Cash And Trade Magazine For Cash and Trade professionals in the Middle East
The Arab Spring challenges of 2011 have had a major impact for Middle Eastern companies trading across the region, but the future now looks positive and growth is expected to accelerate. LIZ SALECKA reports For MENA-based companies trading in countries across the region, the Arab Spring has had major implications in terms of its impact on their business activities and sales as well as their receipt of payments due.
However, as the situation eases, the future is now looking much brighter, and it is believed that the recent events will generate some important benefits for the MENA region, including increased consumption and a general upturn in business opportunities.
“By their own nature, the uprisings have had both short-term effects and long-term effects on corporates in the MENA region, but MENA markets are recovering and the long term-drivers for growth are still the same. The future looks much better with more democracy in place,” says Mohammed Abu Hassan, group treasurer at Hikma Pharmaceuticals, a multinational corporation whose Middle Eastern operations span Egypt, Tunisia, Bahrain, Libya and Yemen among other countries.
“Banks are starting to believe that the Arab world will get better because of the uprisings. There will be less corruption and there will be more democracy now and this will mean more business.
“Going forward, the Arab Spring has also been about getting more justice for people, and employees are likely to see their salaries rise – more money will lead to more demand and a stronger appetite for goods and services,” he concludes, although he also notes that wage rises will increase the expenses many companies face.
Mohammed explained that one of the biggest problems faced by MENA corporates with businesses in countries such as Egypt, Tunisia, Libya and Yemen was the need to keep their cross-border operations up, running and funded – despite weaker sales and revenues and major delays to their receipt of payments.
“Many corporates saw their businesses interrupted during the unrest experienced in different countries. For example, sales came to a halt for a number of days in both Egypt and Tunisia but the expenses companies faced in these countries had to be kept running.
“However, the nature of the uprisings was not the same across the region,” he continues. “In Egypt and Tunisia, the situation was very quickly resolved – the uprising lasted about 30 days in Egypt – but in Libya and Yemen, reaching a resolution has taken far too long, meaning that this has had a major impact on companies with local businesses and funds in those countries.”
In its half-year financial results for 2011, published in August, Hikma reported a 10.4 per cent increase in its group revenues to $394.8m with organic growth of 3.2 per cent, although group gross profit declined by 3.3 per cent to $127.6m.
Revenues from branded products, one of Hikma’s main business streams, grew by three per cent – much of which was driven by growth in MENA markets such as Algeria, Sudan and Iraq – putting it on line to meet its seven per cent target for branded product revenue growth. However, these revenues were offset by weaker results from its operations in Egypt, Tunisia and Bahrain as well as in Yemen and Libya – two countries, where it admits that business is only just starting to return to normal.
“During the period, our team in the MENA region did an excellent job of managing unprecedented disruptions in several markets and we have invested in strengthening our sales and marketing operations. With the exception of markets affected by political unrest, we delivered double-digit growth in most other markets,” says Susan Ringdal, Investor Relations Director, Hikma.
Major delays to payments.
The slow-down in the cross-border transfer of payments has also been a major challenge faced by companies operating in countries affected by the Arab Spring. For many companies, this made it impossible to collect invoice payments due on time – both during and after the disturbances.
Although the situation is now improving in Egypt and Tunisia, money transfers are still taking longer than usual – particularly where large sums are involved.
“Money transfers are not restricted, but banks in countries affected by the uprisings do not like signing money transfers outside those countries,” says Mohammed, pointing out that banks are concerned about the possibility that deposed politicians may seek to transfer money overseas.
“Banks need to make sure where the funds are coming from – and dig into their sources. As a result, money transfers are now taking a lot longer, and this was especially the case immediately after uprisings in certain countries. With the passage of time, we have seen money transfers taking less time.
“In Tunisia, there are no major complications now and making money transfers has got easier again. Cross-border trade and the payment of invoices have got back to normal in Tunisia, but the situation in Egypt has been slower to recover.”
He adds that companies looking to make dividend payments across borders, or to sell an existing investment in either Egypt or Tunisia, are still finding it difficult to transfer such large sums out of either country.
Problems with cross-border invoice payments have, however, continued to persist in both Libya and Yemen: “In Libya and Yemen, cross-border payments have come to a total halt, and this means that is impossible to claim receivables due on time. As a result, the payment terms and methods being applied in these countries are really being tested. This is not the banks’ fault – it is all connected to the uprisings,” says Mohammed.
He adds that for companies active in Libya, weaker sales and very late payments are not the only obstacles that they have had to contend with over the last year.
“In Libya, about 60-70 per cent of the economy is governmental, meaning that corporate have regular dealings with the government. At certain points during the uprising, both the old government and the new government were in charge of trades – now dealings are solely with the new government,” he says.
Better risk management
Today, one of the most significant after-effects of the Arab Spring is that companies and banks operating across the region are placing a greater emphasis on risk management.
“Credit risk has gone up significantly across the MENA region and this has proved very testing for those companies whose business payment terms and payment methods are insufficient. Many companies have relied on unprotected payment terms, but they are now recognising that they need to evaluate and understand their clients better than ever before,” says Mohammed.
He also pointed out that although many companies may have a history of trading with a client, that does not mean that they have a proper understanding of how that client will be impacted by an uprising in its home country.
“Now there is a need for greater classification of clients and the risks they present. Some clients may be small and concentrated in one country – and companies have to evaluate the implications of an uprising in that country, and seek greater security.
“For multinationals and regional trading companies – which operate in more than one country – this is not the case. At Hikma, we have not seen any changes to the ways that our customers do business with us.”
He adds that political risk insurance is still available in the region, although the price of it has gone up. Another option open to companies is to insure their profits against loss as a result of a war or uprisings against governments.
Companies should also consider asking their banks for more support. “Banks definitely have a big role to play in helping companies to assess and manage the risks they face. Risk management itself is most advanced in the banking sector,” he says.
How banks are reacting
According to Mohammed, banks operating across the region have also reacted – and they, too, have become more cautious.
Most banks are now examining their risk management processes and systems with a view to enhancing their risk mitigation.
“There have been no major differences in the way that local banks and foreign banks have responded to the situation,” says Mohammed.
“Banks provision of loans to small businesses has been extremely poor (generally), but they are keen to offer finance to larger corporates. Small firms are suffering, and the Arab Spring has made this situation worse.”
