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Act now to recover
The combined shock of the COVID-19 pandemic and the steep fall in oil prices have fundamentally changed the business environment this year in the Middle East. Companies have seen reduced cash flows, forcing working capital front-and-center in the mind of executives. The three main drivers impacting cash flow include:
These cash flow issues have been further compounded in the Gulf by significantly lower oil prices causing a significant decline in government and state-owned enterprise revenues. This, in turn, has led to payment delays to private sector suppliers. Non-oil exporting countries in the region also witnessed a delay of remittances, further impacting consumer spending.
of total cash on hand at the end of 2019 was held by only 2% of the surveyed companies
fall over a 5 year period in the average EBITDA margins
$36.5bn (AED 134bn)
of excess working capital is currently trapped on the balance sheets of Middle East companies
deterioration in the average working capital performance of surveyed companies in H1 2020
Extraordinarily challenging market conditions struck when companies already had less cash on hand due to declining profitability trends since 2016 with an 11% drop from 2018 to 2019 alone . This is the background to our analysis that as much as $36.5bn (AED 134bn) of excess working capital is currently trapped on the balance sheets of the Middle East companies in our survey. This could be released through companies improving their working capital performance to the median level in their sector.
The challenge for companies across the region in the coming months is how to strengthen working capital management from a weak starting position. At the end of 2019, the average time to turn cash was 127.6 days, the lowest performance in five years, with a further deterioration in the first half of 2020 as the pandemic measures were introduced. This slide occurred while the average days payable outstanding (DPO) for payments to creditors more than doubled between the year end 2019 and first half 2020, from 65 to 139 days.
The surveyed companies also reported an average 20% rise in net debt between 2018 and 2019, producing an average net debt-to-EBITDA ratio of 2.6 for the region. This was the highest ratio in the past five years, increasing the pressure on net cash flows as the companies’ ability to generate free cash flow from pre-tax earnings is decreasing.
As local economies emerge from the initial lockdown periods, the road to full recovery is unlikely to be a smooth one and corporates need to be in good shape to fare well on this journey. Economic conditions will most likely remain challenging for the immediate future, therefore the focus on liquidity, including the task of optimising working capital has never been more critical.
Our other key findings underscore the urgency of accessing this working capital to increase liquidity as companies emerge from lockdowns and restart operations:
Average working capital efficiency in the Middle East deteriorated slightly between the end of 2018 and 2019 to 127.6 days, the lowest performance in the past five years. Net Working Capital (NWC) days deteriorated between 2015 and 2019 by a compounded rate of 2.7%, corresponding to around $9.94bn (AED 36.5bn)2 of additional cash tied up in operations by listed companies across the region.
In the first half of 2020 the average working capital performance deteriorated further during COVID-19 lockdowns to 156.7 days, as weaker credit policy controls slowed the rate of collections and shifting demand patterns coupled with rigid supply chain processes led to inventory build up. Net debt levels increased on average by 20% between 2018 and 2019.
Whilst, CAPEX by listed Middle East companies has decreased by an average of 41% over the last 5 years, and dividend payouts stagnated last year, suggesting that debt has been widely used to fund other investments or to support inefficient operations.
In these uncertain times, with no immediate end in sight to the pandemic, companies can access cash from working capital and speed up the restart of their operations by following some simple operational guidelines and take advantage of other means to increase liquidity and reduce short-term cash pressures created by the unprecedented COVID-19 crisis.
Above all, Middle East companies will need to assess their liquidity position and short term outlook swiftly to ensure that as the region recovers from the COVID-19 downturn, they can seize opportunities rather than lose precious market share or competitiveness because they lack sufficient cash.
We are the largest dedicated Middle East Working Capital Management team consisting of industry practitioners and functional experts in logistics, supply chain management, finance, engineering, sales and marketing with significant experience across sectors e.g. energy, healthcare, retail and distribution construction.
We assist both government and private entities in cash and liquidity management, active working capital management and unlocking trapped cash.
Business Restructuring Services, Director, PwC Middle East
Tel: +971 5 6418 9776
Senior Manager, Business Restructuring Services, PwC Middle East
Tel: +971 5 4793 3263