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Coface’s Massimo Falcioni, CEO Middle East Countries, and Seltem Iyigun, Economist, give their opinions, conclusions and forecasts about how the commodities downswing has affected the behaviour and financing requirements of corporates in the Middle East.
Falcioni: Two years ago, in June 2014, the price of Brent crude was hovering at $115 per barrel. Today, the price of oil is just a little over $40. The price collapse has been a shock to Gulf economies. In Saudi Arabia, the biggest economy in the Gulf, the petroleum sector accounts for roughly 80% of budget revenues and 56% of its GDP. The kingdom's fiscal deficit has soared to $98 billion in 2015 from about $15 billion in 2014 and this has already resulted to massive job cuts affecting domestic consumption.
This oil price collapse and the economic slowdown have given rise to increased risk of non-payment, delay and insolvency. Coface has already seen a rise in payment defaults, delays and a weaker balance sheet. Companies – especially SMEs – are finding it more challenging to access bank financing.
This is affirmed by a recent survey done by Gulf Finance, showing that more small businesses in the UAE have struggled to get loans in the fourth quarter of the past year.
The survey stated that SMEs in the UAE – which comprise 90% of the country’s companies, and contribute 60% of the country’s GDP – have struggled to raise and collect money, and this consequently leads them to put aside plans to recruit, launch or open new outlets.
Companies therefore need to be more cautious in protecting their receivables and their open credit trade by using appropriate solutions. It is important for SMEs to mitigate risks in doing business by seeking companies that could provide them with precise information, access to funding, as well as proper protection for their receivables and against payment defaults.
What is the importance of trade credit management in this case?
Falcioni: To remain competitive, companies need to offer their customers credit payment terms. In the Middle East, almost 40% of a company’s assets can be reflected in its receivables.
But determining the credit worthiness of new trading partners can be very challenging. Extending credit terms can lead to unforeseen contingencies such as customer payment delays, payment defaults or even insolvencies. Our data shows that 80 per cent of businesses are faced with unpaid receivables and 25% of insolvencies are due to unpaid invoices.
That is why distinguishing a good customer from a potentially bad one is vital in a company’s survival. By getting accurate trade credit information services, businesses can make informed credit decisions to grow their business safely.
This is not only true for first time transaction in new territories. Markets change fast and a company that is viable and stable today may become financially weak tomorrow. All businesses, whether large or small, need quick access to reliable information to detect potential payment problems as early as possible. Non-payment risk prevention begins with gathering relevant and up-to-date information on buyers and their environment.
What is the future outlook for commodity prices in the Middle East?
Seltem Iyigun, Economist, Coface: The current trend in commodity prices may continue in the medium term as there is not a significant indicator for a strong recovery in global economy and international trade volume. The slower growth in emerging countries especially China, sluggish recovery in Europe, recession in Japan, and the abundant money supply from the major central banks put downward pressure on the prices of most commodities.
The excess of supply in oil market drags down prices because of producers trying to keep their market shares steady instead of cutting their production. The drop in oil revenue naturally limits public spending to a certain extent, having a cascading effect on general trading activity in the Gulf.
Price indices are expected to plummet this year not only for oil sector but including all main commodities due to persistently large supplies. The same scenario is foreseen for industrial commodities due to slowing demand in emerging market economies. Out of 46 commodity prices being monitored by the World Bank, 37 were modified lower for the year.
Coface estimates growth to reach 3.9% in emerging economies in 2016 from 3.5% in 2015. Although it indicates a recovery in the pace of growth, it is still below the average of 5.3 per cent between 2010 to 2014. This is when the extremely expansionary monetary policies around the globe supported inflows to these countries, thereby sustaining their economic performance. Growth in advanced world is estimated to slow to 1.7% in 2016 from 1.9 per cent in 2015.
What is the impact on corporate balance sheets and sovereign current accounts?
Iyigun: The current account balance to GDP ratio in the Middle East region is expected to decline as low as to -5.3% in 2016 from -1.2% in 2015, according to the IMF. The ratio was at 9.1% in 2014. In Bahrain, the current account deficit will worsen in 2016 as oil and gas exports suffer with low crude oil prices and reduced vitality in the refining segment. The repatriation of profits by foreign companies as well as reduced remittances from foreign workers will feed the balance of the services and revenues deficit.
In addition, FDI flows could weaken. In Saudi Arabia, the current account deficit will continue to rise sharply. The slowdown of imports would hardly offset the effects of lower revenues from oil exports. FDI may also slowdown due to a weaker investor confidence. But in the UAE, despite deteriorating sharply, the current account balance will remain in positive territory but it will, nonetheless, be well below previous levels. The country remains attractive for FDIs. However, a change in direction of US monetary policy could impinge on the UAE's safe-haven status in the region.
Several corporate balance sheets have been impacted, for instance, the recent plunge in cost of the primary metals is impacting business boundaries. The metals sector in the Middle East, along with Latin America, emerging Asia and Western Europe, is now assessed as "very high risk”. It is the riskiest sector in the world and we have detected a huge impact on the balance sheet of companies linked to this sector.
Coface foresees an increase in payment delays and defaults.
To what extent have projects been delayed, cancelled or progressed?
Falcioni: It depends on which country we are referring to. Progress varies from one country to another.
It is very visible that Dubai, specifically, is redesigning itself for Expo 2020. We see the projects and campaigns that are being implemented, not only for Expo 2020 but for different industries such as Education, Real Estate, Travel and Tourism, as well as Hospitality.
For other Middle Eastern countries, the impact is more visible in particular areas. It is noticeable that a lot of infrastructure projects are on hold - whether it is housing, hospitals, schools, roads or highways.
Now, companies are learning how to strategise and find the right way to deal with possible impacts. Coface has in-depth expertise to offer based on the amount of information it has gathered from the international markets. We partner with the relevant government agencies to assist companies in the Middle East in implementing their projects.