This pushes up financing costs to $5 billion to investors
DUBAI: According to a PwC Middle East estimate, as much as $50 billion in liquidity is currently tied up on the balance sheets of listed companies in the region. This “trapped” liquidity is costing shareholders up to $5 billion in financing costs, based on a weighted average cost of capital of 10 per cent.
Despite 54 per cent of companies reporting year-on-year improvements in working capital performance in 2023, only 9 per cent have managed to sustain a positive trend for three consecutive years.
This indicates that just a small fraction of companies have demonstrated to investors that their results are driven by sustainable changes rather than short-term tactical measures.
Working capital management
Improving working capital management remains a priority for business leaders in the Middle East, particularly given the region’s persistently high cost of capital.
In 2023, the average interest expense for corporates surged by 37 per cent year-on-year to a record high, while total debt increased by 4% during the same period.
The cost of debt also rose sharply, with a 120 basis point increase between 2022 and 2023.
However, PwC sees no immediate prospect of a significant decline in lending rates for Middle Eastern companies.
In July 2024, Bloomberg forecasted that the Emirates Interbank Offered Rate (EIBOR) would stay above 4 per cent for the next five years, while the Saudi Arabian Interbank Offered Rate (SAIBOR) is expected to fall below 4 per cent by Q4 of 2027.
Middle Eastern businesses experienced strong growth in 2023, with a combined revenue increase of 6.2 per cent year-on-year, largely driven by the energy sector and continued strategic investments from private equity and sovereign wealth funds focused on the UAE and Saudi Arabia.
Profitability has declined
Despite this robust revenue growth, overall profitability in the region has declined for the second consecutive year, primarily due to rising costs of goods sold across nearly all sectors, influenced by both regional and global trends.
Saudi Arabia continues to have the longest working capital cycle in the region, though its net working capital trend has gradually improved since 2019.
Meanwhile, the UAE has maintained its working capital performance in 2023, following a sharp correction in 2022 that reversed the general deterioration seen during the pandemic.
The engineering and construction sectors are struggling with the longest working capital cycles and the largest year-on-year deterioration, facing significant financial distress due to operational delays and cash shortages.
In contrast, the healthcare sector has shown year-on-year improvement, reflecting a reduction in its overall working capital cycle, according to PwC.
