16 August 2017
The working capital performance of companies across the Gulf region has weakened, dropping by an overall 7 percent in 2016, and a total of 11 percent since the oil price plunge in 2014, a new report from PwC has revealed.

The report covering 431 companies found that working capital performance had worsened in all countries except for the UAE.

“The drop in oil price in late 2014 led to a tightening of liquidity through the region, whether in terms of government spending plans or the banks’ liquidity,” Mihir Bhatt, the report’s lead author and a director of PWC Middle East told Zawya in a telephone interview.

“The liquidity shortage had a knock-on impact on a number of businesses,” he added. “We have various IPO discussions and privatisation plans in order to help boost the region’s capital.

A company’s working capital days metric reflects how many days it takes to convert working capital into sales revenue, and companies that need fewer days are better off than those that require longer period.

While the net working capital days in the UAE increased by 4 percent in 2016, it is the only country in the Gulf region with an overall working capital performance improvement since the oil price plunge in the fourth quarter of 2014. Net working capital days in the UAE dropped by 19 percent on average from Q4 2014 until the end of 2015.

“The data suggests that companies in the UAE have been able to improve their inventory management and adjust for that in a slightly lower growth environment,” said Bhatt.

 Saudi Arabia has seen weakening working capital metrics for six consecutive quarters since the third quarter of 2015. The average number of working capital days increased by 11 per cent both in 2015 and 2016.

“In Saudi, businesses were not able to improve their receivables, inventory and overall working capital. Government spending in Saudi was a big macro-economic factor,” Bhatt said.

 Kuwait had the GCC’s worst overall working capital performance. Working capital days increased by 18 per cent in 2014, and by 11 per cent last year.

“In Kuwait, companies’ ability to collect cash from customers has weakened, and it had more cash tied up to its inventory. So for businesses and customers in Kuwait, they are paying slower,”

Very large companies continued to show improving working capital performance since the first quarter of 2015 and to outperform their peers in the region
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Large companies, however, saw a significant deterioration in the performance of working capital in 2016, and PwC has predicted that trend is likely to continue.

“As oil prices came down towards the end of 2014, small businesses got hit first in 2015. What’s interesting in 2016, is that middle sized and large companies got hit. Because of the prolonged period in which oil prices remained low, government and bank liquidity has had an impact and taken cash out of the economy,” Bhatt said.

PwC recommended that there were three things that individual firms can do to improve working capital performance.

“The first is to make working capital strategic, and on top of management priorities,” Bhatt said. “The second is to assess what is at stake for the business. We look at the way you’re operating, what customers you have, and what tradeoffs you are willing to make in order to improve your working capital.

“Once you set the direction on how much opportunity there is for you, you need to establish the right governance and KPIs to drive sustainable improvement of your working capital over coming months and years," Bhatt concluded.

© Zawya 2017