CFO optimism wavers in Middle East

Deloitte survey finds that Gulf countries CFOs report higher optimism compared with North Africa and Levant

Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle East region with uninterrupted presence since 1926. Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with around 3,000 partners, directors and staff.

The Deloitte CFO Survey is a quarterly report of their member firms globally. The full report including all other Deloitte markets can be found at deloitte.com

The newly released edition of Deloitte’s Global CFO Signals report finds that Chief Financial Officers optimism during the third quarter of 2013 has weakened over the past year in the Middle East due to the ongoing political uncertainties; A net 41 percent of Middle East CFOs feel more optimistic about the prospects for their companies compared with a net 54 percent recorded 12 months ago.

The purpose of the Deloitte Global CFO Signals report is to provide highlights of recent CFO surveys results by Deloitte practices across the world. “The surveys, which were conducted in 17 countries and regions, illustrate that finance executives worldwide seem to be embracing recovery and setting their sights on expansion, despite continued economic hiccups”, reported James Babb, Deloitte Middle East CFO Program leader.

“The case of the Middle East is one of mixed optimism: while CFOs in the region reported improved expectations for revenues, capital spending, and hiring over the coming 12 months, the number reporting so is 38 percent less than a year ago, reflecting less confidence in their outlooks,” he added.

“The sample of 156 Middle East respondents to the ‘Q3 2013 Deloitte Middle Eastern CFO Survey’ expressed decreased optimism from the prior year, due in most part to the ongoing political uncertainties in the region,” elaborated Babb. “Although uncertainty has become a constant companion for many quarters now, the general feeling remains one of mixed optimism”.

Gulf countries reported relatively higher levels of optimism compared with the surrounding North African and Levant countries. Optimism among surveyed CFOs in Syria fell by 13 percent, while finance chiefs in the UAE reported a net 75 percent increase. Only a net 2 percent of CFOs reported their companies are carrying higher cash balances compared with a year ago, when a net 23 percent reported the same last year. While 75 percent of CFOs were predominantly concerned with market risk last year, that number has declined to 39 percent, with strategic, operational, and financial risks all becoming a prevalent concern, reflecting the general uncertainty in the environment.

Moreover, when asked about their companies’ business-continuity plans, one in four CFOs in the Middle East said they still did not have a plan in place despite the increased instability in the region. Middle East CFOs were also found to favor expansion in their own region over other parts of the world.

Optimism varies

Optimism during H2 2013 has weakened over the past year in the region due to the ongoing political uncertainties. A net 41 percent of Middle East CFOs feel more optimistic about the prospects for their companies compared with 12 months ago (a net 54 percent). But the optimism has become increasingly bifurcated in the region, with the Gulf countries reporting relatively higher levels of optimism compared with the surrounding North African and Levant countries. For example, CFOs in Syria reported a net 13 percent less optimism, while CFOs in the UAE reported a net 75 percent more optimism. Only a net 2 percent of CFOs reported their companies are carrying higher cash balances compared with a year ago, when a net 23 percent reported the same. While 75 percent of CFOs were predominantly concerned with market risk last year, that number has declined to 39 percent, with strategic, operational, and financial risks all becoming a prevalent concern, reflecting the general uncertainty in the environment.

Focus on organic growth, cost reduction

Over the next 12 months, CFOs are turning more inward, focusing on organic growth, cost reduction, and increasing cash flows. While many are still seeking strategic alliances, the expectations for M&A have dropped 25 percent over the prior year. The MENA region is still favored in terms of geographic expansion over other parts of the world, which is consistent with the previous year. Only 22 percent of CFOs would consider an IPO at present, compared with 34 percent a year ago. While CFOs reported revenues, capital spending, and hiring as the three key business metrics to improve most during the coming 12 months, the number reporting so is 38 percent less than a year ago, indicating less confidence in their outlook.

Improved balance sheets

A net 61 percent of CFOs surveyed believe their balance sheets are appropriately leveraged, up from 46 percent a year ago. CFOs reported the cost and availability of new credit have improved over the past year. A net 24 percent of CFOs believe that equity markets indexes will increase over the coming 12 month, versus 42 percent a year ago.

The same CFO sentiment exists for government bond values, where a net 2 percent see an increase in values in 12 months compared with a net 23 percent a year ago. The declining market expectations may also be an indication of rising interest rate expectations over the coming 12 months.

Facing continued uncertainty

When asked if it is a good time to be taking greater risk into their balance sheets, 65 percent of the CFOs surveyed would not do so, consistent with a year ago. CFOs reported the top three board themes at their companies as growth, profitability, and improving cash flows.

When asked about their companies’ business continuity plans, CFOs reported that one in four still do not have such a plan in place, despite the increased uncertainty and instability in the region. For those companies that do, 61 percent are reviewing their plans and updating them at least once every 12 months.

Highlights:

Organic growth, cost reduction

•   Over the next 12 months, CFOs are turning more inward, focusing on organic growth, cost reduction, and increasing cash flows. While many are still seeking strategic alliances, the expectations for M&A have dropped 25 percent over the prior year.

•   The MENA region is still favored in terms of geographic expansion over other parts of the world, which is consistent with the previous year.

•   Only 22 percent of CFOs would consider an IPO at present, compared with 34 percent a year ago.

Improved balance sheets

•   A net 61 percent of CFOs surveyed believe their balance sheets are appropriately leveraged, up from 46 percent a year ago. CFOs reported the cost and availability of new credit have improved over the past year.

•   A net 24 percent of CFOs believe that equity markets indexes will increase over the coming 12 month, versus 42 percent a year ago.

•   The same CFO sentiment exists for government bond values, where a net 2 percent see an increase in values in 12 months compared with a net 23 percent a year ago.

Facing continued uncertainty

•   65 percent of CFOs surveyed would not take greater risks on their balance sheet at this time.

•   Top three board themes at companies were found to be growth, profitability and improving cash flows.

•   One in four CFOs in the Middle East said they still did not have a business-continuity plan in place despite the increased instability in the region.

•   61 percent of companies that have business-continuity plans are reviewing and updating their plans at least once a year.

About: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.  Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries.

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