July 15, 2008
To : All Shareholders
For every optimist there are at least two pessimists so predictions of the imminent collapse of the economy, though too frequent repetition, tend to be treated with mild derision or ignored totally. We prefer to think that it won’t happen and find the inevitability difficult to face, all the time knowing that it must occur sometime. Josh Billings wrote “as scarce as the truth is the supply always has exceeded the demand”. One cannot ignore the fact that there is now evident build-up of pressures, a mounting number of symptoms, which point to a growing malaise which could very easily and probably will, develop into a recession.
Inflation has been our principal enemy for the least the last two years and I have written to you often enough on this topic and the sorts of remedies we should put in place to combat it, and we have been largely successful through your diligent efforts. In the past I was concerned with a kind of creeping, insidious inflation which pecks away at margins almost imperceptibly until a great deal of damage has been done. Not so at this present time. The inflation we have experienced in the last few months is of a different kind. It is both local and imported and it has surged in the areas of the economy which bite deep into business profitability, affecting worst our chief industries and putting them in peril – raw materials and labour leading the charge. Added to this is a more recent impediment, which has struck with considerable and escalating force, the shortage of liquidity. Sovereign and prime borrowers have been soaking up bank and private finance in unprecedented amounts. The consequence has been, and this will be exacerbated as the squeeze gets tighter, an expansion of finance margins. The effect on commercial lending to businesses, doesn’t need much imagination to predict.
So, unless there is a sweeping change of circumstances, which I cannot for see, Dubai’s construction based economy is in for a difficult time. Contractors, especially those on fixed price contracts, have been for a long time bemoaning increased prices for steel, cement and imported housing materials, together with the increased wage pressures which we all know about, and their situation is worsening week by week. Those who are in a position to pass on these extra costs risk pricing their product out if the market which, we are told, is already experiencing some shrinkage. The gradual disappearance of affordable credit, both financial and trade, is adding to their woes and there must be many already in difficulties with many more to follow. The domino effect on downstream activities cannot be far off.
In our group, we have a sound record of looking ahead and picking out both opportunities and pitfalls and I hope that this time it will be no different. It has been clear to us for a very long time that the Dubai boom would eventually lead to slowdown, as history say it must, and we have the right kind of flexible outlook within our businesses to deal with the event itself and to profit from the aftermath.
Initially, we should begin at once, in my opinion and upon my advice, to rein credit. Intensify receivables collection and be varying about new credit applications or requests for extended terms. We should also defer or curtail assets purchases wherever possible both to contain our bank borrowing exposure, until margins begin to fall again, and to provide us the opportunity to make our purchases in the softer market which will follow the bust. No one can tell how long such a recession might last but these things are cyclical and the turn will come.
I strongly urge you to give serious thought to this topic and its immediacy, and discuss it among yourselves so that you are primed and prepared for a bumpy ride ahead. You may be sure that I will be following the situation with great interest and I shall be keeping you informed as necessary