The Middle East recorded an even more robust recovery after the pandemic, with an impressive upshot of 21% year-on-year in revenue, which was significantly attributed to increased oil prices averaging around $116 per barrel.
Between 2018 and 2022, “Big Four” accounting company PricewaterhouseCoopers (PwC) observed strong M&A activities and increased local exchange listings. At the end of 2022, there were 632 M&A deals in the region, almost twice that in 2018. Nevertheless, only 186 M&A deals have been completed during the first half of 2023, which is 40% lower than the same period in the previous year due to global macroeconomic uncertainty persisting in the Middle East. The uncertainty surrounding the high-interest rates, the coming recession threat, and inflationary pressure have been intensified by the sharp decline in oil prices in the first two quarters (of 2023).
Companies with growing interest rates and profitability pressure need a solid working capital strategy to be strong enough to enable any transformation.
Based on the latest results, our study highlights some key trends identified across the 424 regional companies analysed:
Declining profitability
With eyes set on top-line growth and acquisitions, regional companies see yet another year of declining profitability. This shows that this negative trend has continued since 2018, whereby its rate of deterioration is 2.5% p.a. (19.6% in 2018 and 17.9% in 2022). By 2021, profits for businesses were on the rise.
However, in 2022, global inflation, geopolitical tensions, continued supply chain disruptions, and volatility in commodities prices have impacted the cost of goods sold, reducing profitability.
Increasing interest rates
The interest rates have also increased in the Middle East, which has contributed significantly to the increases in financing costs and placed attention on the operating capital deficiencies. Some companies have acted. However, the study reveals that 52% of firms in this study enhanced operating capital effectiveness between 2021 and 2022, and only 9% can consistently boost Net Working Capital (NWC) days performance through three consecutive years since 2020.
Regional companies demonstrated the second-year improvement to Net Working Capital (NWC) days in 2022 mainly through improvement in cash collections that were to some extent neutralized by the worsening inventory holding and reduced average days to pay creditors.
The Middle Eastern companies working capital has improved over the last two years. Still, the short-term debts have increased by 15% over the same period, indicating that the firms have turned to external financing for their working capital during rising interest rates. However, suppose firms decide to release the working capital in the operations through performance improvement to fund them. In that case, it will become possible to eliminate the financing costs for the cash and use treasurers to invest it in fixed-term deposits or other options to earn returns.
Room for more
PwC study shows that there are big opportunities for improving the working capital efficiency of 424 Middle East businesses, which showed an improvement in working capital performance in the last two years.
This finding indicates that $44 billion of excess working capital is tied up on their balance sheets, resulting in cost inefficiencies and financial costs at about 5%, totalling $2.20 billion per year.
Growing disparity
Currently, the opportunity is at the peak stage within five years. When analysing the results of the studied companies, it is evident that the gap between the top quartile and median has been widening every year, increasing from 68 days in 2018 to 107. The same goes for the bottom performer whose gap to the median expands from just two days in 2018 to 34 days in 2022.
Corporations have performed well over the past few years since the turbulent market conditions that have been in place. The companies align their working capital initiatives to the repositioned strategies and newly designed operating models with a view of treating working capital as a pillar in performance and corporate resilience
Start ‘now’ and return to your working capital strategy, policies and procedures if you do not want to fall apart between the best companies and the rest of the pack that will widen up later.
Working capital priorities for companies in the Middle East
- Many regional corporates do not consider working capital metrics and reporting essential to working capital management. This is very crucial if we are to know where they stand currently and monitor their progress.
- Inventory management and demand planning are essential to reduce the stock-tied money and make a robust supply chain. Supply chain segmentation, differentiated approaches, statistical parameter demand estimation, advanced technology to support demand planning, statistical parameters and process automation.
- Improving payment inefficiency involves processes like cash collections and dispute management. Targeting the root causes of disputes, coupled with an active, differenced approach based on the credit behaviour profile, will allow firms to boost their cash flows out of debtor days.
- Payment term standardisation for both customers and suppliers is an exercise that should reduce the complexity of the system, lower the risk of errors, and allow businesses to move their extended supply chain towards preferred terms as much as possible. During the standardization exercise, companies must benchmark themselves by seeking an optimal position.
