Once the transaction is completed, only NCB will survive, while Samba “will cease to exist”, with its shares being cancelled and new shares in NCB will be issued to its shareholders. In these days of tight liquidity, it is inevitable that more mergers will be seen in the coming months because of economies of scale, greater pricing power over both loans and deposits with a bigger financial institution cost synergy.
On the back of a rebound in global financial markets, Morgan Chase & Co posted a 30% Q3 hike in trading revenue to US$ 6.6 billion, as loan impairment provisions of US$ 611 million were well down on the US$ 10.5 billion of the previous quarter. The bank’s net Q3 income rose to 3.3% to US$ 9.4 billion, or $2.92 per share. Because the Fed has maintained rates at nearly zero, to offset the impact of the pandemic, its net interest income fell 9.05 to US$ 13.1 billion.
As the company tries to get to grips with the new post pandemic norm, the luxe division of L’Oréal USA plans to close retail locations, as it starts to restructure its US luxury operations which will see more emphasis in growth areas such as e-commerce, which jumped 65% in H1. L’Oréal confirmed that up to 400 roles in the luxe divisions would be affected in the US, the company’s largest market, but was silent how many of its outlets would close. The French company, with 88k global employees, has seen revenue knocked, (19% lower in Q2), by the fact that spending has decreased for pricey perfumes and makeup as lockdown drastically reduced the number of social occasions.
The WTO has ruled in favour of the EU and has allowed the bloc to impose a further US$ 4.0 billion in annual tariffs in response to the US government providing subsidies granted to Boeing; last year the global body cleared the US to impose tariffs on US$ 7.5 billion of EU items. The US has responded by noting that it had had removed the offending subsidies for Boeing, tax breaks granted by the state of Washington, with the EU countering with the fact that there would no longer be any subsidies for the A380, as it has been taken out of production. This particular trade dispute has been ongoing since 2005, when both sides lodged complaints with the WTO, and now fifteen years later, it seems both sides want to reach a settlement by negotiation rather than tariffs and that “it is time to find a solution now so that tariffs can be removed on both sides of the Atlantic.”
Last Thursday, BA bade farewell to its last two 747s which made a rare double departure from LHR. The jumbos’ premature retirement was brought forward by the Covid-19 impact. The plane first entered service in 1974, with BA taking delivery of its first jet a year later and for over forty years, the ‘Queen of the Skies’ was a firm favourite with passengers. British Airways streamed the take-off live on its Facebook page so that aviation fans from around the world could tune in for the final farewell. Since its first test flight in 1969, Boeing has built 1,558 747s, with the initial programme costs coming at US 1.0 billion (US$ 7.4 billion at today’s prices) Only a few airlines now fly their passengers on a 747, including Lufthansa, Air China, Korean Air, Air India and Thai. The oldest 747, which first flew in 1986, still flying passengers is owned by Iran’s Mahan Air. it is estimated that 427 747s are still air-borne, most of which are for cargo. Of the five variants of the plane there are nine -100s, 20 -200s, 2 -300s, 266 – 400s and 130 -8s in operation.
Meanwhile, the airline is ditching its current chief executive Alex Cruz to be replaced by Sean Doyle, the Aer Lingus boss for the past two years; before that, he had worked at BA since 1998. The Spaniard, who has been involved in a bitter dispute with unions over redundancies and pay cuts. will stay on as non-executive chairman; towards the end of his four-year tenure, he has overseen 13k staff cuts and been criticised for following a “fire and rehire” policy, which left some employees facing pay cuts of up to 50%. The change at the top of the BA hierarchy comes a month after similar changes with its parent company, IAG, with Luis Gallego, replacing Wille Walsh as chief executive. A case of out with the old and in with the new guard as the airline navigates through the worst crisis in its history. The BA brand has taken a beating of late, with both staff and customer dissatisfaction growing, plus the repeated IT failures and various strikes over “poverty pay” by cabin crew.
The first age of commercial supersonic effectively came to an end in July 2000, with the fatal take-off crash of AF4590 in Paris but was pulled from service three years later. Now it seems there is every chance that the second era is nearly upon us. The Aerion AS2 supersonic business jet, being developed by Aerion and Lockheed Martin, with GE’s Affinity engines, is planning to start flights in 2027; initial flight speeds will top 1,074 mph but later models could see jets travelling at 3k mph (equivalent to almost four times the speed of sound). The company, founded by Texas billionaire Robert Bass and with Boeing a stakeholder, claims it already has a US$ 3.5 billion backlog.
Other players entering the field include Boom Technologies, Virgin Galactic and Spike Aerospace. With thirty jets already ordered by Japan Airlines and Virgin, its US$ supersonic aircraft, slated for a 2030 launch, will travel twice the speed of sound and carry up to eighty-fiver passengers. A third the size demo model, XB-1, powered by three GE J85 engines, will begin test flights next year. Virgin Galactic Holdings made a surprise announcement in August about its planned 19-seater Mach 3 aircraft as an interim step on the company’s path toward eventual hypersonic point-to-point travel. Meanwhile, Boston-based Spike Aerospace plans an 18-seater supersonic jet that can travel at Mach 1.6 that would be able to fly from Dubai to New York, non-stop. Even Elon Musk’s Space Exploration Technologies has indicated that their eventual high-speed point-to-point aircraft service will operate above earth’s atmosphere, at hypersonic speeds.
In a move that could affect 21k jobs, Edinburgh Woollen Mill, owner of the Peacocks and Jaeger clothing brands, Jane Norman, Ponden Mill and Austin Reed, and with 1.1k stores, is planning to appoint administrators to save the failing business. It will be business as usual until a review of the firm is carried out. EWM posted that this decision was partly taken because of “the harsh trading conditions, caused by the impact of the Covid-19 pandemic and a recent reduction in its credit insurance”. Like most other retailers, the business was severely impacted by the pandemic but more so because it attracts a bigger number of older shoppers, more likely to keep away from the High Street during these troubled times. The 73-year old company, founded in Carlisle, is owned by Dubai-based billionaire Philip Day who also bought Bonmarché out of administration in February – a company that he previously owned; the company is not part of the current restructuring plans.
Restaurant Brands International has posted plans to open a Tim Hortons outlet in “every major city and town” in the UK over the next two years. The Canadian fast food chain, which has only 25 coffee shops in the country, after opening its first in 2017, expects this growth spurt to create over 2k new jobs. Even though the pandemic has severely hit sales, (down some 30% globally among its 4.9k outlets – including nearly 4k in Canada), Tim Hortons sees expansion in the drive-through dining sector. RBI, which also owns Burger King and Popeye’s Chicken, has more than 27k restaurants globally, which it operates through a franchise model; it still harbours ambitions to grow this figure to 40k over a period of time.
Online fashion group Asos has done well because of the pandemic by adding three million customers, to 23.4 million, in the twelve months, as global sales jumped 19.0% with pre-tax profits climbing 329% to US$ 190 million, driven by cost-cutting and buyers returning fewer items amid the pandemic. Its main worries going forward are unemployment hitting young customers, (reducing their consumer spend) and if tariffs were introduced because of a Brexit deal. On Tuesday, the worry concerned its investors so much that Asos’s market value fell 10% on the day.
Boparan Restaurant Group, which owns the Giraffe chain, has agreed to buy part of the restaurant chain Gourmet Burger Kitchen out of administration; the deal covers 35 sites and 669 jobs, but 26 other restaurants and 362 jobs will be lost. GBK, most recently owned by South Africa-based Famous Brands, has been in trouble for some time, having entered into a Company Voluntary Arrangement in November 2018; it appears that Covid-19 was the final nail in its coffin.
By expanding its customer base, adding 800 McDonald’s restaurants and 300 Greggs outlets, Just Eat indicated that its orders had jumped by 43%; the company also did well because of the lockdown, as it delivered 46 million orders in Q3. The takeaway delivery company, which merged with Dutch rival Takeaway.com in February, is planning to acquire US rival Grubhub for US$ 7.3 billion – this came about after potential merger negotiations between Grubhub and Uber collapsed. The group also saw demand rise in markets like Germany, Canada and Australia, with global bookings rising 46% to 151.4 million orders in Q3.
Almost half of Australian home loans deferred due to the coronavirus pandemic are now being repaid, but that also means half are not. In June, almost 500k home loans, with major banks, were on a “pause” – the latest figure is around the 270k level. Furthermore, it is estimated that 20% of those 270k are ‘ghosting’ or avoiding communications from their lender. In March, banks gave an almost blanket offer that allowed people to stop making payments for six months and now that period has ended, and payments have to resume with some now worse off than they were six months ago. Inevitably, there will be defaults and if the number is sizeable, it will have the double whammy of banks posting reduced profits as their impairment provisions go higher, and house prices will head south.
This week has seen casino baron James Packer, son of Kerry, who was born into unimaginable privilege and power, appearing before a NSW inquiry into whether his company Crown Resorts is fit to hold a casino licence. In recent times, he has struggled with alcohol and depression, as well as bipolar disorder, and this week, there were more startling revelations concerning Mossad agents, accusations of negligence in policing and reporting suspected money laundering, illegal or unlawful operations in China that may have had a negative impact on his ability to hold a casino licence. The enquiry also revealed the lack of oversight from Victorian and Western Australian gaming regulators, where Crown has operations. It also showed that even though management and board duties have been relinquished, he still remains the dominant figure at Crown, whilst still retaining a controlling shareholder agreement.
His grandfather was a media magnate but when James took the reins as chairman of Publishing and Broadcasting Ltd, his first deal was to acquire the then ailing Melbourne-based Crown Casino. Seven years later, he linked up with Lawrence Ho, (the son of Stanley who had enjoyed a 30-year monopoly in the Macau casino business until 1999, when the former Portuguese colony was returned to China), to build the first of several new casinos. With casinos still outlawed on the mainland, money-making enterprises proved a magnet for China’s infamous organised crime groups, known as triads. It has been widely reported that Stanley, who controlled Melco International, had been banned in the 1980s from having any involvement in a proposed Sydney casino development and declared unfit to run American gaming operations in Nevada; in fact several governmental and regulatory agencies had noted his links with criminal organisations which included allowing them access to his casinos to carry out illegal activities.
It seems that only weeks before Packer’s JV with Melco, the control of the Macau business was handed over from father to son but despite this the Victorian gaming authority had no problem approving Crown’s Macau joint venture. The due diligence was so slack that nobody bothered to check that the principal shareholder in Melco was a Virgin Islands Trust, with Stanley— personally banned by the NSW Government — being a beneficiary until his recent death. Lawrence Ho has subsequently withdrawn his interest in taking control of Crown and has left James Packer and Crown to pick up the pieces and to do a lot of explaining to the NSW enquiry.
There are reports that Chinese state-owned energy providers and steel mills have been told to stop importing Australian coal, this coming after earlier in the year, China had imposed tariffs on Australian beef and barley exports. On Thursday, BHP confirmed that Chinese customers have asked for deferrals of their coal orders. It appears that two steel mills were told verbally about the ban and even if not true, some traders believe buyers will avoid Australian coal. Trade Minister Simon Birmingham confirmed that the government had not been able to verify the reports but there had been similar disruptions to coal exports to China before; Prime Minister, Scott Morrison, noted that China sometimes changed its import demand based on how much coal it is receiving domestically and put domestic quotas in place. However, it seems that the procrastinating Birmingham should lift his game and get talking with his Chinese counterparts – more so because the country is home to 48% of Australia’s exports.
As the Australian government starts to taper its coronavirus stimulus measures, the RBA has warned once again that there are distinct possibilities of a substantial rise in business failures, home prices falling further, along with a marked increase in borrower defaults. As the country climbs out from its first recession in almost thirty years, after the coronavirus pandemic had closed parts of the country’s economy, it will face new economic problems, as mortgage loan repayment holidays begin to expire and income support measures, such as the JobKeeper wage subsidy, are being wound back; such measures had shielded many from economic reality and had helped with increased cash buffers and lower bankruptcies, which now have been largely withdrawn. The end result will be an increase in business failures which will reverberate around the while economy and impact on creditors, both financial institutions and other businesses, and their employees.
Whilst it appears that most global economies continue to struggle, China comes with impressive economic data once again, noting September exports and imports growing by 9.9% and 13.2% respectively. With imports growing at a quicker rate than exports, the country’s trade surplus dipped by US$ 22 billion, month on month to US$ 37 billion. The world’s second biggest economy has recovered well over the year, after a sharp decline in Q1, because of the then strict lockdown measures, bounced back at the beginning of Q3. The drivers behind this trade improvement, which YTD has reached US$ 3.4 trillion, has been put down to a surge in global demand for medical devices, PPE, home electronics and textiles.
Over the last two months, there have been troubling signs that all is not well with the US labour market and last week applications for US state unemployment benefits unexpectedly jumped by 53k to 898k – as Americans increasingly moved to longer-term jobless aid. The total number of Americans claiming ongoing unemployment assistance fell 1.2 million to 10 million; however, as that number has dropped, the Pandemic Emergency Unemployment Compensation headed in the other direction – by 818k to 2.8 million. There is no doubt that the recovery in the labour market will continue to slow down as the economy and the job market cannot operate at full capacity until a vaccine is widely available.
Reaching its lowest level in a decade, employment in the 37-country Organisation for Economic Co-operation and Development area fell to 64.6% in Q2 and in the 19-nation euro area by 66.2%, with the highest decreases of three percentage points found in Estonia, Ireland and Spain. Over the period, the OECD reported that there were 34 million fewer people, in work by the end of Q2 to 560 million. The age make-up is interesting, as the youth employment rate dropped more sharply (down 5.6 percentage points, to 36.3 per cent) than for people aged 25-54 and those aged 55-64. Overall, male and female employment rates fell by around 4% (to 72 per cent and 57.3 per cent respectively).
In an attempt to test the waters with the UK banks, the Bank of England has written to them, asking them how ready they are if interest rates were cut to zero or turned negative, as has happened in Japan and Switzerland. There is every chance that this could happen especially since rates were cut to 0.1% last March and the BoE is concerned that the banks would face technological challenges if rates should turn negative; this is vitally important because the banks have had a recent litany of outages and other problems with their computer systems.The idea behind the concept of negative rates is to penalise hoarding of cash and provide incentives to spend and invest; to date, banks depositing cash overnight at the likes of the European Central Bank currently pay 0.5% to do so, whilst the Swiss bank UBS began charging up to 0.75% for cash deposits from wealthy clients. If the BoE were to go down this path, it shows that the English central bank is demonstrating that it has not run out of weapons from its monetary policy armoury, which comprise cutting interest rates, which in return reduce the cost of borrowing, encourages investment and consumer spending; on the flip side, lower interest rates also reduce the incentive to save, and makes spending more attractive instead.
24k people in the UK have woken up this week to receive unwanted mail from HM Revenue and Customs that questioned whether they received the self-employment support grants and whether they had been trading at the required times. Some 2.7 million people claimed grants from the Coronavirus Self Employed Income Support Scheme (SEISS) which came in the form of two grants of up to US$ 3.4k and those who were trading in the financial year 2018-2019, and the following year, and who planned to continue doing so, but whose business has been hit by coronavirus. HMRC have indicated that up to US$ 350 million in grants may have been fraudulent or paid in error or made by fraudsters making claims under names of innocent people.
Even as the economy continued its growth recovery for the fourth straight month, August’s return of 2.1% was lower than expected and still 9.2% down from pre-pandemic February; the UK economy had grown8.7% and 6.6% in June and July. Three factors – the October end of the generous furlough scheme, Brexit and possible further lockdowns – will almost certainly ensure that Q4 monthly growth rates will ease. The immediate outlook is that the recovery is beginning to peter out, but Q3 will show slowing growth and put an end to the country being in technical recession (being two straight quarters of contraction which was the case in Q1 and Q2). The dream of a V-shaped – and quick – recovery, which was spoken about four months ago, has long gone and with winter approaching and the inevitability of further lockdowns, any rate of growth would be welcome.
With the pandemic not going away and rearing its ugly head again, the UK unemployment rate has surged to its highest level in over three years, standing at 4.5% in the quarter ending 31 August, higher than the 4.1% in the previous quarter; this will get worse and it would be no surprise to see this hit over 8.0% early next year. This equates to 1.5 million, as redundancies were at 227k, mostly in hospitality, travel and recruitment sectors, their highest level since 2009. Overall, unemployment has fallen 500k from its pandemic peak but there may be more with the government having imposed tough local lockdown rules this week. By the end of last month, the number claiming work related benefits had risen to 2.7 million from March’s 1.5 million.
The Chancellor, Rishi Sunak, has announced a scheme that will see UK employees receive 67% of their wages from the government purses, if the firms they work for are forced to shut by law because of coronavirus restrictions. This will run from 01 November, when the furlough scheme comes to an end, and will run for six months – a sure indicator that the government sees the pandemic continuing at least until the end ofApril 2021. Whether this is enough investment for the worst affected areas and sectors remains to be seen. The announcement comes just weeks after the government .announced its Job Support Scheme top up the wages of staff who have not been able to return to the workplace full time; the grants will be paid up to US$ 2.8k a month However, this will only apply to those businesses told to close rather than those who choose to shut because of the broader impact of restrictions. Furthermore, businesses that are forced to close will receive an increase in business grants – with up to US$ 4k a month paid every fortnight
Even though initial estimates point to the fact that the UK Q3 economy may have grown by as much as 17%, driven by shoppers making up for lost time when the coronavirus lockdown restrictions were initially lifted. However, it seems likely that in comparison, Q4 may be much slower, probably around 1%, especially now that some restrictions are being reintroduced and the generous furlough scheme curtailed. With unemployment expected to rise, consumer spending will slow, with the end result of sluggish growth for the immediate future. Overall, the UK economy will probably not return to pre-pandemic levels until H2 2023.
Apart from all the political, social and economic problems, emanating from Covid-19, the Johnson government has had to deal with the intransigent EU bureaucracy, led by Michel Barnier, in Brexit discussions. The EU is infamous for its last-minute deals but they could be in for a rude awakening and live to regret their apparent unwillingness to discuss topics on fishing rights and state help for business. Goodbye To You My Trusted Friend.