x Abu Dhabi, UAESunday 21 January 2018

Month-by-month 2013 business review

What a year it's been. The UAE stock market was upgraded, the Microsoft controversy, the property rebound in Dubai, the mortgage cap and then Expo 2020 success – and that's far from all.

Dubai's Crown Prince Sheikh Hamdan, gestures as he wears a t-shirt bearing the logo of Dubai's 2020 World Expo campaign on top of Burj Khalifa, the world's tallest tower on November 25 to mark the emirates 42nd independence day and as part of a campaign that Dubai launched to win the World Expo 2020.  AFP PHOTO/HO/ALI ISSA-PERSONAL PHOTOGRAPHER OF SHEIKH HAMDAN BIN MOHAMED BIN RASHID AL-MAKTOUM
Dubai's Crown Prince Sheikh Hamdan, gestures as he wears a t-shirt bearing the logo of Dubai's 2020 World Expo campaign on top of Burj Khalifa, the world's tallest tower on November 25 to mark the emirates 42nd independence day and as part of a campaign that Dubai launched to win the World Expo 2020. AFP PHOTO/HO/ALI ISSA-PERSONAL PHOTOGRAPHER OF SHEIKH HAMDAN BIN MOHAMED BIN RASHID AL-MAKTOUM

The year began with banks and the Central Bank tussling over a mortgage cap, which inspired as much bile from lenders as it did worry from estate agents and home buyers.

Just before the new year, the Central Bank distributed a circular to lenders stating that mortgage loan-to-value limits for first homes should be capped at 50 per cent for expatriates and 70 per cent for Emiratis. For second homes, the limits would be tightened to 40 per cent for expats and 60 per cent for nationals. Previously, no limit had existed.

The number of housing transactions shrank almost overnight, property agencies said.

Throughout 2012, the housing market had been dominated by cash sales, with banks struggling to attract enough mortgage customers to replace loans being paid off. But banks complained that the effect of the new circular would wreak havoc on the local economy that had just recovered from the property bust of 2009.

The Central Bank tried to cool down the dispute, saying that as the result of a “misunderstanding” the circular had been interpreted as an order rather than the beginning of a consultation with lenders.

It was soon soliciting banks on their views on a more appropriate cap, with the Emirates Banks Association also seeking to impose a limit on mortgages for the purchase of properties under construction, also known as “off-plan” purchases.

At 11pm on Friday February 22, Etihad Airways began its “big switch” to its new computerised sales and booking system delivered by the US systems company, Sabre, in a 10-year deal worth US$1 billion. The mammoth cutover operation involved training more than 6,000 members of Etihad’s staff, all with the aim of transforming the carrier’s reservations, inventory, e-commerce, distribution and departure control activities, as well as providing enhanced mobile and communications access for passengers.

After the shutdown, the staff worked on transferring all existing 530,000 bookings into the new system and restructuring the airline’s website. In addition to Etihad’s Abu Dhabi hub, 23 other airports around the world switched to the new platform during the weekend. However, implementation in the remaining destinations continued until the end of March.

The first passenger checked in using the new system at 7pm on Saturday, February 23, for flight EY 221 Abu Dhabi to Karachi. At the same time, the first sale made through the Sabre system at the Abu Dhabi Contact Centre was a Pearl business class ticket to Manila.

One of the most far-reaching systems switches in the airline’s 10-year history had been successfully completed with minimal operational disruption across the airline’s global flight network during the changeover period.

Behind the scenes Sabre’s team had reworked the business processes, rewired all of the links into the airline’s operation and back office systems, and transferred all of the network connections, before doing a final check to ensure the system was ready to go live.

“The cutover to the new system has been an outstanding operation,” James Hogan, Etihad’s chief executive, said at the time. “To have achieved a cutover of this magnitude with such minimal disruption to our operations and customers is testament to excellent teamwork.”

Cyprus, the third-smallest economy in the euro zone, unexpectedly became the source of one of the year’s biggest headaches for European leaders after a proposed rescue plan seemed set to inflict more damage on the rescuers than the cost of inaction.

A plan to impose a 6.75 per cent levy on bank deposits – rising to 9.9 per cent for deposits above €100,000 (Dh506,400.) – created significant anxiety across the continent.

The “bail in” of depositors was a quick fix by Cyprus’ government to enable it to unlock €10 billion of funding from the so-called troika of the European Commission, the European Central Bank and the IMF.

A bank holiday, which coincided with the announcement of the deposit raid, was unexpectedly extended, as Cypriots rushed to ATMs to withdraw their euros and fears of bank runs spread.

The troika had approved the bail-in because of the political costs of making whole depositors from Russia, which provides a significant number of foreign deposits in Cyprus. A double taxation agreement between the two countries allowed the island to be used as a tax shelter by Russian companies.

Ultimately the levy was voted down by the Cypriot parliament and a new plan proposed, which preserved insured depositors’ savings, but still imposed wrenching losses on high-net worth savers, capital controls and a winding down of the country’s second biggest lender, Laiki Bank.

But the measure effectively shredded the credibility of European governments’ guarantees on bank deposits in the minds of many investors.

Markets worried about contagion effects and deposit runs by Italian or Spanish savers, but none materialised. Within a month of the Cypriot crisis, European countries’ bond prices were rising once again.

Two notable items of consumer news bookended the business pages in April.

First, on April 8, Etisalat joined du in unblocking access to the Skype website. This meant residents could now do legally what many were doing illicitly – using Skype to make free long-distance calls. Even amid Etisalat’s partial ban, Skype’s software could be used in the UAE once it had been downloaded to a computer while users were overseas (or through a virtual private network). The National’s front page headline on this development pulled no punches: “Phone call revolution as Skype is unblocked”, it said.

And then on the last day of the month came a clear signal that the creation of a federal credit bureau would lead to the decriminalisation of bouncing a cheque.

“Definitely. We’re aiming towards that. It’s one of the key purposes of approving this entity,” said Younis Al Khoori, undersecretary at the Ministry of Finance and vice chairman of the incipient Al Etihad Credit Bureau.

A pilot project to come three months later would create credit reports for customers at a dozen banks; it was envisaged as a test of the new system. The broad hope was that credit reports, once established across the financial system, would enable banks to avoid bad borrowers, thus mitigating the need for a deterrent as severe as imprisonment. It was also hoped that a reduction in bounced cheques would entice banks to lower their credit card rates – the average annual rate on a card was running at a robust 37.8 per cent at the time of Mr Al Khoori’s remark.

A European Union investigation into oil trading threw up more questions than answers. The offices of the oil companies Shell, BP and Statoil, and of the pricing agency Platts, were raided in early May as authorities worried that price manipulation has pushed up the costs of petrol at the pump.

Despite a lack of hard evidence, similar concerns had been raised about the United Kingdom’s wholesale gas market a few months earlier.

While oil companies were quick to be vilified, the trading community extends beyond producers, and if the market is manipulated, the culprits were likely to be a diverse bunch.

The Arabian Gulf’s national oil companies and governments share the EU’s concern about the price manipulation of oil, but their outlook is different. The price for the main benchmarks – Brent and West Texas Intermediate – is set on transparent exchanges in London and New York respectively. The investigations in Europe focus on oil products that are less widely traded, making their markets less liquid and hence more opaque.

But while the flow of crude out of the Gulf certainly does not lack in volume, most of it is priced by Platts rather than by an exchange. Most of it ends up in the East of Suez market, that is, in Asia. If European worries proved correct, GCC producers were apt to come to the conclusion that their oil was also sold at manipulated prices. But unlike western car owners, their fears were not about oil being too dear, but rather about it being sold too cheaply to Asian buyers able to play the market. (Late in the year, the investigation was continuing and the EU had yet to file any charges)

Normally this is a time of year when the news slows to a crawl. But not this year.

First, at 1am local time on June 12, the index compiler MSCI announced that it was upgrading the UAE from “frontier market” to “emerging market”.

The move represented a seal of approval for governance of the nation’s stock markets. The month’s two other big stories were economic not at their core but in their implications: Saudi Arabia moved its weekend from Thursday-Friday to Friday-Saturday, which was expected to sharply reduce the cost of doing business in or with the kingdom.

Sheikh Tamin bin Hamad Al Thani, meanwhile, became Emir of Qatar, signalling a new generation’s control of the national energy strategy amid the rise of shale gas.

In the Middle East, the dominant news story of the summer was the Egyptian crisis in which the military swept Mohammed Morsi from the presidency. Investors – averse to sharp change, but aware the country’s economy was stagnant – would go back and forth on the merits of the move.

The country’s benchmark EGX 30 Index was closed on Monday, July 1, amid mass protests against Mr Morsi.

The next day, the Cairo exchange opened around midday and share prices flew through the roof. The EGX 30 had risen nearly 5 per cent by the end of the session, as local investors cheered the veiled threats of a military coup from the head of the armed forces and anticipated the swift removal of Mr Morsi from power.

“We are at a point arguably where anything that breaks this political stalemate, however painful, may be welcomed by foreign investors of all hues,” said Hasnain Malik of Frontier Alpha Research, a Dubai-based financial research company.

The tumult was perhaps more painful than investors had expected.

On Monday, July 8, the EGX 30 fell by 4 per cent to 700.61, the biggest decline in four weeks, after shootings outside the Republican Guard headquarters in Cairo killed at least 51 and injured hundreds more.

The volatility was of particular concern to the many UAE companies with a presence in Egypt. These companies – among them Emirates NBD, Dana Gas and Emaar Properties – are among the largest investors in the country, with projects spanning property, banking, ports and energy.

On August 23, Steve Ballmer said that, within the next year, he would resign as chief executive of Microsoft. He had ruled the world’s largest software company since 2000, during which time its sales nearly tripled but it lagged as an innovator. Case in point: according to a report in The Wall Street Journal, in early 2010 Mr Ballmer killed a prototype of a tablet computer to redirect resources to a fresh version of Windows. Tablets would shortly thereafter explode in popularity, the great mass of them running on Android or Apple operating systems, and not on Windows.

Mr Ballmer’s fortune stood at $16.8bn, most of it in Microsoft stock, on the day he said he would quit. Because his impending departure raised investors’ hopes for a Microsoft revival, and thus plumped the company’s shares, Mr Ballmer found himself enriched by a quick $786 million.

Microsoft was founded by Bill Gates and Paul Allen in Albuquerque, New Mexico, in 1975. Mr Ballmer had attended Harvard University at the same time as Mr Gates. Unlike his schoolmate, who left the Ivy League institution before graduating, Mr Ballmer stayed and received a bachelor’s degree in applied mathematics and economics.

In his defence, Mr Ballmer would later drop out of the Stanford Graduate School of Business. In 1980 Mr Ballmer joined Microsoft, where he would experience gain and bounty, after working as a marketing executive for Procter & Gamble.

In mid-September, the markets were expecting the US Federal Reserve Board to announce that it would start to reduce its programme of US$85bn a month in bond purchases.

The Fed, some economists thought, might go as low as $65bn a month.

After all, the Fed chairman, Ben Bernanke, had said in June that a so-called tapering of the stimulus programme known as quantitative easing (QE) would begin by year’s end, and QE would altogether expire by mid-2014.

But on September 18, the Fed board decided the US economy was not yet strong enough to walk without its QE crutch.

But if not then, when?

“We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy,” Mr Bernanke said. “We don’t have a fixed calendar schedule. But we do have the same basic framework that I described in June.”

The central bankers’ chosen language might have been delicate – after all, what is a “tapering” of an “easing”?

The blunted wording notwithstanding, it was big news to the markets. After the Fed’s decision to delay tapering, bond, gold and stock prices – and especially stock prices in emerging markets – rallied worldwide at the prospect of an extension of the Fed’s largesse. (Subsequently, at a meeting October, the Fed again decided the US economy was still not ready to cope with a lessening of QE expenditures.)

Picture the scene at the first day of the Cityscape Global exhibition in Dubai, on the afternoon of October 8. Some of those attending didn’t even know what they were in a frenzy for. But they desperately knew they did not want to miss out.

Against a backdrop of questions about whether the emirate’s rising property prices were a bubble or just a bit of froth, a crowd of at least 50 people formed outside an Emaar meeting room and began jostling and scuffling for prime position.

Prime position for what? Some thought they were queuing for a shot at off-plan property in The Greens and Downtown Dubai. Others were less certain. But amid the rising prices, they smelled a chance to make money.

In fact, Emaar was selling properties, but none of them were off-plan. Instead they were new and old homes and offices.

In a press release after the melee over its Cityscape offerings, Emaar said “the response has been overwhelming”.

After the show had ended, Mario Volpi, the property broker who writes the weekly Homefront column on The National’s Life page, observed: With all the talk of new developments, each more fantastic than the next, the question on everybody’s lips was always about whether Dubai would again suffer a property bubble. The jury is out on this one, with some saying that this time around the market is driven by different forces and does not depend on cheap credit; others are using the age-old adage of “what goes up must come down”.

No month was newsier than November.

The 17th was a day when the importance of the Arabian Gulf states’ buying power was on full display. It was the opening day of the Dubai Airshow and, before the morning was out, the region’s airlines – Emirates, Etihad, Qatar Airways and flydubai – had announced orders that, if fully exercised, would cost nearly $200bn.

Yet while the money in those deals was coming from the East, the production was coming from the West. A day later, though, another air show deal cast the Middle East as producer rather than purchaser. Airbus and Boeing reached an agreement, valued at $5bn, to buy parts from Strata Manufacturing, a unit of Mubadala Development, the strategic investment company of the Abu Dhabi Government. As a result, Strata’s plant in Al Ain was expected to triple in size.

Then on November 27, the Bureau International des Expositions voted to award Dubai the Expo 2020 world’s fair. Expectations of a win had been lifting the UAE stock markets for months, and the job market could get its turn next.

A report from Barclays predicted that the Expo preparations would lift Dubai’s growth rate to an average of 6.4 per cent over the next three years, with the strongest gains in the tourism, trade and transport sectors. “Hosting the Expo could provide a considerable boost to the emirate’s growth and strengthen its macroeconomic outlook,” wrote Alia Moubayed, head of Middle East and North Africa research at Barclays.

Two things ended and one thing began to end.

First, the endings: on Dec 9, the US government sold the last of its shares in General Motors. It had received the shares in exchange for bailing out the carmaker, and at one time held 60 per cent of the stock. And on Dec 15, Ireland became the first euro-zone country to exit its bailout programme, having received aid of 85 billion euros.

The beginning of an end came on Dec 18, when the Federal Reserve announced that it would henceforth reduce its monthly bond purchases -- aka quantitative easing -- to US$75 billion a month from the prior $85bn a month. This followed a signal that the economy could now stand on it own: the US government had reported on Dec 6 that the unemployment rate in November had fallen to 7 per cent, the lowest since it was 6.8 per cent precisely five years earlier.

The Fed had hemmed and hawed for so long about tapering its stimulus that when it finally happened, the markets, rather than panicking, almost shrugged it off. It was like the story of Chicken Little – fret about something long and loud, and eventually people will grow inured to the threat -- except that that’s what the Fed wanted.

With that settled, investors will need something else to worry about in the new year. The direction of the Chinese economy is a good prospect. Economic reports from China have been inconsistent. A case in point from Dec 10: new figures said that industrial output was up 10 per cent in November, which was less than economists had expected, and that retail sales were up 13.7 per cent, which was more than expected. Bank of America said the fourth quarter was looking good for China; yet Barclays said the country’s economic recovery seemed to have “run its course”.

* Compiled by Rob McKenzie, Gregor Stuart Hunter, David Black and Florian Neuhof