Distressed companies on rise in Saudi Arabia and UAE, study says

Alamy via Reuters

• 9% higher than last year
• Volatile inflation rate
• Restructurings likely

The number of distressed companies in the UAE and Saudi Arabia has increased by almost 9 percent in the past year, with the sectors most at risk including chemicals, commodities and specialised retail. 

Concerns also surround the consumer-facing food and beverage industry in both countries, according to a report from consultancy Alvarez & Marsal.

A&M defines distressed companies as those that have “significant” deficits in terms of both their financial and earnings situation.

The research comes against a background of general optimism surrounding the UAE economy, with the latest projections from the International Monetary Fund forecasting growth of 4 percent this year.

A separate study has found that levels of retail registrations in the UAE are falling.

Máire Morris of Morris Global Consulting said retail had been suffering over the past 12 to 18 months.

“It has really been impacted by boycotts, but, in a general sense, because of the economic instability across the world, retail has taken a big hit,” she said.

This is reflected in flat or lower business retail registrations in the UAE.

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In the second quarter of the year, the number of retail rental registrations in Dubai stood at 17,500, up just 0.1 percent on the previous year. Rental contract renewals increased by 4 percent but new registrations fell by 9 percent, according to real estate consultancy CBRE Middle East.

In Abu Dhabi, activity levels were also depressed. The total number of rental contracts registered was just above 7,000, down 10 percent compared with 2023.

Analysts say UAE shoppers are more cost conscious so retailers’ margins are being squeezed.

“Deals or discounts have become the No 1 decision driver for consumers when choosing retailers in the UAE this year, indicating they have become a lot more price sensitive,” said Akshay Jayaprakasan, associate partner at consultancy Redseer.

Consumer price inflation is expected to accelerate slightly over the second half of the year and briefly rise above 2 percent in September and October, before falling below 2 percent again, according to S&P Global.

• UAE businesses increase prices to protect margins
• Interest in Saudi commercial space may be peaking
• UAE economic growth brings rise in court disputes, say lawyers

In June the UAE’s inflation rate rose to the highest level in almost two years. 

“With reports of swelling competition in some sectors, firms are keen to retain their competitive edge, which makes the latest uptick in prices even more indicative that businesses are feeling the pain on their balance sheets and having to protect their margins,” said David Owen, senior economist at S&P.

More widely, the number of distressed businesses operating in the UAE and Saudi Arabia is going up, A&M found.

The increase in the number of underperforming companies “reflects an environment of weakened consumer demand both regionally and in key export markets”, A&M said in its report. This, combined with volatile inflation rates and supply chain disruptions, is increasing costs and tightening margins.

A&M reported that more than a quarter of companies lack balance sheet robustness. “As a result, many are squeezing working capital balances to manage cash flows and meet large debt burdens,” it said.

Vikas Papriwal, senior managing director at FTI Consulting, previously told AGBI that GCC countries were sitting on a total of around $50 billion in non-performing loans.

A new UAE bankruptcy and restructuring law came into effect on May 1, introducing a specialist court to oversee disputes and replacing the 2016 framework. 

However, Darren Bradshaw, head of corporate law at Hussain Lootah & Associates in Dubai, said there had not been a significant increase in cases coming to the courts.

“We haven’t seen any vast trends where, all of a sudden, the bankruptcy courts in Dubai are overrun,” he said. “We’re not seeing failures and distressed assets at this moment in time. Not above the norm.”

Paul Gilbert, managing director and co-head of A&M in the Middle East, said the impact of higher inflation on asset valuations has delayed the need for restructurings. 

But he cautioned that, as inflationary pressure eases and interest rates decline at a slow pace, “more restructuring activity is expected across the region”.