The strategy that once worked for Keynes and Buffett has performed badly writes Robin Wigglesworth in The Financial Times
When Joel Greenblatt went to Wharton Business School in the late 1970s, the theory of “efficient markets” was in full bloom, approaching the point of becoming dogma among the financial cognoscenti. To the young student, it all felt bogus.
Mr Greenblatt had already developed a taste for calculated gambles at the dog racing tracks. Reading the wildly fluctuating stock prices listed in newspapers also made him deeply sceptical of the supposed rationality of markets. One day he stumbled over a Fortune article on stockpicking, and everything suddenly fell into place.
“A lightbulb went off. It just made sense to me that prices aren’t necessarily correct,” recalls Mr Greenblatt, whose hedge fund Gotham Capital clocked up one of the industry’s greatest ever winning streaks until it was closed to outside investors in 1994. “Buying cheap stocks is great, but buying good companies cheaply is even better. That’s a potent combination.”
The article became his gateway drug into a school of money management known as “value investing”, which consists of trying to identify good, solid businesses that are trading below their fair value. The piece was written by Benjamin Graham, a financier who in the 1930s first articulated the core principles of value investing and turned it into a phenomenon.
One of Graham’s protégés was a young money manager called Warren Buffett, who brought the value investing gospel to the masses. But he isn't the only one to play a role in popularising the approach. Since 1996, Mr Greenblatt has taught the same value investing course started by Graham at Columbia Business School nearly a century ago, inculcating generations of aspiring stock jocks with its core principles.
Mr Greenblatt compares value investing to carefully examining the merits of a house purchase by looking at the foundation, construction quality, rental yields, potential improvements and price comparisons on the street, neighbourhood or other cities.
“You’d look funny at people who just bought the houses that have gone up the most in price,” he points out. “All investing is value investing, the rest is speculation.”
However, the faith of many disciples has been sorely tested over the past decade. What constitutes a value stock can be defined in myriad ways, but by almost any measure the approach has suffered an awful stretch of performance since the 2008 financial crisis.
Many proponents had predicted value investing would regain its lustre once a new bear market beckoned and inevitably hammered the glamorous but pricey technology stocks that dominated the post-2008 bull run. This would make dowdier, cheaper companies more attractive, value investors hoped.
Instead, value stocks have been pummelled even more than the broader market in the coronavirus-triggered sell-off, agonising supporters of the investment strategy.
“One more big down leg and I’m dousing my internal organs in Lysol,” Clifford Asness, a hedge fund manager, groused in April.
Value investing has gone through several bouts of existential angst over the past century, and always comes back strongly. But its poor performance during the coronavirus crisis has only added to the crisis of confidence. The strength and length of the recent woes raises some thorny questions. Why has value lost its mojo and is it gone forever?
Search for ‘American magic’
Berkshire Hathaway’s annual meeting is usually a party. Every year, thousands of fans have flocked to Omaha to lap up the wisdom of Mr Buffett and his partner Charlie Munger, the acerbic, terse sidekick to the conglomerate’s avuncular, loquacious chairman. Last weekend’s gathering was a more downbeat affair.
A shaggy-haired Mr Buffett sat alone on stage without his usual companion, who was stranded in California. Instead of Mr Munger, Greg Abel, another lieutenant, sat at a table some distance away from Berkshire’s chairman. Rather than the 40,000 people that normally fill the cavernous CHI Health Center for the occasion, he faced nothing but a bunch of video cameras. It was an eerie example of just how much the coronavirus crisis has altered the world, but the “Oracle of Omaha” tried to lift spirits.
“I was convinced of this in World War II. I was convinced of it during the Cuban missile crisis, 9/11, the financial crisis, that nothing can basically stop America,” he said. “The American magic has always prevailed, and it will do so again.”
Berkshire’s results, however, underscored the scale of the US economy’s woes. The conglomerate — originally a textile manufacturer before Mr Buffett turned it into a vehicle for his wide-ranging investments — slumped to a loss of nearly $50bn in the first three months of the year, as a slight increase in operating profits was swamped by massive hits on its portfolio of stocks.
A part of those losses will already have been reversed by the recent stock market rally triggered by an extraordinary bout of central bank stimulus, and Mr Buffett’s approach has over the decades evolved significantly from his core roots in value investing. Nonetheless, the worst results in Berkshire’s history underscore just how challenging the environment has been for this approach to picking stocks. After a long golden run that burnished Mr Buffett’s reputation as the greatest investor in history, Berkshire’s stock has now marginally underperformed the S&P 500 over the past year, five years and 10 years.
But the Nebraskan is not alone. The Russell 3000 Value index — the broadest measure of value stocks in the US — is down more than 20 per cent so far this year, and over the past decade it has only climbed 80 per cent. In contrast, the S&P 500 index is down 9 per cent in 2020, and has returned over 150 per cent over the past 10 years.
Racier “growth” stocks of faster-expanding companies have returned over 240 per cent over the same period.
Ben Inker of value-centric investment house GMO describes the experience as like being slowly but repeatedly bashed in the head. “It’s less extreme than in the late 1990s, when every day felt like being hit with a bat,” he says of the dotcom bubble period when value investors suffered. “But this has been a slow drip of pain over a long time. It’s less memorable, but in aggregate the pain has been fairly similar.”
Underrated stocks
Value investing has a long and rich history, which even predates the formal concept. One of the first successful value investors was arguably the economist John Maynard Keynes. Between 1921 and 1946 he managed the endowment of Cambridge university’s King’s College, and beat the UK stock market by an average of 8 percentage points a year over that period.
In a 1938 internal memorandum to his investment committee, Keynes attributed his success to the “careful selection of a few investments” according to their “intrinsic value” — a nod to a seminal book on investing published a few years earlier by Graham and his partner David Dodd, called Security Analysis. This tome — along with the subsequent The Intelligent Investor, which Mr Buffett has called “the best book about investing ever written” — are the gospel for value investors to this day.
There are ways to define a value stock, but it is most simply defined as one that is trading at a low price relative to the value of a company’s assets, the strength of its earnings or steadiness of its cash flows. They are often unfairly undervalued because they are in unfashionable industries and growing at a steadier clip than more glamorous stocks, which — the theory goes — irrational investors overpay for in the hope of supercharged returns.
Value stocks can go through long fallow periods, most notably in the 1960s — when investors fell in love with the fast-growing, modern companies like Xerox, IBM and Eastman Kodak, dubbed the “Nifty Fifty” — and in the late 1990s dotcom boom. But each time, they have roared back and rewarded investors that kept the faith.
“The one lesson we’ve learnt over the decades is that one should never give up on value investing. It’s been declared dead before,” says Bob Wyckoff, a managing director of money manager Tweedy Browne. “You go through some uncomfortably long periods where it is not working. But this is almost a precondition for value to work.”
The belief that periodic bouts of suffering are not only unavoidable but in fact necessary for value to work is entrenched among its adherents. It is therefore a field that tends to attract more than its fair share of iconoclastic contrarians, says Chris Davis of Davis Funds, a third-generation value investor after following in the footsteps of his father Shelby MC Davis and grandfather Shelby Cullom Davis.
“If you look at the characteristics of value investors they don’t have a lot in common,” he says. “But they all tend to be individualistic in that they aren’t generally the type who have played team sports. They weren’t often president of their sororities or fraternities. And you don’t succeed without a fairly high willingness to appear wrong.”
But why have they now been so wrong for so long? Most value investors attribute the length of the underperformance to a mix of the changing investment environment and shifts in the fabric of the economy.
The ascent of more systematic, “quantitative” investing over the past decade — whether a simple exchange-traded fund that just buys cheap stocks, or more sophisticated, algorithmic hedge funds — has weighed on performance by warping normal market dynamics, according to Matthew McLennan of First Eagle Investment Management. This is particularly the case for the financial sector, which generally makes more money when rates are higher.
The usual price discount enjoyed by value stocks was also unusually small at the end of the financial crisis, setting them up for a poorer performance, according to Mr Inker. Some industries, especially technology, are also becoming oligopolies that ensure extraordinary profit margins and continued growth. Moreover, traditional value measures — such as price-to-book value — are becoming obsolete, he points out. The intellectual property, brands and often dominant market positioning of many of the new technology companies do not show up on a corporate balance sheet in the same way as hard, tangible assets.
“Accounting has not kept up with how companies actually use their cash,” he says. “If a company spends a lot of money building factories it affects the book value. But if you spend that on intellectual property it doesn’t show up the same way.”
As a result, GMO and many value-oriented investors have had to adapt their approach, and focus more on alternative metrics and more intangible aspects of its operations. “We want to buy stocks we think are undervalued, but we no longer care whether it looks like a traditional value stock,” Mr Inker says.
Mr McLennan points out that while the core principles won’t change, value investing has always evolved with the times. “It’s not a cult-like commitment to buying the cheapest decile [of stocks]. We invest business-by-business,” he says. “I don’t know what the alternative is to buying businesses you like, at prices you like.”
Bargain hunt
Can value investing stage a comeback, as it did in when the dotcom bubble burst in the early 2000s, or the “Nifty Fifty” failed to justify investor optimism and fell to earth in the 1970s?
There has clearly been a shift in the corporate landscape over the past few decades that could be neutering its historical power as an investing approach. It is telling that the recent stock market rebound has been powered primarily by big US technology companies, despite value investors having confidently predicted for a long time that their approach would shine in the next downturn. Value stocks tend to be in more economically-sensitive industries, and given the likelihood of the biggest global recession since the Depression, their outlook is exceptionally murky, according to an AQR paper published last week.
“If value investing was like driving my four kids on a long car ride, we’d be very deep into the ‘are we there yet?’ stage of the ride, and value investors are justifiably in a world of pain,” Mr Asness wrote. However, the odds are now “rather dramatically” on the side of value.
Redemption could be at hand. there has in recent days been a cautious renaissance for value stocks, indicating that coronavirus may yet upend the market trends of the past decade. This stockpicking approach often does well as economies exit a recession and investors hunt for bargains.
Devotees of value investing certainly remain unshakeable in their faith that past patterns will eventually reassert themselves. Citing a common saying among adherents, Mr Wyckoff argues that “asking whether value is still relevant is like asking whether Shakespeare is still relevant. It’s all about human nature”.
Mr Greenblatt, who founded Gotham Asset Management in 2008, says that his students will occasionally quiz him on whether value investing is dead, arguing that computers can systematically take advantage of undervaluation far more efficiently than any human stockpicker can. He tells them that human irrationality remains constant, which will always lead to opportunities for those willing to go against the crowd.
“If you have a disciplined strategy to value companies, and buy companies when they’re below fair value you will still do well,” he says. “The market throws us pitches all the time, as there are so many behavioural biases . . . You can watch 20 pitches go by, but you only need to try to hit a few of them.”
Monday, 11 May 2020
Why some companies will survive this crisis and others will die
Andrew Hill in The Financial Times
The first written document about a Stora operation, a Swedish copper mine, dates back to 1288. Since then, the company — now Finland-based paper, pulp and biomaterials group Stora Enso — has endured through attempts to end its independence, the turmoil of the Reformation and industrial revolution, wars, regional and global, and now a pandemic.
“It would have been catastrophic for [Stora] to concentrate on its business in an introverted fashion, oblivious to politics. Instead the company reshaped its goals and methods to match the demands of the world outside,” writes Arie de Geus, describing one particularly turbulent era in the 15th century in his 1997 book The Living Company, shaped round a study of the world’s oldest companies he conducted for Royal Dutch Shell.
This is wisdom that companies today, wondering how to survive, let alone thrive, could use. Alas, de Geus himself is not around to help them: he died in November last year.
Part of his work lives on through the scenario-planning exercises that I identified last week as one way of advancing through the uncertainty ahead. The multilingual thinker was Shell’s director of scenario planning, where he developed the distinction between potential futures (in French, “les futurs”) and what was inevitably to come (“l’avenir”).
He also lived through the aftermath of the second world war, which destroyed Rotterdam, the city of his birth, and encouraged him and his friends to seek jobs within the safe havens of great corporate institutions, such as Shell, Unilever and Philips.
It is not a given that all the oldest or largest companies will outlive this crisis. Those that do, however, should take a leaf out of de Geus’s book.
Longtime collaborator and friend Göran Carstedt, a former Volvo and Ikea executive, says he discussed with de Geus last year how near-death experiences enhance the appreciation of being alive. “Things come to the fore that we took for granted. You start to see the world through the lens of the living,” he told me. “Arie liked to say, ‘people change and when they do, they change the society in which they live’.” That went for companies as much as for societies. Long-lived groups such as Stora owed their survival to their adaptability as human communities and their tolerance for ideas, as much as to their financial prudence.
These are big ideas for business leaders to ponder at a time when most are desperately trying to keep their heads above the flood or, at best, concentrating on the practicalities of how to restart after lockdown. In her latest update last month, Stora Enso’s chief executive sounded as preoccupied by pressing questions of temporary lay-offs, travel bans and capital expenditure reductions as her peers at companies with a shorter pedigree.
Some groups that meet de Geus’s common attributes for longevity are still likely to go under, simply because they find themselves exposed to the wrong sector at the wrong time.
Others, though, will find they are ill-equipped for the aftermath. What he called “intolerant” companies, which “go for maximum results with minimum resources”, can live for a long time in stable conditions. “Profound disruptions like this will simply reveal the underlying schisms that were already there,” the veteran management thinker Peter Senge, who worked with de Geus, told me via email. “Those who were on a path toward deep change will find ways to use the forces now at play to carry on, and even expand. Those who weren’t, won't.” For him the core question is whether those who interpret the pandemic as a signal that humans need to change how they live will grow to form a critical mass.
For decades after the war, big companies did not change the way they operated. They took advantage of young people who believed material security was “worth the price of submitting to strong central leadership vested in relatively few people”, de Geus wrote. Faced with this crisis, though, de Geus would have placed his confidence in those companies that had evolved a commitment to organisational learning and shared decision-making, according to another close collaborator, Irène Dupoux-Couturier.
The pressure of this crisis is already flattening decision-making hierarchies. Progress out of the pandemic will be founded on technology that reinforces the human community by encouraging rapid cross-company collaboration.
De Geus was adamant that a true “living company” would divest assets and change its activity before sacrificing its people, if its survival was at stake. That optimism is bound to be tested in the coming months but it is worth clinging to.
“Who knows if the characteristics of Arie’s long-lived companies . . . boost resilience in such situations as this?” Mr Senge told me. “But it is hard to see them lessening it.”
The first written document about a Stora operation, a Swedish copper mine, dates back to 1288. Since then, the company — now Finland-based paper, pulp and biomaterials group Stora Enso — has endured through attempts to end its independence, the turmoil of the Reformation and industrial revolution, wars, regional and global, and now a pandemic.
“It would have been catastrophic for [Stora] to concentrate on its business in an introverted fashion, oblivious to politics. Instead the company reshaped its goals and methods to match the demands of the world outside,” writes Arie de Geus, describing one particularly turbulent era in the 15th century in his 1997 book The Living Company, shaped round a study of the world’s oldest companies he conducted for Royal Dutch Shell.
This is wisdom that companies today, wondering how to survive, let alone thrive, could use. Alas, de Geus himself is not around to help them: he died in November last year.
Part of his work lives on through the scenario-planning exercises that I identified last week as one way of advancing through the uncertainty ahead. The multilingual thinker was Shell’s director of scenario planning, where he developed the distinction between potential futures (in French, “les futurs”) and what was inevitably to come (“l’avenir”).
He also lived through the aftermath of the second world war, which destroyed Rotterdam, the city of his birth, and encouraged him and his friends to seek jobs within the safe havens of great corporate institutions, such as Shell, Unilever and Philips.
It is not a given that all the oldest or largest companies will outlive this crisis. Those that do, however, should take a leaf out of de Geus’s book.
Longtime collaborator and friend Göran Carstedt, a former Volvo and Ikea executive, says he discussed with de Geus last year how near-death experiences enhance the appreciation of being alive. “Things come to the fore that we took for granted. You start to see the world through the lens of the living,” he told me. “Arie liked to say, ‘people change and when they do, they change the society in which they live’.” That went for companies as much as for societies. Long-lived groups such as Stora owed their survival to their adaptability as human communities and their tolerance for ideas, as much as to their financial prudence.
These are big ideas for business leaders to ponder at a time when most are desperately trying to keep their heads above the flood or, at best, concentrating on the practicalities of how to restart after lockdown. In her latest update last month, Stora Enso’s chief executive sounded as preoccupied by pressing questions of temporary lay-offs, travel bans and capital expenditure reductions as her peers at companies with a shorter pedigree.
Some groups that meet de Geus’s common attributes for longevity are still likely to go under, simply because they find themselves exposed to the wrong sector at the wrong time.
Others, though, will find they are ill-equipped for the aftermath. What he called “intolerant” companies, which “go for maximum results with minimum resources”, can live for a long time in stable conditions. “Profound disruptions like this will simply reveal the underlying schisms that were already there,” the veteran management thinker Peter Senge, who worked with de Geus, told me via email. “Those who were on a path toward deep change will find ways to use the forces now at play to carry on, and even expand. Those who weren’t, won't.” For him the core question is whether those who interpret the pandemic as a signal that humans need to change how they live will grow to form a critical mass.
For decades after the war, big companies did not change the way they operated. They took advantage of young people who believed material security was “worth the price of submitting to strong central leadership vested in relatively few people”, de Geus wrote. Faced with this crisis, though, de Geus would have placed his confidence in those companies that had evolved a commitment to organisational learning and shared decision-making, according to another close collaborator, Irène Dupoux-Couturier.
The pressure of this crisis is already flattening decision-making hierarchies. Progress out of the pandemic will be founded on technology that reinforces the human community by encouraging rapid cross-company collaboration.
De Geus was adamant that a true “living company” would divest assets and change its activity before sacrificing its people, if its survival was at stake. That optimism is bound to be tested in the coming months but it is worth clinging to.
“Who knows if the characteristics of Arie’s long-lived companies . . . boost resilience in such situations as this?” Mr Senge told me. “But it is hard to see them lessening it.”
Rahul Gandhi is back. Now with two economists, a migrant aid pack and an ethical hacker
Zainab Sikandar in The Print
It takes a lot to be defeated twice over, ridiculed for years and still care enough to show up for your country, the majority of which has rejected you for a national leadership role. Rahul Gandhi continues to surprise us. He simply won’t give up. He just doesn’t turn cynical and walk away.
He keeps coming back with his empathy as well as his willingness to find viable solutions to pressing issues induced by the pandemic: an economy in doldrums, a huge migrant workers’ problem that’s slowly turned into a humanitarian crisis as well as transparency of the government’s Arogya Setu app being used to map Covid positive patients. Rahul Gandhi’s comeback is all the more conspicuous against the backdrop of Prime Minister Narendra Modi’s unwillingness to have a press conference
Rahul is ready to talk
Rahul Gandhi is the eternal unputdownable comeback kid. He has managed to hold the attention of the media by continuously participating in the process of finding answers to the problems that Covid has thrown at India. He has had two conversations with two economists par excellence, former RBI governor Raghuram Rajan and Nobel laureate Abhijit Banerjee. Add to this, the migrant aid pack that Sonia Gandhi offered, where the Congress party would have paid the train fare for every migrant labourer who wants to go home. This “masterstroke” has made the fiercest of critics of the Congress party applaud the Gandhis. The Gandhis are consciously and conspicuously placing themselves polar opposite to Narendra Modi. Whatever Modi is avoiding, the Gandhis are accepting and dealing squarely.
Right-wing editorials are claiming that Rahul Gandhi is trying to come off as an “intellectual”. This, for a man who till recently they caustically made fun of. But this perception is cracking because for the first time, the entire BJP PR machinery is being used to not make fun of Rahul Gandhi, but to discredit his interactions with the two economists by either calling the interaction a “repackaged Socialist snake oil” or by spinning fake news related to the guests. MoneyControl.com and News18 misquoted Abhijit Bannerjee as criticising UPA’s schemes, which the BJP had embraced. Banerjee had said no such thing.
Ending obsession with Modi
Then there’s Rahul Gandhi’s two press conferences (via Zoom). We got to see a visibly more calmer and zen Rahul Gandhi who is neither shaken nor stirred by the six-year-long vicious slander by the BJP or the media, which has more often than not dealt rather unfairly with him. He has significantly altered his behaviour from the Rahul of yore, who would either attack Modi with his ‘Chowkidar Chor hai’ jibe or give him a hug in Parliament and say that he loves the prime minister.
Rahul’s detachment from Modi is palpable when he urges the government to transfer direct cash to the poor, as envisaged in Congress’s NYAY scheme, by saying “Call it ‘nyay’ (justice) or call it by any other name but do it.”
Rahul, it appears, has specifically distanced himself from acts of political pettiness and his statements reflect a sense of political maturity: “We can defeat the virus if we fight it together, we lose if we fight with each other”. Even though he also unapologetically added that he does not agree with Prime Minister Narendra Modi on most things but wanted to offer “constructive suggestions”.
Gandhi’s well-directed tweets with suggestions to the government are now also being affirmed by experts.
Turning Aarogya to his advantage
While the BJP is in pathological denial of anything substantive that Rahul Gandhi or the two economists had to say, an ethical hacker had the government promptly take notice and admit to its mistake. French hacker Elliot Alderson on Twitter looked into the Aarogya Setu app and confirmed Rahul’s fear that it was nothing more than a “sophisticated surveillance system”. The app’s user agreement states that the data can be used in the future for purposes other than epidemic control if there is a legal requirement. The privacy policy of the app states that the data on the app may be shared with as many agencies as the government sees fit.
Alderson went on to confirm and tweeted to the government that “A security issue has been found in your app. The privacy of 90 million Indians is at stake.” He ended the tweet with a post script that read; “@Rahul Gandhi was right.”
Although the Modi government confirmed that there could be no security breach in the app, they thanked the ethical hacker on engaging with them. Alderson on the other hand has confirmed that some of the issues he reported were fixed in the app and that he did receive calls from the National Informatics Centre (NIC) and the Indian Computer Emergency Response Team (ICERT), both government bodies.
In fact the press note of Aarogya Setu thanked Alderson for engaging with them. “We thank the ethical hacker on engaging with us. We encourage any users who identify a vulnerability to inform us immediately.” Anderson, however, maintained that the app should “stop lying, stop denying”.
Rahul’s initial warning, as early as 12 February, foreboding the government of ignoring the contagion almost seems prophetic today. The BJP can go on to dismiss him but it’s getting harder for the party and the government to ignore Rahul in these Covid times.
It takes a lot to be defeated twice over, ridiculed for years and still care enough to show up for your country, the majority of which has rejected you for a national leadership role. Rahul Gandhi continues to surprise us. He simply won’t give up. He just doesn’t turn cynical and walk away.
He keeps coming back with his empathy as well as his willingness to find viable solutions to pressing issues induced by the pandemic: an economy in doldrums, a huge migrant workers’ problem that’s slowly turned into a humanitarian crisis as well as transparency of the government’s Arogya Setu app being used to map Covid positive patients. Rahul Gandhi’s comeback is all the more conspicuous against the backdrop of Prime Minister Narendra Modi’s unwillingness to have a press conference
Rahul is ready to talk
Rahul Gandhi is the eternal unputdownable comeback kid. He has managed to hold the attention of the media by continuously participating in the process of finding answers to the problems that Covid has thrown at India. He has had two conversations with two economists par excellence, former RBI governor Raghuram Rajan and Nobel laureate Abhijit Banerjee. Add to this, the migrant aid pack that Sonia Gandhi offered, where the Congress party would have paid the train fare for every migrant labourer who wants to go home. This “masterstroke” has made the fiercest of critics of the Congress party applaud the Gandhis. The Gandhis are consciously and conspicuously placing themselves polar opposite to Narendra Modi. Whatever Modi is avoiding, the Gandhis are accepting and dealing squarely.
Right-wing editorials are claiming that Rahul Gandhi is trying to come off as an “intellectual”. This, for a man who till recently they caustically made fun of. But this perception is cracking because for the first time, the entire BJP PR machinery is being used to not make fun of Rahul Gandhi, but to discredit his interactions with the two economists by either calling the interaction a “repackaged Socialist snake oil” or by spinning fake news related to the guests. MoneyControl.com and News18 misquoted Abhijit Bannerjee as criticising UPA’s schemes, which the BJP had embraced. Banerjee had said no such thing.
Ending obsession with Modi
Then there’s Rahul Gandhi’s two press conferences (via Zoom). We got to see a visibly more calmer and zen Rahul Gandhi who is neither shaken nor stirred by the six-year-long vicious slander by the BJP or the media, which has more often than not dealt rather unfairly with him. He has significantly altered his behaviour from the Rahul of yore, who would either attack Modi with his ‘Chowkidar Chor hai’ jibe or give him a hug in Parliament and say that he loves the prime minister.
Rahul’s detachment from Modi is palpable when he urges the government to transfer direct cash to the poor, as envisaged in Congress’s NYAY scheme, by saying “Call it ‘nyay’ (justice) or call it by any other name but do it.”
Rahul, it appears, has specifically distanced himself from acts of political pettiness and his statements reflect a sense of political maturity: “We can defeat the virus if we fight it together, we lose if we fight with each other”. Even though he also unapologetically added that he does not agree with Prime Minister Narendra Modi on most things but wanted to offer “constructive suggestions”.
Gandhi’s well-directed tweets with suggestions to the government are now also being affirmed by experts.
Turning Aarogya to his advantage
While the BJP is in pathological denial of anything substantive that Rahul Gandhi or the two economists had to say, an ethical hacker had the government promptly take notice and admit to its mistake. French hacker Elliot Alderson on Twitter looked into the Aarogya Setu app and confirmed Rahul’s fear that it was nothing more than a “sophisticated surveillance system”. The app’s user agreement states that the data can be used in the future for purposes other than epidemic control if there is a legal requirement. The privacy policy of the app states that the data on the app may be shared with as many agencies as the government sees fit.
Alderson went on to confirm and tweeted to the government that “A security issue has been found in your app. The privacy of 90 million Indians is at stake.” He ended the tweet with a post script that read; “@Rahul Gandhi was right.”
Although the Modi government confirmed that there could be no security breach in the app, they thanked the ethical hacker on engaging with them. Alderson on the other hand has confirmed that some of the issues he reported were fixed in the app and that he did receive calls from the National Informatics Centre (NIC) and the Indian Computer Emergency Response Team (ICERT), both government bodies.
In fact the press note of Aarogya Setu thanked Alderson for engaging with them. “We thank the ethical hacker on engaging with us. We encourage any users who identify a vulnerability to inform us immediately.” Anderson, however, maintained that the app should “stop lying, stop denying”.
Rahul’s initial warning, as early as 12 February, foreboding the government of ignoring the contagion almost seems prophetic today. The BJP can go on to dismiss him but it’s getting harder for the party and the government to ignore Rahul in these Covid times.
Change the LBW laws
Ian Chappell in Cricinfo
There will be some noticeable changes to the game when cricket resumes from its Covid-19 hiatus with one of the major differences being the way the ball is polished.
It's critical administrators produce the right response to the health challenges as swing bowling, along with wristspin, is a crucial part of attacking cricket. Both skills place a high priority on wicket-taking and need to be encouraged at every opportunity.
An outswing bowler is seeking the edge to provide a catch behind the wicket. The inswinger is delivered in search of a bowled or an lbw decision. In both cases, the bowler, in seeking the perfect ambush, is also providing the batsman with a driving opportunity as the ball needs to be pitched full to achieve the desired outcome.
Either way two results are in play - a wicket or a boundary - which creates the ideal balance of tension and expectation. Fans crave a genuine contest between bat and ball and that's part of what attracts them to the game in the first place.
With ball-tampering always a hot topic, in the past I've suggested that administrators ask international captains to construct a list (i.e. the use of natural substances) detailing the things bowlers feel will help them to swing the ball. From this list, the administrators should deem one method to be legal with all others being punishable as illegal.
With cricket on hold, this is the ideal time to conduct the exercise. Using saliva and perspiration are now seen as a health hazard, so bowlers require something to replace the traditional methods of shining the ball.
And while they are in a magnanimous mood, the administrators should also make a change to the lbw law that would be welcomed by all bowlers.![]()
Changing the lbw law will mean batsmen can't get away with simply padding away balls Mitchell Gunn / © Getty Images
The new lbw law should simply say: "Any delivery that strikes the pad without first hitting the bat and, in the umpire's opinion, would go on to hit the stumps is out regardless of whether or not a shot is attempted."
Forget where the ball pitches and whether it strikes the pad outside the line or not; if it's going to hit the stumps, it's out.
There will be screams of horror - particularly from pampered batsmen - but there are numerous positives this change would bring to the game. Most important is fairness. If a bowler is prepared to attack the stumps regularly, the batsman should only be able to protect his wicket with the bat. The pads are there to save the batsman from injury not dismissal.
There will be some noticeable changes to the game when cricket resumes from its Covid-19 hiatus with one of the major differences being the way the ball is polished.
It's critical administrators produce the right response to the health challenges as swing bowling, along with wristspin, is a crucial part of attacking cricket. Both skills place a high priority on wicket-taking and need to be encouraged at every opportunity.
An outswing bowler is seeking the edge to provide a catch behind the wicket. The inswinger is delivered in search of a bowled or an lbw decision. In both cases, the bowler, in seeking the perfect ambush, is also providing the batsman with a driving opportunity as the ball needs to be pitched full to achieve the desired outcome.
Either way two results are in play - a wicket or a boundary - which creates the ideal balance of tension and expectation. Fans crave a genuine contest between bat and ball and that's part of what attracts them to the game in the first place.
With ball-tampering always a hot topic, in the past I've suggested that administrators ask international captains to construct a list (i.e. the use of natural substances) detailing the things bowlers feel will help them to swing the ball. From this list, the administrators should deem one method to be legal with all others being punishable as illegal.
With cricket on hold, this is the ideal time to conduct the exercise. Using saliva and perspiration are now seen as a health hazard, so bowlers require something to replace the traditional methods of shining the ball.
And while they are in a magnanimous mood, the administrators should also make a change to the lbw law that would be welcomed by all bowlers.
The new lbw law should simply say: "Any delivery that strikes the pad without first hitting the bat and, in the umpire's opinion, would go on to hit the stumps is out regardless of whether or not a shot is attempted."
Forget where the ball pitches and whether it strikes the pad outside the line or not; if it's going to hit the stumps, it's out.
There will be screams of horror - particularly from pampered batsmen - but there are numerous positives this change would bring to the game. Most important is fairness. If a bowler is prepared to attack the stumps regularly, the batsman should only be able to protect his wicket with the bat. The pads are there to save the batsman from injury not dismissal.
---Also read
---
It would also force batsmen to seek an attacking method to combat a wristspinner pitching in the rough outside the right-hander's leg stump.
Contrast Sachin Tendulkar's aggressive and successful approach to Shane Warne coming round the wicket in Chennai in 1997-98 with a batsman who kicks away deliveries pitching in the rough and turning in toward the stumps. Which would you rather watch?
The current law encourages "pad play" to balls pitching outside leg while this change would force them to use their bat. The change would reward bowlers who attack the stumps and decrease the need for negative wide deliveries to a packed off-side field.
The law, as it pertains to pitching outside leg, was originally introduced to stop negative tactics to slow the scoring. Imagine trying to stifle players like VVS Laxman and Mark Waugh by bowling at their pads. The law should retain the current clause where negative bowling down the leg side is deemed illegal.
This change to the lbw law would also simplify umpiring and result in fewer frivolous DRS challenges. Consequently, it would speed up a game that has slowed drastically in recent times. It would also make four-day Tests an even more viable proposition as mind-numbing huge first-innings totals would be virtually non-existent.
The priority for cricket administrators should be to maintain an even balance between bat and ball. These law changes would help redress any imbalance and make the game, particularly Test cricket, a far more entertaining spectacle.
It would also force batsmen to seek an attacking method to combat a wristspinner pitching in the rough outside the right-hander's leg stump.
Contrast Sachin Tendulkar's aggressive and successful approach to Shane Warne coming round the wicket in Chennai in 1997-98 with a batsman who kicks away deliveries pitching in the rough and turning in toward the stumps. Which would you rather watch?
The current law encourages "pad play" to balls pitching outside leg while this change would force them to use their bat. The change would reward bowlers who attack the stumps and decrease the need for negative wide deliveries to a packed off-side field.
The law, as it pertains to pitching outside leg, was originally introduced to stop negative tactics to slow the scoring. Imagine trying to stifle players like VVS Laxman and Mark Waugh by bowling at their pads. The law should retain the current clause where negative bowling down the leg side is deemed illegal.
This change to the lbw law would also simplify umpiring and result in fewer frivolous DRS challenges. Consequently, it would speed up a game that has slowed drastically in recent times. It would also make four-day Tests an even more viable proposition as mind-numbing huge first-innings totals would be virtually non-existent.
The priority for cricket administrators should be to maintain an even balance between bat and ball. These law changes would help redress any imbalance and make the game, particularly Test cricket, a far more entertaining spectacle.
Sunday, 10 May 2020
Soaring government debt is now inevitable. It’s nothing to fear
Thatcher’s simplistic aversion to borrowing still haunts fiscal policy, but interest rates have been falling for many years writes Philip Inman in The Guardian
There are plenty of Tory MPs who believe there is a bigger threat to health, and possibly their electoral chances, from a damaged economy. They give equal billing to the threat from a flurry of corporate bankruptcies, a steep rise in unemployment and a ballooning debt pile that would dwarf the legacy left by the 2008 banking crash.
And it is this last concern – that of the mortgage to end all mortgages being left on the nation’s balance sheet – to which ministers have turned and begun to debate in the most heated terms. Without a doubt, a fear of debt is the main constraint on funding the current rescue operation and on making a boost to investment once the crisis is over.
If you are a traditional Conservative MP with a picture of Margaret Thatcher on the constituency office wall, you believe debts must be repaid, much like a domestic property mortgage.
This is the household analogy Thatcher used to great effect during her years as prime minister, despite it being economically illiterate, and only ever deployed as a way to keep public spending in check and state power limited.
Now, to tackle the coronavirus outbreak and nurse the economy until a vaccine is mass-produced, there is no choice but to watch the gap between spending and income soar.
The Institute for Fiscal Studies estimates the government will need to borrow an extra £200bn in this financial year alone and is heading for a debt-to-GDP ratio of 95% from the current level of around 83%.
A debt mountain that falls just short of the UK’s £2.2 trillion annual income is a level of borrowing that butts up against a significant psychological barrier – the three-figure debt-to-GDP ratio.
In the mind of a conservative thinker, only countries that are reckless, and possibly morally dubious, have spent so much that their debts exceed 100% of GDP.
In practical terms, a country with high debt levels can become the target of panicky investors, who can orchestrate a strike that means no one lends it money.
A government borrows by issuing bonds with a maturity date, and it needs fresh lenders to step in and buy the debt from existing lenders each time it matures. “Bond vigilantes” make money from orchestrating such bond-buying strikes and are ever watchful for countries that have left themselves vulnerable.
The euro crisis is still fresh in many people’s minds, when Italy and Greece found themselves bond-market pariahs. Italy’s debts equalled 130% of GDP. Greece found itself with a debt-to-GDP ratio of 180%.
George Osborne’s career as chancellor, and his adherence to a debilitating austerity programme, was built on warnings that Britain could suffer the same fate as Greece and Italy. Like his hero Thatcher, he persuaded an anxious nation that debt was to be feared.
Yet it was never true and is even less true today. Central to this argument is the path of interest rates. For the last 20 years in the UK and Europe, and the last 40 years in the US, interest rates on government debt have tumbled. Even though governments have borrowed more over time, the cost of financing each pound of debt has fallen.
There was always the concern that interest rates could increase at some time, but it was never likely and most economists agree it cannot happen now, at least not for a decade or more. There are too many savings in the world looking for a safe haven for the demand for government bonds ever to fall, especially relative to stock markets or lending to corporations. That means the bond vigilantes have no leverage, except in the developing world. For the richer countries, there is always someone to borrow from.
So, as the US and Japan have learned, it is not the size of your debts but how much they cost to service that matters. No wonder the US government debt-to-GDP ratio is at 110% and rising while Japan is a darling of the bond markets even though its government has a debt-to-GDP ratio above 250%.
Margaret Thatcher campaigning in the 1979 election. Photograph: Geoff Bruce/Getty Images
It is clear Boris Johnson has favoured his health advisers as he looks to ease the lockdown. Worries about a second coronavirus outbreak have clinched victory over concerns about keeping much of industry and commerce in a state of suspended animation.
After weeks of pleading by the Treasury to get the nation back to work, No 10 has opted to play it safe with people’s health, and particularly older people. And no wonder, after a hapless first few months in which the UK leapt to fourth place in probably the most ignominious league table in modern history – that of Covid-19 deaths per 100,000 population – behind Belgium, Spain and Italy.
It is clear Boris Johnson has favoured his health advisers as he looks to ease the lockdown. Worries about a second coronavirus outbreak have clinched victory over concerns about keeping much of industry and commerce in a state of suspended animation.
After weeks of pleading by the Treasury to get the nation back to work, No 10 has opted to play it safe with people’s health, and particularly older people. And no wonder, after a hapless first few months in which the UK leapt to fourth place in probably the most ignominious league table in modern history – that of Covid-19 deaths per 100,000 population – behind Belgium, Spain and Italy.
---Also read
---
There are plenty of Tory MPs who believe there is a bigger threat to health, and possibly their electoral chances, from a damaged economy. They give equal billing to the threat from a flurry of corporate bankruptcies, a steep rise in unemployment and a ballooning debt pile that would dwarf the legacy left by the 2008 banking crash.
And it is this last concern – that of the mortgage to end all mortgages being left on the nation’s balance sheet – to which ministers have turned and begun to debate in the most heated terms. Without a doubt, a fear of debt is the main constraint on funding the current rescue operation and on making a boost to investment once the crisis is over.
If you are a traditional Conservative MP with a picture of Margaret Thatcher on the constituency office wall, you believe debts must be repaid, much like a domestic property mortgage.
This is the household analogy Thatcher used to great effect during her years as prime minister, despite it being economically illiterate, and only ever deployed as a way to keep public spending in check and state power limited.
Now, to tackle the coronavirus outbreak and nurse the economy until a vaccine is mass-produced, there is no choice but to watch the gap between spending and income soar.
The Institute for Fiscal Studies estimates the government will need to borrow an extra £200bn in this financial year alone and is heading for a debt-to-GDP ratio of 95% from the current level of around 83%.
A debt mountain that falls just short of the UK’s £2.2 trillion annual income is a level of borrowing that butts up against a significant psychological barrier – the three-figure debt-to-GDP ratio.
In the mind of a conservative thinker, only countries that are reckless, and possibly morally dubious, have spent so much that their debts exceed 100% of GDP.
In practical terms, a country with high debt levels can become the target of panicky investors, who can orchestrate a strike that means no one lends it money.
A government borrows by issuing bonds with a maturity date, and it needs fresh lenders to step in and buy the debt from existing lenders each time it matures. “Bond vigilantes” make money from orchestrating such bond-buying strikes and are ever watchful for countries that have left themselves vulnerable.
The euro crisis is still fresh in many people’s minds, when Italy and Greece found themselves bond-market pariahs. Italy’s debts equalled 130% of GDP. Greece found itself with a debt-to-GDP ratio of 180%.
George Osborne’s career as chancellor, and his adherence to a debilitating austerity programme, was built on warnings that Britain could suffer the same fate as Greece and Italy. Like his hero Thatcher, he persuaded an anxious nation that debt was to be feared.
Yet it was never true and is even less true today. Central to this argument is the path of interest rates. For the last 20 years in the UK and Europe, and the last 40 years in the US, interest rates on government debt have tumbled. Even though governments have borrowed more over time, the cost of financing each pound of debt has fallen.
There was always the concern that interest rates could increase at some time, but it was never likely and most economists agree it cannot happen now, at least not for a decade or more. There are too many savings in the world looking for a safe haven for the demand for government bonds ever to fall, especially relative to stock markets or lending to corporations. That means the bond vigilantes have no leverage, except in the developing world. For the richer countries, there is always someone to borrow from.
So, as the US and Japan have learned, it is not the size of your debts but how much they cost to service that matters. No wonder the US government debt-to-GDP ratio is at 110% and rising while Japan is a darling of the bond markets even though its government has a debt-to-GDP ratio above 250%.
Will it be a downsized Dubai that emerges from pandemic?
Simeon Kerr in Dubai and Andrew England in The Financial Times
Dubai’s leaders headed into 2020 brimming with confidence. After four years of tepid growth, that had fuelled questions about the durability of the Gulf trade hub’s business model, the optimism was inspired by the emirate’s hosting of Expo 2020, which was predicted to draw 25m visitors and reassert Dubai’s position on the international stage.
On January 29, Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s leader, said the expo would mark the start of a 50-year phase of “achievements” for the United Arab Emirates and “offer new hope for creating a better tomorrow”. But just as he was inaugurating Al-Wasl plaza, at the heart of the expo site, the UAE was making a separate announcement — a portent for the grim reality ahead — the seven-member federation had recorded the Middle East’s first case of Covid-19.
The economic consequences of the coronavirus pandemic, coupled with the spectacular collapse of crude prices, have wrought havoc across the oil-rich Gulf as lockdowns strangle businesses and finance ministers cut state spending. Few in the region are as exposed to the crisis as Dubai; the strengths that have long made the city stand out — and put the UAE on the map — make it more vulnerable.
For decades, Dubai’s success has been built on its transformation from pearl-diving backwater into global entrepot with some of the world’s busiest ports and airports, as well as a financial centre that hosts top international banks — the Middle East’s version of Singapore or Hong Kong.
But today the emirate’s main economic drivers — trade, transportation, tourism, retail and real estate — are slammed shut with the world in lockdown. Dubai has minimal oil resources, and lacks the financial muscle of its wealthier neighbours such as Abu Dhabi and Qatar to cushion the economic impact of Covid-19. Expo 2020, which was scheduled to open in October, has been pushed back 12 months — joining a long list of global events that have fallen victim to the pandemic.
The global crisis has raised concerns about the emirate’s high debt burden — which the IMF found last year “exceeds 100 per cent of Dubai gross domestic product”, including government-related entities — and revived painful memories. During the 2008-09 crisis, Dubai came to the brink of defaulting and was forced to downsize and restructure distressed state entities.
It survived, and later thrived, largely thanks to $20bn in bailout loans underpinned by Abu Dhabi, the UAE’s wealthy capital. But that crisis was primarily contained within Dubai’s real estate sector and government-related entities, which had gorged on debt as the city expanded.
This time the impact is broader and, in a worst-case scenario, could result in a slimmed down version of Dubai Inc.
“There is no choice but restructurings, downsizing, mergers,” says Karen Young, a resident scholar at the American Enterprise Institute, a think-tank. “Staff numbers from cleaners to interior designers, accountants to general managers, will be affected.”
Even before the crisis struck, Dubai was in a downturn. Property prices had slumped more than 30 per cent from 2014 highs, and bankers and analysts were speculating whether the “build it and they will come” model had run its course.
The model is now expected to come under its severest financial pressure yet and force the emirate to re-evaluate how it operates. Government officials accept it will not be “business as usual”.
“The global economic situation will not return to what it was,” Sami al-Qamzi, director-general of Dubai’s economic department, told local media in April, adding that the emirate could respond quickly to challenges. “The strategy and economic model will be adjusted.”
Minimising the exodus
Instead of people arriving in vast numbers for Expo 2020, a mass exodus of expatriates — who make up the bulk of Dubai’s 3.3m population — is more likely.
Foreigners account for 98 per cent of Dubai’s private sector workforce — mainly migrant workers from south Asia — and those without jobs are unlikely to remain for long. To ease the burden, the UAE has extended all residency visas until the end of the year, allowing redundant expatriates to look for work or wait for flights home to restart.
Diplomats say hundreds of thousands of foreign workers risk losing their jobs across the UAE in the next few months. Around 260,000 Indian and Pakistani workers have already applied for repatriation as employers try to offload staff in sectors ranging from construction to retail and tourism.
“We’re looking at a minimum population contraction of 10 per cent for the year,” Nasser al-Shaikh, a former head of Dubai’s department of finance, tweeted in April.
Farhan, who has been driving taxis for eight years, used to send $300 a month to his family in Pakistan. But last month his earnings collapsed to $60. Even with a loan of $110 from his employer, he is borrowing from friends to survive. “Corona has stopped everything,” he says. “So many drivers need to go home.”
The hardship extends into the white collar workforce. A fifth of the Indians applying to return home are professionals, the Indian embassy says. “I will give it two months and then take my family home,” says one Indian retail consultant on unpaid leave.
Hasnain Malik of Tellimer, an emerging markets research company, says Dubai should consider expanding access to long-term residency for expatriates, who currently have limited rights to remain. That could boost longer-term investment in property and businesses, as well as consumer spending.
“To return to high economic growth in a world where trade, travel and tourism are under threat, new technology is displacing traditional business models, and regional rivals are catching up, Dubai may have to contemplate a much more competitive cost of living and operating,” he says.
Big Brother Bailout
As in 2008-09, Abu Dhabi is expected to ride to Dubai’s rescue if needed. But bankers believe any support could come with “quid pro quos”, such as asset sales and mergers involving Dubai’s state-affiliated entities.
The two emirates have long been brotherly competitors, and Abu Dhabi's ambitious diversification agenda has raised the capital's profile over the past 15 years. The 2009 debt crisis, however, played out in the glare of international scrutiny, was a humbling experience for the Dubai brand.
Both emirates control their own utilities, airlines, ports and stock markets despite being members of a small federation of 9.6m people. “There is likely to be consolidation, it will be forced consolidation, wrapped nicely under the PR strategy of the [UAE], and it's all a matter of time,” says a senior Gulf-based banker.
Jihad Azour, the IMF’s regional head, notes that many government-related entities have restructured their operations and “deleveraged significantly” in recent years. But he says “some of them still have large levels of liabilities and need to be monitored carefully”.
Capital Economics says some state-owned enterprises may struggle to service their debts. It estimates that over the next three years they face a total of $21.3bn in repayments — equal to 19.4 per cent of GDP. The consultancy, which predicts a “major crunch point” in 2023 when another $30bn of debt matures, says the scale of the downturn could see strains emerge sooner.
Much will depend on how long global travel and trade remain frozen. Thaddeus Best, a sovereign risk analyst at Moody’s, says those state-affiliated entities covered by the rating agency have adequate liquidity and moderate leverage, and are expected to continue servicing their debts. Many, he says, should be able to reschedule loans with local banks, if needed, while paying bondholders.
A large portion of the emirate’s outstanding bonds are held by the Investment Corporation of Dubai, a sovereign fund which owns high-quality assets, such as Emirates airline, and stakes in lender Emirates NBD and developer Emaar. Mr Best says issuers, such as ICD, could tap bond markets later in the year, “when some semblance of normality returns”.
The government is already in talks with more than 10 lenders for five-year loans of up to Dh2bn ($540m) each and private placement of bonds that avoid the glare of public debt markets. “They see these as bridge financing,” says one person briefed on the scheme, “and then [plan to] issue bonds in due course.”
Tough shutdown
The UAE stopped passenger air traffic — the lifeblood of the economy — in late March. Dubai, a transit point between east and west, is a popular destination for Chinese tourists — the first cases reported in January were family members who had travelled from Wuhan, the epicentre of the outbreak in China.
More restrictive measures were introduced, with Dubai requiring residents to obtain a police permit before leaving their homes. Covid-19 patients have been treated for free whether or not they hold health insurance. Residents broadly welcomed the decisive measures and the authorities’ zero tolerance approach, including imposing more than 50,000 fines on lockdown violators.
A nationwide campaign, backed by a coronavirus testing laboratory in Abu Dhabi that has the largest processing capacity outside China, has tested more than one in 10 of the UAE’s population, focusing on low-income areas where migrant workers live in cramped conditions. Carrying out the third highest number of tests per capita in the world, the outbreak has been relatively contained. The UAE has reported more than 17,000 cases and 185 deaths, according to Johns Hopkins University.
Dubai eased its 24-hour curfew on the eve of Ramadan in the last week of April, allowing residents to visit malls, which are operating at 30 per cent capacity, and to exercise outside.
But businesses are already reeling from the shutdown and the prognosis for global travel demand. Many companies have cut salaries by up to 75 per cent or placed staff on leave as they seek to preserve cash, while praying for a recovery in autumn.
Dubai International, once the world’s busiest international airport by passenger numbers, has reopened for one-way rescue flights to allow unemployed expatriates to return home and to bring those stranded abroad back to the UAE. But regular services, originally planned to restart in early June, have been pushed back — Emirates airline, Dubai’s flagship carrier, has grounded most of its fleet and imposed salary cuts on many of its 105,000 staff. Support for the airline threatens to be expensive given last year's operating costs were $26bn.
Contractors working for the government and private sector are being urged to find cost cuts for existing projects of up to 30 per cent. Dubai government departments have also frozen hiring and cut administrative and capital spending by up to 50 per cent.
“Everyone is cutting costs to preserve cash,” says one private equity fund manager. “There is going to be a bloodbath in the SME sector — lots of failures, and most are going to happen as we come out of the lockdown.”
Survival mode
The UAE’s financial response to the crisis has been led by the federal government, with the central bank’s $70bn support package for lenders. The measures include extra liquidity to allow banks to extend debt relief.
But the most vulnerable smaller companies, the bedrock of the economy, making up half of output and providing the same in terms of jobs, say they have yet to see the benefits of the government's rescue package. “This is like giving mascara to the blind,” says one business owner. “Next month I will have no income, and what happens then?”
Dubai has extended direct support to businesses, including reducing government fees and utility bills. Mall operators and commercial property companies, as well as the city’s financial district, have offered rent relief to tenants. But the UAE’s direct fiscal stimulus equates to 2 per cent of GDP, compared with 5 per cent unveiled by Bahrain and 12 per cent by Singapore, says Mr Malik.
For businesses it is now a question of survival.
“Without proper support from the government and banks, it is going to be very difficult,” says Abdul Kader Saadi, whose Glee Hospitality consults on and operates restaurants. He has lost management contracts and closed some operations, while cutting salaries and encouraging staff to return home for three months’ unpaid leave.
His business thrived during the global financial crisis a decade ago, even as many expatriates left, with images of abandoned cars at the airport a symbol of that period. He says today’s crisis is worse.
A magnet for millions across the Middle East, Africa and Asia, Dubai has a record of defying its sceptics. But like Mr Saadi’s business, the commercial hub’s ability to bounce back will depend as much on external factors as domestic.
“In Dubai, the question is which sector is not stressed? It all depends on how long it would take for oil to recover and Covid-19 to go away,” says the Gulf-based banker. “But don't bet against Dubai. Dubai is a survivor.”
Dubai’s leaders headed into 2020 brimming with confidence. After four years of tepid growth, that had fuelled questions about the durability of the Gulf trade hub’s business model, the optimism was inspired by the emirate’s hosting of Expo 2020, which was predicted to draw 25m visitors and reassert Dubai’s position on the international stage.
On January 29, Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s leader, said the expo would mark the start of a 50-year phase of “achievements” for the United Arab Emirates and “offer new hope for creating a better tomorrow”. But just as he was inaugurating Al-Wasl plaza, at the heart of the expo site, the UAE was making a separate announcement — a portent for the grim reality ahead — the seven-member federation had recorded the Middle East’s first case of Covid-19.
The economic consequences of the coronavirus pandemic, coupled with the spectacular collapse of crude prices, have wrought havoc across the oil-rich Gulf as lockdowns strangle businesses and finance ministers cut state spending. Few in the region are as exposed to the crisis as Dubai; the strengths that have long made the city stand out — and put the UAE on the map — make it more vulnerable.
For decades, Dubai’s success has been built on its transformation from pearl-diving backwater into global entrepot with some of the world’s busiest ports and airports, as well as a financial centre that hosts top international banks — the Middle East’s version of Singapore or Hong Kong.
But today the emirate’s main economic drivers — trade, transportation, tourism, retail and real estate — are slammed shut with the world in lockdown. Dubai has minimal oil resources, and lacks the financial muscle of its wealthier neighbours such as Abu Dhabi and Qatar to cushion the economic impact of Covid-19. Expo 2020, which was scheduled to open in October, has been pushed back 12 months — joining a long list of global events that have fallen victim to the pandemic.
The global crisis has raised concerns about the emirate’s high debt burden — which the IMF found last year “exceeds 100 per cent of Dubai gross domestic product”, including government-related entities — and revived painful memories. During the 2008-09 crisis, Dubai came to the brink of defaulting and was forced to downsize and restructure distressed state entities.
It survived, and later thrived, largely thanks to $20bn in bailout loans underpinned by Abu Dhabi, the UAE’s wealthy capital. But that crisis was primarily contained within Dubai’s real estate sector and government-related entities, which had gorged on debt as the city expanded.
This time the impact is broader and, in a worst-case scenario, could result in a slimmed down version of Dubai Inc.
“There is no choice but restructurings, downsizing, mergers,” says Karen Young, a resident scholar at the American Enterprise Institute, a think-tank. “Staff numbers from cleaners to interior designers, accountants to general managers, will be affected.”
Even before the crisis struck, Dubai was in a downturn. Property prices had slumped more than 30 per cent from 2014 highs, and bankers and analysts were speculating whether the “build it and they will come” model had run its course.
The model is now expected to come under its severest financial pressure yet and force the emirate to re-evaluate how it operates. Government officials accept it will not be “business as usual”.
“The global economic situation will not return to what it was,” Sami al-Qamzi, director-general of Dubai’s economic department, told local media in April, adding that the emirate could respond quickly to challenges. “The strategy and economic model will be adjusted.”
Minimising the exodus
Instead of people arriving in vast numbers for Expo 2020, a mass exodus of expatriates — who make up the bulk of Dubai’s 3.3m population — is more likely.
Foreigners account for 98 per cent of Dubai’s private sector workforce — mainly migrant workers from south Asia — and those without jobs are unlikely to remain for long. To ease the burden, the UAE has extended all residency visas until the end of the year, allowing redundant expatriates to look for work or wait for flights home to restart.
Diplomats say hundreds of thousands of foreign workers risk losing their jobs across the UAE in the next few months. Around 260,000 Indian and Pakistani workers have already applied for repatriation as employers try to offload staff in sectors ranging from construction to retail and tourism.
“We’re looking at a minimum population contraction of 10 per cent for the year,” Nasser al-Shaikh, a former head of Dubai’s department of finance, tweeted in April.
Farhan, who has been driving taxis for eight years, used to send $300 a month to his family in Pakistan. But last month his earnings collapsed to $60. Even with a loan of $110 from his employer, he is borrowing from friends to survive. “Corona has stopped everything,” he says. “So many drivers need to go home.”
The hardship extends into the white collar workforce. A fifth of the Indians applying to return home are professionals, the Indian embassy says. “I will give it two months and then take my family home,” says one Indian retail consultant on unpaid leave.
Hasnain Malik of Tellimer, an emerging markets research company, says Dubai should consider expanding access to long-term residency for expatriates, who currently have limited rights to remain. That could boost longer-term investment in property and businesses, as well as consumer spending.
“To return to high economic growth in a world where trade, travel and tourism are under threat, new technology is displacing traditional business models, and regional rivals are catching up, Dubai may have to contemplate a much more competitive cost of living and operating,” he says.
Big Brother Bailout
As in 2008-09, Abu Dhabi is expected to ride to Dubai’s rescue if needed. But bankers believe any support could come with “quid pro quos”, such as asset sales and mergers involving Dubai’s state-affiliated entities.
The two emirates have long been brotherly competitors, and Abu Dhabi's ambitious diversification agenda has raised the capital's profile over the past 15 years. The 2009 debt crisis, however, played out in the glare of international scrutiny, was a humbling experience for the Dubai brand.
Both emirates control their own utilities, airlines, ports and stock markets despite being members of a small federation of 9.6m people. “There is likely to be consolidation, it will be forced consolidation, wrapped nicely under the PR strategy of the [UAE], and it's all a matter of time,” says a senior Gulf-based banker.
Jihad Azour, the IMF’s regional head, notes that many government-related entities have restructured their operations and “deleveraged significantly” in recent years. But he says “some of them still have large levels of liabilities and need to be monitored carefully”.
Capital Economics says some state-owned enterprises may struggle to service their debts. It estimates that over the next three years they face a total of $21.3bn in repayments — equal to 19.4 per cent of GDP. The consultancy, which predicts a “major crunch point” in 2023 when another $30bn of debt matures, says the scale of the downturn could see strains emerge sooner.
Much will depend on how long global travel and trade remain frozen. Thaddeus Best, a sovereign risk analyst at Moody’s, says those state-affiliated entities covered by the rating agency have adequate liquidity and moderate leverage, and are expected to continue servicing their debts. Many, he says, should be able to reschedule loans with local banks, if needed, while paying bondholders.
A large portion of the emirate’s outstanding bonds are held by the Investment Corporation of Dubai, a sovereign fund which owns high-quality assets, such as Emirates airline, and stakes in lender Emirates NBD and developer Emaar. Mr Best says issuers, such as ICD, could tap bond markets later in the year, “when some semblance of normality returns”.
The government is already in talks with more than 10 lenders for five-year loans of up to Dh2bn ($540m) each and private placement of bonds that avoid the glare of public debt markets. “They see these as bridge financing,” says one person briefed on the scheme, “and then [plan to] issue bonds in due course.”
Tough shutdown
The UAE stopped passenger air traffic — the lifeblood of the economy — in late March. Dubai, a transit point between east and west, is a popular destination for Chinese tourists — the first cases reported in January were family members who had travelled from Wuhan, the epicentre of the outbreak in China.
More restrictive measures were introduced, with Dubai requiring residents to obtain a police permit before leaving their homes. Covid-19 patients have been treated for free whether or not they hold health insurance. Residents broadly welcomed the decisive measures and the authorities’ zero tolerance approach, including imposing more than 50,000 fines on lockdown violators.
A nationwide campaign, backed by a coronavirus testing laboratory in Abu Dhabi that has the largest processing capacity outside China, has tested more than one in 10 of the UAE’s population, focusing on low-income areas where migrant workers live in cramped conditions. Carrying out the third highest number of tests per capita in the world, the outbreak has been relatively contained. The UAE has reported more than 17,000 cases and 185 deaths, according to Johns Hopkins University.
Dubai eased its 24-hour curfew on the eve of Ramadan in the last week of April, allowing residents to visit malls, which are operating at 30 per cent capacity, and to exercise outside.
But businesses are already reeling from the shutdown and the prognosis for global travel demand. Many companies have cut salaries by up to 75 per cent or placed staff on leave as they seek to preserve cash, while praying for a recovery in autumn.
Dubai International, once the world’s busiest international airport by passenger numbers, has reopened for one-way rescue flights to allow unemployed expatriates to return home and to bring those stranded abroad back to the UAE. But regular services, originally planned to restart in early June, have been pushed back — Emirates airline, Dubai’s flagship carrier, has grounded most of its fleet and imposed salary cuts on many of its 105,000 staff. Support for the airline threatens to be expensive given last year's operating costs were $26bn.
Contractors working for the government and private sector are being urged to find cost cuts for existing projects of up to 30 per cent. Dubai government departments have also frozen hiring and cut administrative and capital spending by up to 50 per cent.
“Everyone is cutting costs to preserve cash,” says one private equity fund manager. “There is going to be a bloodbath in the SME sector — lots of failures, and most are going to happen as we come out of the lockdown.”
Survival mode
The UAE’s financial response to the crisis has been led by the federal government, with the central bank’s $70bn support package for lenders. The measures include extra liquidity to allow banks to extend debt relief.
But the most vulnerable smaller companies, the bedrock of the economy, making up half of output and providing the same in terms of jobs, say they have yet to see the benefits of the government's rescue package. “This is like giving mascara to the blind,” says one business owner. “Next month I will have no income, and what happens then?”
Dubai has extended direct support to businesses, including reducing government fees and utility bills. Mall operators and commercial property companies, as well as the city’s financial district, have offered rent relief to tenants. But the UAE’s direct fiscal stimulus equates to 2 per cent of GDP, compared with 5 per cent unveiled by Bahrain and 12 per cent by Singapore, says Mr Malik.
For businesses it is now a question of survival.
“Without proper support from the government and banks, it is going to be very difficult,” says Abdul Kader Saadi, whose Glee Hospitality consults on and operates restaurants. He has lost management contracts and closed some operations, while cutting salaries and encouraging staff to return home for three months’ unpaid leave.
His business thrived during the global financial crisis a decade ago, even as many expatriates left, with images of abandoned cars at the airport a symbol of that period. He says today’s crisis is worse.
A magnet for millions across the Middle East, Africa and Asia, Dubai has a record of defying its sceptics. But like Mr Saadi’s business, the commercial hub’s ability to bounce back will depend as much on external factors as domestic.
“In Dubai, the question is which sector is not stressed? It all depends on how long it would take for oil to recover and Covid-19 to go away,” says the Gulf-based banker. “But don't bet against Dubai. Dubai is a survivor.”
Subscribe to:
Posts (Atom)