November 9, 2020 | telecom

Mideast firms need to improve working capital performance'

Companies in the Middle East need to act now and improve working capital performance in order to fare better on the road to recovery, PwC has said in a recent study.
According to its Middle East Working Capital Study, 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-centre in the mind of executives, it said.
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 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 percent, corresponding to around $9.94 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 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.
The study also highlights that Net debt levels increased on average by 20 percent between 2018 and 2019, while capital expenditure remained stable.
However, CAPEX by listed Middle East companies has decreased by an average of 41 percent 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 percent of companies in this year’s study ended 2019 with a year-on-year improvement in working capital performance measured by NWC days.
“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,” said Mo Farzadi, Business Restructuring Services Leader at PwC Middle East.


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