How to survive and thrive in the ‘new normal’ era of low oil prices and squeezed liquidity
There is a growing realisation that lower oil and gas prices are here to stay. In a region where between 65%-95% of government revenues come from oil and gas, this is already having an impact - not just on Governments and Oil & Gas companies, but across all entities, corporate and Government.
It’s important that management teams act now if they are to survive, succeed and grow in this ‘new normal’ macro environment. Whilst there will be challenges, there will also be opportunities - those with the strongest balance sheet and agile management will be best placed to take advantage.
But, it won’t be easy. Liquidity is tightening as Governments absorb cash to fund their plans. In short, the ripple is being felt across all organisations operating in the region - how you react now will set a course for your future success.
Here we set out positive actions that all management teams can and should take now to survive and thrive in the ‘new normal’.
Many government agencies and bodies now face budget constraints and lower funding allocations from their respective ministries of finance. However priority projects under construction along with legally binding committed projects in social and economic infrastructure still need to proceed. Private financing through Public Private Partnerships (PPP) procurement models are being seriously considered and implemented throughout the region. Building on the success of the PPP model in utilities, large scale financings in transportation, healthcare and housing sectors are now being structured in a bankable manner. Government agencies familiar with PPP models will have a useful tool to use to cope with reduced capital budget allocations while still being able to deliver much needed investments while contractors, operators, and banks who have experience in PPP project financings will have an edge over those who do not.
Many banks have withdrawn working capital facilities for a host of SMEs. This increases pressure on companies to quickly find means to generate their own cash. Very quickly we’ve seen payments delayed in areas such as construction, where new projects are delayed current projects are facing payments and project delays. However, this is not isolated to the construction sector and squeezed margins, delayed payments and falling revenues threaten all sectors as the ripple effect continues.
A more challenging trading environment is evident in sectors such as construction, real estate, retail and hospitality and across segments of the market such as Small and Medium sized Enterprises (SMEs). In particular we are seeing a large number of small traders already experiencing severe difficulties and in some cases shutting up shop and leaving. This anecdotal evidence is supported by the increased number of Non-Performing Loans (NPLs) reported by many local banks in the last round of quarterly results.
Banking market liquidity is reducing very rapidly following the collapse in oil prices - which has seen Governments become net borrowers. This, coupled with growing demand for debt to fund large projects and the ending of QE (seeing US rates creep up - sucking liquidity out further), has seen supply and demand shift significantly and will lead to a smaller pot of funding being available, more difficulty in accessing it and higher prices.
We are witnessing an uptick in deal flow, as vendors are looking at divestments as a means of raising capital to fund other activities. This creates a potential buying opportunity for investors with available funds that can move quickly.
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