Middle East companies need to act now and improve working capital performance in order to fare better on the road to recovery, says PwC (PricewaterhouseCoopers) in a study.
PwC in its latest Middle East Working Capital Study finds that 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 compound rate of 2.7%, corresponding to around $9.94 billion (AED36.5 billion) 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 buildup. This increase in working capital days was a key early indication of reduced liquidity due to the pandemic, and delayed or cancelled payments by companies seeking to protect their balance sheet.
Businesses are facing new uncertainties introduced by the dual shock of the impact of Covid-19 pandemic and the steep drop in oil prices. 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 reduced consumer demand, leading to a downturn in corporate revenues; slowing accounts receivable payments as customers delay payments due to their own falling revenues; and increased expenses to respond to remote working requirements and supply chain disruptions.
These cash flow issues are 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.
The study also highlights that Net debt levels increased on average by 20% between 2018 and 2019, while capital expenditure remained stable. However, Capex by listed Middle East companies has decreased by an average of 41% over the last five years, and dividend payouts stagnated last year, suggesting that debt has been widely used to fund other investments or to support inefficient operations.
Industry data in the report shows that, regardless of size and sector, working capital improvements are within a company’s grasp. Despite the ongoing external competitive and economic challenges, companies with the right focus and drive at the top can use operational levers to improve working capital management. 51.5% of companies in this year’s study ended 2019 with a year-on-year improvement in working capital performance measured by NWC days.
Mo Farzadi, Business Restructuring Services Leader at PwC Middle East said: “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. Organisations will need to act now to recover.”
The report highlighted the liquidity coverage on balance sheets as the cash on hand (COH) days, meaning cash and cash equivalents coverage based on total operating and interest expenses. Average COH fell from 76 to 70 days between 2018 and 2019. The report also revealed that companies have started efforts to conserve liquidity in anticipation of the lockdown measures that have been implemented globally by end of Q1.
Farzadi ends: “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.”
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