Articles

MEA Regional Update: Global Challenges to Working Capital, FX, and Forecasting Accuracy, Plus AFP Visits Egypt

  • By AFP Staff
  • Published: 11/18/2022
Map of middle east region at night

Like the rest of the globe, the Middle East and Africa (MEA) region is facing economic challenges in the form of increased interest rates, absence or scarcity of credit and working capital, and trying to build an accurate forecast in the midst of it all. To better understand the effects of the current economic environment on the MEA region, we spoke with treasury professionals in the region, via a discussion led by Tom Hunt, AFP’s director of treasury services and payments.

AFP visits Egypt

Representatives from AFP recently traveled to Egypt, where they met with local universities, banks, key corporations and training partners. “Everyone was receptive to the mission of AFP,” said Melissa Rawak, AFP’s managing director.

From a membership and marketing perspective, meetings with members who reside in Egypt provided a firsthand look at and a greater understanding of regional financial professionals, the resources AFP can provide, and how we can work together. “The goal was to learn as much as possible about how to effectively address the needs of practitioners in the region, and I feel we accomplished that,” said Pat Culkin, AFP’s executive vice president.

Managing working capital in MEA

Working capital is the hero of the business novel. In times of stress, it forces companies to focus on internal drivers and how to best handle the day-to-day cash operation: What can be controlled can be measured. This gives the company better positioning in tough economic times, especially in net import countries with limited access to USD, as is the case in the MEA region.

Interest rate increases from the United States have had an impact worldwide, the level of which depends heavily on one’s geographic location. Egypt doubly impacted the economy in the form of a squeeze on working capital and the availability of credit facilities for banks; its inflation rate is now around 14-15% monthly.

Most of the Gulf Cooperation Council (GCC) raised interest rates after the Federal Reserve's move to minimize inflation to the target range of 2% and hedge the inflationary environment to restore pricing stability worldwide; for example, Bahrain raised 75 basis points, Qatar increased rates by between 50 and 75 basis points, and Saudi Arabia raised 75 basis points. Additionally, the cost of funding for financial institutions has increased with an expectation that they will increase their margins.

The tea industry in Kenya has been significantly impacted by economic challenges like foreign exchange and interest rate hikes in Egypt and Pakistan. Twenty percent of the tea produced in Kenya goes to Egypt; Pakistan is their second largest importer. The industry is currently trying to reduce the production of items sold in these countries to assuage the effects of economic risk, as well as their working capital problems due to interest rate risk. Meeting this goal means changing the management mindset to include only in-demand items.

Oftentimes staff outside of the treasury department is unaware of working capital flow and procedures; this deficit could be fixed by treasury running a working capital program, which could be marketed across the organization. Teams could be created to help business units develop an understanding of working capital and guide them, with proper policies and procedures, to arrive at the optimal working capital point. This is an opportunity for treasury to be a better business partner and identify where cash gains in the conversion cycle can be made. It would also provide better insights for forecasting financial performance or working capital needs for the organization.

Some business units will be skeptical. One challenge will be to convince them that you’re here to help the "cash story"; treasury is not a threat. The other big challenge will be improving and managing the working capital itself. It’s a journey that begins by building trust. Educate your fellow employees on what working capital means, its importance to the entire organization, and how you can improve it for the short- and long-term vision.

Forecasting in a tumultuous environment

There is no one way to forecast. It is specific to each company and industry, as well as how large the industry is and how many competitors and players one has in the industry. Better forecasting remains a goal of many; as the economy is rapidly evolving, it’s important to defend those assumptions with the information at the time they were made.

In Egypt specifically, FX reserves started to retreat back after a fully floating mechanism was applied by the Central Bank of Egypt with an upward sloping curve from 19.25 levels to $/EGP 24.25. It is expected to go down the slope between ‘21 and ‘22 levels by end of 2022, gaining foreign investment trust and allowing foreign trade to float smoothly back.

One might define the current visibility in the MEA region as less than ideal, making it a challenge to forecast beyond three months. Getting other parties in the organization involved, outside of finance — business units that affect the working capital and cash forecasting — could provide some clarity.

There are four key steps/considerations for building a forecast in this environment:

  1. Build the budget from scratch, taking into consideration factors that can impact what you have now and how you prepare the forecast for the next three years, such as inflation, interest rates and FX fluctuations.
  2. Make sure there are approved policies and procedures in place regarding how working capital will be managed on a monthly basis, and that your business has internal liquidity. If not, cash position problems can be solved by managing cash via an internal or external factor such as accessing the short-term borrowing market.
  3. Analyze the revenue implications and how the risk factor will affect the profitability of the company.
  4. Cash management is critical to the accuracy of your forecast. It provides you with your financial position, allowing you to consider your direct and indirect costs and make informed decisions.

The most challenging piece to manage in a tumultuous forecasting environment is accounts receivable. Why? Because we in treasury do not own the decision to collect, plus the highest cost belongs to inventory items. Tackling this has to be a collaborative effort between FP&A, supply chain and treasury.

We’ve heard your call for training and education in the MEA region. AFP will be holding its inaugural event in Egypt, December 2-3, 2022, titled “AFP Future of Finance.” Learn more.

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