Middle East companies need to improve working capital performance in order to fare better on the road to post-Covid recovery as Dh36.5 billion of excess working capital is currently trapped on their balance sheets, according to a survey.
PwC, a leading global accounting firm, said in a survey report that 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 report cited reduced consumer demand, leading to a downturn in corporate revenues as one key factor behind the depletion of working capital. Other reasons include “slowing accounts receivable payments as customers delay payments due to their own falling revenues as well as increased expenses to respond to remote working requirements and supply chain disruptions.”
The study said net working capital (NWC) days deteriorated between 2015 and 2019 by a compound rate of 2.7 per cent, corresponding to around Dh36.5 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 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. “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,” said the study.
“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,” PwC’s latest Middle East Working Capital study said.
The study also pointed out that net debt levels increased on average by 20 per cent between 2018 and 2019, while capital expenditure remained stable.
Mo Farzadi, business restructuring services leader at PwC Middle East, said 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.”
Farzadi said Middle East companies would need to assess their liquidity position and short term outlook swiftly to ensure that as the region recovers from the pandemic downturn, they can seize opportunities rather than lose precious market share or competitiveness because they lack sufficient cash.
According to the study, capital expenditure by listed Middle East companies has decreased by an average of 41 per cent 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.
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