PwC: Middle East struggling with weak working capital performance
The overall working capital performance in the region has decreased by 7% (nine days) in 2016, bringing the total decline to 11% (14 days) since 2014
The UAE is the only key economy in the Middle East not suffering from a deteriorating working capital performance, a PwC report shows.
Citing the results of its 2017 Middle East Working Capital Study, PwC said that the overall working capital performance in the region has decreased by 7% (nine days) in 2016, bringing the total decline to 11% (14 days) since 2014.
PwC added that the decline – a result of low oil prices, among other factors – is further straining liquidity.
According to the company, while small-sized companies were the first to show signs of being affected by working capital challenges, the issue with liquidity has spread to mid-market and large companies. These large-sized organisations reportedly “experienced rapid deterioration of their working capital throughout 2016”.
PwC stressed, however, that large companies outperformed their smaller peers in 2016 by “exercising their size dominance and adhering to better working capital management practices”.
Mihir Bhatt, director of PwC Middle East and lead author of the 2017 study, said: “"The study mirrors the situation that we see on the ground when working with our clients. Leading companies are tackling their working capital challenges head on, and are able to outperform their peers regardless of sector."
Elaborating on the performance of the different key economies in the Middle East, PwC noted that while Saudi Arabia’s working capital deteriorated for six consecutive quarters starting Q3 2015, Kuwait has “relatively the weakest net working capital (NWC) performance”, witnessing approximately 30% deterioration from 2014 to 2016.
“While the UAE and KSA are the largest economies in the region, they also have the largest (on average) invested working capital days in our survey,” said PwC in a statement. “This likely reflects the industry mix of companies surveyed but also suggests potential opportunities for significant working capital release.”
The company added: “In addition to the cash benefits received from better working capital management, leading working capital performers have shown better KPIs across all key financial metrics, such as revenue growth, EBITDA margin, and return on capital employed, demonstrating [that] the impact of working capital efficiency extends well beyond cash.”
Remarking that companies and organisations are increasing their focus on working capital and cash management, PwC pointed out that awareness continues to be rather low in the region.
Mihir said: “We are having numerous discussions with our clients about how they could improve their liquidity through better management of working capital.
“Releasing cash from working capital is one of the cheapest forms of financing and our clients are starting to see the value it can bring to shareholders. Now the topic is more often about how it can be done, not why it should be done.”