Covid-19 has pressure-tested businesses around the globe, Daniel Pacic talks about the implications the pandemic has had on the UAE in his interview with Sarajevo-based ‘Business’ Magazine.
To what extent has the crisis brought about by the pandemic had an effect on the economy in Dubai and the UAE as a whole?
As the current crisis due to the Covid-19 pandemic began to take a global hold and breed more economic uncertainty, businesses in UAE’s seven emirates, as elsewhere across the world, responded by slashing salaries, putting employees on unpaid leave, and reducing staffing levels.
For a country that relies on an 80% expatriate population for much of its economic activity, the stakes are even higher: if residents can no longer find work, they will likely return to their home countries, depleting the consumer base needed to enable any economic recovery. More than 150,000 Indian nationals and 40,000 Pakistani nationals had already left or registered to leave the UAE by early May, according to those countries’ diplomatic missions, and senior officials at the Dubai government’s department of finance, a minimum population contraction of 10% was expected for the year.
Some might suggest that the timing of this crisis couldn’t have been worse as it follows several years of declining revenues for some of Dubai’s most important sectors, primarily real estate and hospitality. Residential property prices had already fallen 30% from their 2014 peak and revenue per available hotel room was down more than 25% since 2015.
Last year Dubai’s economy grew at just 1.94%, its slowest pace since the dark days of the global financial crisis in 2008-09. Dubai, which has one of the most diversified and non-oil dependent economies in the Gulf, relies on sectors like hospitality, tourism, entertainment, logistics, property and retail. Its hotels and restaurants are internationally acclaimed, but nearly half the restaurants and hotels surveyed by the organization expected to go out of business in the next month alone. Some 74% of travel and tourism companies said they expected to close in that time, and 30% of companies in transport, storage and communications expect the same fate.
However, a couple of months on and the outlook is somewhat more positive. This could be because the 1228 companies (out of 245,000) were surveyed in April, during a time when the lockdown measures were in their strictest phase and their sentiments were based on the expectation that this would be prolonged. Now that businesses are starting to return to more normal operation, we can anticipate an improvement in business confidence in the coming weeks and months.
In which sectors have the economic consequences been most severe and which sectors have shown the most resistance or even benefitted from the situation?
The coronavirus outbreak has impacted businesses worldwide and wiped more than $20 trillion (Dh73.5tn) off the value of global equity markets.
Unsurprisingly perhaps, the travel and aviation sectors in the Middle East were immediately among the hardest hit by the crisis. Airlines in the Gulf region saw passenger numbers slump by 23 percent and revenues by nearly USD $5 billion due to the global spread of the new coronavirus. The International Air Transport Association (IATA) said it now sees 2020 global revenue losses for the passenger business of up to $113 billion if it continues to spread at its current rate.
Dubai’s hotel businesses are clearly hit by the global travel slowdown. In February, hotel occupancy rates in the UAE were down 6.6% year-on-year, while revenue per available room was down 21.4%. The situation was further exacerbated by the cancellation or indefinite postponement of all concerts, sporting events and industry conferences, as well as the closing of night clubs.
In the banking sector, there are fears that the epidemic may lead to reduced borrowing and lending, impacting banks that work in corporate and personal finance in Dubai and the Middle East. The UAE’s Targeted Economic Support Scheme includes a 50-billion dirham aid package for banks in the country through collateralised, zero-interest loans. Banks will also be allowed to free up capital buffers, which will make another 50 billion dirhams in liquidity available to lenders.
However, it is not all doom and gloom. There are some businesses that are thriving during the pandemic as they experience a spike in demand for their products and services.
Apart from sellers of products like N95 respirators, medical and sanitizers, the pharma and healthcare sector are definitely profiting. Companies in this region have taken the opportunity presented by the epidemic to diversify their portfolio – even if they don’t necessarily intend to make a profit. Regal Global Trading, for example, has announced plans to set up a factory in Dubai to manufacture affordable face masks and medical kits to be shipped to virus-stricken countries all over the world, particularly China. Healthcare technology firms that offer home diagnostics and telemedicine services are witnessing a rush in the number of customers and queries. Okadoc – a UAE-based instant doctor-booking company – recorded a jump in traffic of over 50% to its platform immediately following the coronavirus outbreak.
Cybersecurity is another industry which is doing well as there tends to be an uptick in cyberattacks during major news events or even holiday periods. Although it might be too early to predict the financial impact the coronavirus will have on cybersecurity firms, Kaspersky says the company has already seen a significant increase in demand for its security products and advisory services, particularly from firms that have asked employees to work from home.
As a greater number of people work remotely, they are turning to videoconferencing and other real-time communication tools to stay in touch with colleagues. Platforms such as Zoom, Slack and Skype are experiencing an increase in the number of users on their platforms. Microsoft UAE says demand for remote working platforms is likely to remain long after the end of the epidemic and consumer “stay-at-home” products and services are also benefiting from the outbreak; search trends for Netflix on Google suggest that international subscribers may grow 30.9 percent compared to the same quarter last year, above expectations for growth of 29.9 percent.
The drone industry has also seen an increase in business over the past two months and industry analysts predict the trend to continue. Drone technology that had previously been used to spray pesticides in agricultural fields was effectively used in Dubai to spray disinfectants in public places and on prevention vehicles travelling across affected areas. Delivering medical samples by drone can significantly reduce unnecessary human contact throughout the transport cycle, according to a World Economic Forum report.
E-commerce companies are witnessing an overwhelming demand from customers placing online orders for packed foods and household goods as they avoid congested supermarkets and stores. Global technology giant Amazon recently announced plans to hire 100,000 more staff at its fulfilment centres and across its delivery network to meet rising demand. Last-mile delivery companies that transport essential goods such as grocery and medicine are also experiencing a surge in business. Instashop, an online grocery delivery company, said its orders have risen more than 53 per cent month-on-month, with a significant increase from the end of February, as has another UAE-based company called iMile. Saudi home maintenance services start-up, Fanni App, has reported a 30 per cent increase in orders since people in the kingdom were asked to stay at home.
In parallel with the pandemic, there is also an oil price crisis – how are Dubai and the UAE coping with this problem?
Oil and gas has historically been the UAE economy’s mainstay. However, the government has long emphasized its intention to pursue economic diversification and to reduce the federation’s reliance on oil. This was borne out of the recognition that hydrocarbon resources are finite, that both the price and demand for oil fluctuates considerably, and that the oil and gas industry was the sole source of wealth in many economies in the Persian Gulf.
Indeed, Covid-19 sent the price of oil plummeting to all-time lows as people stopped moving around in order to limit the spread of the virus. With commerce resuming, the price has ticked back up, though a peak in demand may be years away. Some are concerned that the world’s economies may be moving permanently away from fossil fuels. Oversupply and the increasing competitiveness of cleaner energy sources mean that oil may stay cheap for the foreseeable future. The recent turmoil in oil markets might be a glimpse of the future as opposed to an aberration.
As a result, and building on the progress made thus far, the UAE seems determined to continue its transformation into a diversified and knowledge-based economy. The Abu Dhabi Economic Vision 2030 reaffirms economic diversification as a “key pillar” and aims to grow the non-oil sector by more than 7.5 per cent annually to help the UAE achieve a neutral non-oil trade balance. The explicit objective of the Dubai Industrial Strategy 2030 is to “increase the output of manufacturing” and “increase the value-added share in output”.
Abu Dhabi and Dubai are the richest Emirates within the UAE but have historically taken different approaches to diversification. Backed by huge oil reserves which accounted for nearly 7 per cent of the world’s proven oil resources, Abu Dhabi sought diversification through resource-based manufacturing. The Abu Dhabi Economic Vision 2030 has identified aerospace and healthcare equipment industries as the engines of future growth, alongside established manufacturing industries (such as oil and gas, petrochemicals and metals) and several service industries (including tourism, education and media). Abu Dhabi also has the largest sovereign wealth fund (ADIA) in the Middle East and the fifth largest in the world with USD 792 billion.
By contrast, having depleted its small oil resources, Dubai was more proactive than other Emirates in its attempts at diversification but chose to pursue it by bypassing industrialization and instead creating a service-based economy. It has diversified into trade, banking, real estate, and tourism.
The strategic future of the economy is mainly based on the digital economy. Digital economy is the economic activity that results from billions of everyday online connections among people, businesses, devices, data, and processes. The UAE aims to enhance economic security by adopting digital economy and block chain technologies in financial transactions and service.
Considering the impact of the consequences on the aviation industry, what have the effects been for Emirates Airlines and the transport sector as a whole? How worrying is this considering that transportation contributes 20% to Dubai’s GDP?
The region’s proud aviation industry is facing the gravest crisis in its history. The AACO, which represents some 30 Arab public and private carriers, has called for support packages including tax relief, waivers of a string of fees and charges, and help with new virus-related costs. They warn that at least 800,000 regional jobs could be in danger without some form of government intervention. Traditionally, the 19 state-owned Middle East carriers have received copious structural support in the past, even those that have posted significant losses. However, given the impending economic contraction, the ability for governments to plug the gap could be severely limited.
As a result, some airlines have resorted to deep cost-cutting measures without delay. Emirates, the Dubai-based carrier, initially issued temporary salary cuts between 25% and 50% as a means of avoiding redundancies. However, they were eventually forced to lay off 780 pilots and over 7,000 cabin crew members with redundancies expected to continue unabatedly in the near future (the final toll is expected to be around 30,000 employees).
On the other hand, there has been an increase in air cargo market demand for the rapid, reliable and efficient transportation of essential commodities such as Personal Protective Equipment (PPE), pharmaceuticals, medical equipment, food, machinery and other supplies around the world. Emirates has introduced additional cargo capacity by using Boeing 777-300ER aircraft with seats removed from the Economy Class cabin so as to allow up to 17 tonnes or 132 cubic metres of additional cargo capacity per flight on top of the 40-50 tonne cargo capacity in the belly hold of the wide body passenger aircraft.
Which intervention measures has the country taken to combat the numerous economic consequences of the pandemic – what sort of assistance has been offered to business owners and their employees and stakeholders?
For their part, the UAE Central bank recently announced an AED 100 billion stimulus plan as a means of offering support to corporates and individuals overwhelmed by a liquidity and solvency crisis, instigated by both the Covid-19 outbreak and a simultaneous collapse in oil prices. The scheme includes an injection of AED 50bn from Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and AED 50bn funds from the banks’ capital buffers.
This has enabled the largest local banks to offer specific measures to their individual clients such as; increasing the loan-to-value ratio for first-time home buyers by 5%, repayment holidays with zero fees for personal loans, auto loans and mortgages as well as interest-free instalment plans for school fee payments.
SMEs impacted by the Covid-19 situation can also apply for three-month repayment holidays on any merchant, equipment or business vehicle loans, while many banks have reduced the monthly minimum balance requirements for corporate bank accounts to AED 10,000. Reductions in charges for trade finance customers are also being offered, as well as enhanced credit lines to cover operational costs.
In light of the exceptional circumstances faced by local businesses, Dubai’s economic free zones have unveiled a stimulus package for their registered entities in the form of a five-point plan including:
- The postponement of rent payments for six months;
- Payment instalments;
- Refunding security deposits and guarantees;
- Cancelling administrative fines for companies and individuals; and
- Permitting temporary contracts allowing the free movement of employees between free zones.
Dubai was supposed to host Expo 2020 – has the event been postponed / cancelled and what are the financial consequences of the postponement / cancellation? How many resources were invested in the project and how will the Dubai Smart City initiative be affected by the fate of the Expo?
Following the announcement on March 30th from the Dubai Expo 2020 steering committee regarding the possibility of the event being delayed for a year due to the Covid-19 pandemic, it was clear that the much-awaited Expo would become the latest in a long line of global entertainment, business and sporting events, including Euro 2020 and the Tokyo Olympic Games, to be postponed.
Despite billions of dollars being spent in recent years on the construction of hotels and other Expo-related infrastructure, government officials and business leaders in Dubai are choosing to take an open and pragmatic approach, with a view to allowing participating nations and their economies time to regroup in the wake of the crisis and contribute to the six-month showcase at a more upbeat time. Millions of visitors were expected over the course of the Expo which would have featured pavilions from 192 countries worldwide.
On the other hand, the execution committee now has more time to ensure everything is in place for the event in 2021, which will largely be viewed as a platform for global economies to display the extent to which they have managed to climb out of recession.
What was the level of economic cooperation with Bosnia & Herzegovina before the pandemic – had there been an improvement on previous years? What are the expectations for the continuation of cooperation post-Covid19?
Ambassador Novic met with the Abu Dhabi Chamber of Commerce in February, just before the pandemic and called on them to form a trade mission to his country in order to be introduced to the available trade opportunities in Bosnia and Herzegovina.
He praised the strong relationship between the UAE and Bosnia and Herzegovina on all levels, noting that between 30,000 to 35,000 Emirati tourists visit the country every year, highlighting the fact that many Emirati investments focus on the property sector in the Bosnian capital considering the importance of tourism and the great geographical and natural features of the country. Discussions also centred around the formation of a Bosnian business council in Abu Dhabi that would include Bosnian businesses operating in the emirate. For his part, His Excellency Muhammad Helal Al Mheiri Director general of the Abu Dhabi Chamber said the chamber is ready to increase its joint cooperation with all Bosnian companies who are members at the Chamber and operating in Abu Dhabi and all the other emirates in general.
The relationship between the two countries has long been warm and extends further than commercial and business interests. At the end of May, the Government of the United Arab Emirates also committed to valuable medical assistance to Bosnia and Herzegovina at the end of May, including 40 respirators and 100,000 coronavirus tests. As reported by klix.ba news portal, 100,000 tests, 25,000 protective clothing sets, 150,000 pairs of gloves, 150,000 N95 masks, 150,000 disposable surgical masks, 150,000 disposable protective masks, 50,000 visors and 20,000 goggles would be delivered.
Which preventive measures have been taken in Dubai and the UAE to prevent the spread of Covid-19 infections? In what ways have you personally protected yourself, in both your personal and professional life? Which preventive measures were employed by your company and others in your industry?
The UAE leadership were amongst the first to take the necessary drastic measures to curb the spread of Covid-19 in the country. Following the closure of all schools and higher education institutions at the beginning of March, they also followed up with the suspension of all inbound and outbound passenger flights at major international airports. All fresh food markets and commercial centres, including shopping malls, were also subsequently closed. The use of the metro, tram and public service was indefinitely suspended, as was the issuance of any new employment visas.
As part of a nationwide disinfection programme, a night-time curfew was introduced, and residents were able to visit pharmacies and food retail outlets such as supermarkets (which remained open) through an online permit system. Even after restrictions were lifted, private companies and commercial establishments were encouraged and, in some cases, mandated to implement remote working systems for 80% of their staff. Even after the curfew and travel restrictions were lifted in June, the country’s authorities made sure to make Covid testing readily available at drive-thru testing centres and mandated that residents wear face masks and gloves at all time outside the home, following social distancing measures.
As a global company working across different continents and time zones with a robust infrastructure, Dominion Fiduciary Services is positioned to offer clients the highest value of service and communicate with our teams daily. We installed a dedicated Covid-19 response team, which ensured we were prepared and had the appropriate measures in place to maintain an undisrupted working environment, ensuring that there would be no disturbance to our levels of client service.
Of course, our priority is the health and wellbeing of our people, our clients and our community, and we are applying a balanced and informed approach to the ever evolving Covid-19 situation. In line with current advice from the World Health Organisation, as well as Government advice in the locations in which we are based, including the UAE, our staff have been given the option to work from home. Our remote working capability is well tested and working effectively, and we have the best technology in place to enable remote working with no disruption. Similar action has been taken by many of our partner firms in consultancy and service-based industries such as law firms, accountancy firms, private banks and tax consultancies.
Insight provided by Daniel Pacic, Executive Director, Abu Dhabi