As per Finance latest news, in the Middle East, a staggering $50 billion is currently stuck on the balance sheets of publicly traded companies, according to PwC Middle East. This trapped cash is costing shareholders up to $5 billion a year to finance, assuming an average cost of capital of 10%.
Despite 54% of companies reporting better working capital performance in 2023, only a small fraction—just 9%—have managed to show consistent positive results over the past three years. This means that while many companies are making improvements, only a few have proven that their successes are sustainable and not just short-term fixes.
For business leaders in the Middle East, improving how they manage working capital is crucial, especially given the region's high cost of borrowing. In 2023, interest expenses for companies shot up by 37% to an all-time high, while total debt rose by 4%. The cost of debt increased by 1.2% from 2022 to 2023, and PwC doesn’t expect a significant drop in lending rates anytime soon.
Looking ahead, Bloomberg forecasts that the Emirates Interbank Offered Rate (EIBOR) will stay above 4% for the next five years. On the other hand, the Saudi Arabian Interbank Offered Rate (SAIBOR) is expected to dip below 4% in the fourth quarter of 2027.
In 2023, businesses in the Middle East saw impressive revenue growth of 6.2% year-on-year, thanks to the energy sector and continued investment from private equity and sovereign wealth funds, particularly in the UAE and Saudi Arabia. However, despite this revenue boost, overall profitability in the region has fallen for the second year in a row. Rising costs of goods sold across nearly all sectors, driven by both local and global factors, are to blame.
Saudi Arabia still has the longest working capital cycle in the region, though it has shown gradual improvement since 2019. Meanwhile, the UAE’s working capital performance improved in 2023 after a significant correction in 2022 that reversed the general decline seen during the pandemic.
The engineering and construction sectors are struggling the most, with the longest working capital cycles and the most significant year-on-year deterioration. These sectors are facing severe financial challenges due to operational delays and cash shortages.
On a brighter note, the healthcare sector has been performing well, showing consistent improvement in its working capital cycle.
Overall, managing working capital effectively remains a top priority for Middle Eastern businesses, especially in a landscape marked by high borrowing costs and economic pressures.
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