Pizza on Palm Island Seemed a Perfect Fit. Until the Pandemic
Pizza on Palm Island Seemed a Perfect Fit. Until the Pandemic
(Bloomberg) -- In a bleak morning ritual at his home in Dubai, Hisham Ibrahim weighs up which invoices he absolutely must pay.
The Canadian entrepreneur’s “House of Pizza” restaurant on the man-made Palm Jumeirah island had been restricted to delivery orders by government regulations to contain the Covid-19 pandemic for most of April. Unable even to cover salaries in full as sales slumped 70%, the 49-year-old gave each employee 1,000 dirhams ($272) to help them through. Some suppliers, though, would have to wait. “We were already struggling and now the coronavirus is killing us,” he said.
With its low taxes, wealthy residents and sun-seeking tourists, the business hub of the United Arab Emirates was an obvious choice when Ibrahim set up in the Gulf in 2016. In Dubai, small and medium enterprises like his generate nearly half of output, double the level in neighboring Saudi Arabia, and employ 51% of the workforce.
Yet the arrival of the virus exposed some of its downsides. Cautious banks are still reluctant to lend to the private sector a decade on from the emirate’s near-default during the global financial crisis. And the government’s preference for monetary stimulus, through lenders, rather than direct cash handouts to an expat-dominated private sector means Dubai’s virus safety-net falls far short of those elsewhere.
The central bank of the U.A.E., of which Dubai is a part, said 75% of stimulus in the Target Economic Support Scheme has been utilized. The 50 billion-dirham program allows lenders to tap funds at zero cost and pass them onto their small business, individual and corporate clients affected by the coronavirus.
The approach hasn’t “lived up to the size of the shock,” said Ziad Daoud of Bloomberg Economics. “The state may have been put off more direct support by the slump in oil prices and worries about burning through their reserves,” he said. “But without enough support, virtually every single sector will likely struggle due to lack of demand and may require state aid further down the road.”
There is another problem. According to government figures, smaller firms receive just 5.3% of domestic credit in the U.A.E., against an average of 8% in the Middle East and North Africa and 18% in emerging economies.
Any “increase in lending to SMEs is likely not to be significant, and won’t be a catalyst for growth,” said Edmond Christou, a banking analyst at Bloomberg Intelligence.
According to an early April survey of finance leaders by PricewaterhouseCoopers, 23% based in the U.A.E. aren’t even aware that relief or stimulus programs are available. That compares with zero percent in Saudi Arabia. Forty-two percent in the U.A.E. planned to take advantage of official measures, compared to 76% in the kingdom.
Instead, companies are getting creative to survive.
Kim Thomson, a New Zealander who founded Raw Coffee Co., moved in with her daughter, while giving her apartment to staff, and has been able to defer rent payments on a coffee shop and showroom.
“This was meant to be our year of growth, we were planning to go into Saudi Arabia,” she said. “Now it is pure crisis management.”
Expo Delayed
Dubai’s World Expo 2020, recently postponed by a year, was meant to give the emirate the needed push to finally move on from its 2009 troubles, when it needed a bailout from oil-rich Abu Dhabi, and the 2014 oil-price crash. The economy grew more than 2% in the first half of last year, even as companies absorbed extra costs such as the 2018 introduction of value-added tax.
It has taken the virus weeks to send it backward. In Dubai’s non-oil private-sector economy, business conditions continued deteriorating in March, as the outbreak wrecked havoc across all sectors. Moody’s Investors Service projects a 4.9% contraction in Dubai’s non-oil gross domestic product this year.
Dubai’s media office said authorities have started several initiatives to help small and medium businesses. Among them:
- Reduced costs involved in obtaining and renewing licenses.
- Allowed enterprises to renew commercial permits without having to negotiate new leases.
It also said many Dubai entities and free-zones have come up with their own measures to support smaller companies.
“As Gulf economic policy making becomes more tailored and the grim consequences of oil markets hit home, governments will confront the unenviable task of determining what SMEs are worth saving,” said Robert Mogielnicki, a resident scholar at the Arab Gulf States Institute in Washington. A lot won’t be “economically viable over the short term,” he said, especially those in the hardest-hit tourism, aviation and hospitality industries.
Trouble Ahead
Authorities have eased some restrictions after locking down Dubai for about a month to halt the spread of the virus, which has infected more than 16,000 people nationwide and led to 165 deaths.
The government, while moving to protect the jobs of citizens, has given private companies, mostly employing expats, leeway to cut salaries or extend unpaid leave. Foreigners make up about 85% of Dubai’s population.
But local media reports suggest hundreds of thousands of blue-collar Indian and Pakistani workers have registered to leave the U.A.E. after the pandemic eradicated their jobs. In a Twitter post, Nasser Al-Shaikh, Dubai’s former finance chief who helped steer the emirate through the 2008 credit crisis, said the population of the U.A.E. would shrink at least 10% this year.
“Excess capacity is a major problem that would hit growth in an economy designed around perpetual demand increase,” Daoud said. “An abrupt loss of 10% of the population will aggravate the supply issue many folds and hit virtually every sector of the economy, requiring state-help to avoid collapse.”
Meanwhile, Ibrahim of “House of Pizza” has caught a breather, but it might not be enough. The bank agreed to postpone repayments on a loan for six months, while bills on two credit cards can be delayed for a month at no extra change, he said. Nakheel PJSC, which developed the Palm and is Ibrahim’s landlord, is evaluating rent relief for some tenants, said Omar Khoory, managing director of Nakheel Malls.
“I’ve given myself till the end of the year,” Ibrahim said. “If nothing improves, I’ll sell the business for any price and move back to Canada.”
©2020 Bloomberg L.P.