$35bn ‘locked’ in balance sheets of Middle East listed companies

October 20, 2022, 8:47 AM

The PwC report states that there remains significant room for improvement in the working capital efficiency of the 386 Middle East businesses in their study

PwC working capital report on data for 386 public companies
Recovery driven partly by oil prices and impact of Qatar World Cup
Higher interest rates increasing cost of working capital financing

Listed businesses in the Middle East have experienced a rebound with revenues rising above pre-pandemic levels, but billions of dollars remain trapped on balance sheets due to working capital inefficiencies.

The annual working capital study by PwC Middle East says the recovery has been driven by a strong response by the region’s governments to the coronavirus, combined with the boost provided by the increase in oil prices, the positive impact of Expo 2020 and the upcoming FIFA World Cup in Qatar.

The report, which includes data relating to 386 publicly listed companies in the Middle East, also shows that there is $35.5 billion in excess working capital waiting to be used.

Working capital is money that companies spend paying suppliers and holding inventories while waiting for payments from customers. Firms seek to convert working capital into cash as quickly as possible to use it for other, higher-yielding purposes.

Middle East businesses have seen short-term debt steadily increasing since 2017 at an average annual rate of six percent, with the rate rising steeply by 10 percent between 2020 and 2021.

The figures show a 25 percent average increase in revenues between 2020 and 2021 and a two percent average annual decline in EBITDA margins.

Combined with a continued increase in capital employed between 2017 and 2021, this means that shareholders received a reduced return overall on capital employed.

Companies in the region, like their counterparts around the world, have continued to experience disruption throughout 2021 and the first half of 2022 due to global macroeconomic and geopolitical events.

While inflation has been less severe in the Middle East, firms have been forced to pay higher prices for many imported materials, finished goods and services.

These higher costs are trickling through balance sheets, increasing the amount of working capital tied up in operations.

There have also been delays in receiving orders, resulting in products being out of stock and lost sales, or companies planning strategic buffer stocks to cover the gap, which also ties up working capital.

Higher interest rates, which are likely to rise further in the short term, are increasing the cost of working capital financing, PwC said, adding that many businesses in the region are rethinking their overall strategy, as well as their end-to-end supply chains, in order to increase resilience.

“The focus for many businesses has shifted from ‘stabilise and survive’ to recovery and growth,” Mo Farzadi, partner, Business Restructuring Services leader at PwC Middle East said.

“However, headwinds such as inflation, interest rates and operational disruptions are heightening the pressure on working capital.

“There are still many ‘hidden treasures’ locked up on balance sheets of businesses which could be released to fuel growth and build resilience in the face of continuous global disruption.”

Working capital efficiency in the Middle East, measured as average net working capital days, slightly improved in 2021.

Net working capital (NWC) days – the number of days required to convert cash paid out into cash collected – is a critical measure of a company’s financial health.

Between 2017 and 2021 NWC days increased on average by five days for listed Middle East companies. This increase corresponds to an additional $14.5 billion tied up in working capital by the businesses in the study compared to 2017, which could not be invested elsewhere.

“Companies in most Middle East countries, apart from Oman and Bahrain, improved their working capital performance during 2021,” Farzadi added.

“However, this is compared to 2020 where working capital levels were still high after the Covid-19 pandemic.

“UAE companies delivered a significant year-on-year improvement in their average working capital performance in 2021, while companies in Qatar performed better year-on-year across all working capital cycles.

“Companies in Saudi Arabia continue their transformation with working capital performance improving. However, the kingdom remains the country with the longest cash conversion cycle.”

The working capital performance was also impacted by another increase in the days payable outstanding (DPO), a measure of how long companies take to pay creditors.

The days sales outstanding (DSO) and days inventory outstanding (DIO), which represent, respectively, the average time to collect cash and average inventory holding time, have remained stable or deteriorated slightly.

The PwC results showed that the largest companies are able to operate with a much shorter cash cycle than their smaller peers.

Very large companies, with more than $2 billion in annual revenues, take on average 64 days to convert cash paid out into cash collected, while small and medium-size companies, with annual revenues of less than $500 million, take more than twice as long with 139 days.