Changes in Dubai
February 14, 2010
To : All Shareholders
Since I last wrote to you there have been some changes in Dubai which are, let us say, noticeable.
There are many issues to be resolved before that question whether economy has bottomed out can be answered with any confidence and chief among them is debt restructuring by major developers. April 30 is said to be the deadline but the actual date will depend upon how long it takes the banks to understand and accept that they are going to be on the wrong end of an “unconscionable bargain” and what happens when the subject of “new money” arises, as it must. The PR, so far, has not been impressive and the foreign press is still full of disparaging remarks. The longer this issue is allowed to languish the harder it will be to address in the future.
Another hanging question is the direction of the dollar exchange rate, i.e. our rate, too. Local banks have begun imposing rate hikes and are charging higher account fees, partly to restore their own flagging fortunes and partly to discourage borrowing because of a dearth of liquidity. Any weakening of the dollar would raise the spectre of a further rate hike to support funding of the burgeoning US fiscal and trade deficits. That would dampen further the prospects for local business growth, stifle the green shoots of confidence which are starting to sprout and eat into the core economy which is, and always has been, basic trading. When looked at rationally, it is hard to see how higher rates can be avoided but the rational doesn’t always apply. The US dollar has to serve two masters, firstly in its role as a domestic currency and secondly as a reserve currency for the rest of the world. What is right for one role is not necessarily right for the other. There are often contradictions in the desirability of rises and falls in dollar value, affecting interest rates, and so far the conflicts between these opposing forces have been well managed, but we have moved into uncharted territory in the past few months. The US fiscal deficit, as a percentage of GDP, is greater than that of Greece, Portugal or Spain, which countries are being touted as candidates for default. The US Treasury Secretary has gone so far, recently, to say, in public, that the US will not default on its debt or lose its AAA rating. Why was that necessary. There is evidently a lot of nervousness as the realization grows that the net effect of the gigantic stimulus packages put in place around the world has been to transfer private debt to public debt, and the risks that brings of sovereign default and another international crisis worse than the last. Which leads on to another related topic.
Has enough stimulus been done and will the fledgeling international recovery begin to stall when the stimulus expires. This is the same question as “Will there be a double dip recession?” and there is no way yet of answering the question.
Where is all this preamble leading me? Sit comfortable and I will tell you.
I hear, mainly market gossip, people saying that the worst is over, the recovery has begun and it is time to start looking for business expansion. may be so, I am even tentatively inclined to think so, but we are too prudent and longsighted to make such judgements without more evidence and sufficiently experienced to recognize the difference between and evidence and proof. Therefore, I want to urge you to remain on guard and, indeed, to take further steps in your contingency planning to forestall any further deterioration in the economy.
We have tended, for good reasons in the past, to look upon our businesses as one Group, with strengths and weaknesses, shifts in areas of growth and profitability, with a willingness to carry ailing businesses or product lines through difficult times and our sheer diversity has allowed us to do this without significant risks to our tendency to grow. A further dip in the economy, or even a stubborn lack of growth at existing levels, is likely to test the wisdom of this approach, if such conditions occur. I therefore think, because we always anticipate rather than react, that it would be advisable to carry out a further review of all our activities potentially to weed out those product lines, or even whole businesses, which passed the last test but, because of altered circumstances, might not pass the next. This will require a searching examination of every component of the group’s activities to determine real value and growth potential using much the same criteria as we apply when assessing a share purchase. Our Group is doing very well, make no mistake about it, but it would be a grave error to allow complacency to creep in. Cost savings are an essential product of this exercise and it might be the case that we have too many corporate entities, each with its own infrastructure, where merging might be both economical and effective. Reductions and redeployment of headcount are another prime goal and on this topic I want to make a special appeal.
We have already begun, and made commendable progress, in developing expat markets for our goods and services, particularly in neighbouring GCC markets. This business, having a different competition factor, requires greater sales force concentrations than the business we are accustomed to, so I want to urge you to beef up, perhaps by redeployment, and not shy away from selling expenses if they have the real prospect of improving the top line. For our CEOs especially, I see a particular role in this area – the delegation of day-to-day admin matters and intensified concentration in the areas of sales and receivables. I think this makes sense and employs our best talents in the most rewarding fields. My Goodness, you will say, a whole letter, somewhat too long, and not a word about real estate. Well, what can I say? This market is presently moribund although in the residential sector pricing doesn’t seem to be getting any worse at present. But from our Group point of view it is a sector of little interest in the short term.
Overall, we can be pleased (but hopefully not smug) at our performance during this crisis because the ability to ride out bad times is considered to be the ultimate test of good management skills. You have passed this test with flying colours and I thank you for it.