Highlights from the semi-annual 2016 Middle East CFO Survey:
- CFOs must begin to prepare for introduction of value-added tax (VAT) in Gulf nations by 2018
- Net CFO optimism has fallen to its lowest recorded level in the region.
- Almost 75% of CFOs believe the level of external uncertainty is “high” or “very high.”
- Top CFO priorities are cost reduction, increasing cash flow, and organic growth.
This semi-annual CFO sentiment in the Middle East reflects a more consistent outlook among the eight countries reporting, according to Deloitte’s latest report entitled “Global CFO Signals – Still reluctant to spend.” Optimism stands at a net -2%, which is down from +26% the last time CFOs in the region were surveyed (Q2 2015). What seems clear, however, is that optimism—as well as risk appetite—seems to be correlated with the drop in energy.
“A net 38% do expect energy prices to be higher in six months, which might shift focus toward more strategic priorities for their Middle East corporations. However, oil prices are not returning to $100+ levels any time soon. That gives CFOs the opportunity to incorporate lower prices into forecasts. And combined with continued accessibility to capital, low interest rates, and solid demand, that might just give them the comfort to spend again,” said James Babb, partner and CFO program leader at Deloitte in the Middle East.
VAT introduction consideration
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In an effort to diversify revenues and lower dependence on energy-related income, GCC states have agreed to incorporate value-added tax (VAT) at a rate of 5% in 2018. Of those polled, 93% of CFOs expect to see some level of impact upon their business with the introduction of VAT. Still, almost half of polled CFOs shared that their business has a “minimal understanding” of the range of impacts typically associated with the introduction of VAT. Further, 81% are yet to incorporate VAT considerations into their strategic planning processes
Optimism fall and communal uncertainty
Collective skepticism has emerged among Middle East CFOs. Traditionally, perceptions are divided across the region, with Gulf Cooperative Council (GCC) nations reporting higher levels of optimism when compared with countries in North Africa and the Levant. However, GCC states did not remain unscathed from current market and economic conditions. Regarding their company’s financial prospects over the next six months, CFOs’ optimism has fallen to its lowest figure since the survey began in 2009 (net -2%). These sentiments are largely driven by external factors, with 71% of CFOs agreeing that the level of uncertainty in the Middle East is “high” or “very high.” Economic growth/outlook overtook geopolitics as the factor most likely to pose a significant business risk over the next six months. Other areas of concern include reductions in demand (foreign and domestic) and currency fluctuations.
CFOs top strategies for the year ahead
Given the weakened economic sentiment across the region, CFOs are focusing on the business strategies that fall within the financial steward and operator domains. The top priorities for the next 12 months include cost reduction (net 91%), increasing cash flow (net 76%), and organic growth (net 52%). Further, risk appetite has been curbed, as 83% of CFOs believe it is not a good time to add greater risk onto the balance sheet. The regional economic effects are mainly attributed to increased geopolitical concerns and decreased energy prices, typically a stalwart of GCC fiscal policy.
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