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MENA execs feel positive as deal intentions rise

Global Capital Confidence Barometer| Middle East and North Africa

Improving economic conditions give M&A an added boost

What a difference six months can make. When we last surveyed Middle East and North Africa (MENA) executives for the November 2016 Capital Confidence Barometer report, countries were at low ebb, with only 21% of expecting to pursue acquisitions in the coming 12 months.

In our 16th Global Capital Confidence Barometer, 47% of MENA executives expect deal activity to increase in the next 12 months. Although this optimism is not reflected in the actual deal data, where there were 80 transactions on the go versus an average of 100, executives are positive about the quality of deals, deal flow and the number of transformational deals in certain sectors.

Further, 41% indicate they have five or more deals in the pipeline, and 44% expect this number to increase over the next 12 months — four percentage points higher than six months ago. Expectations around transaction completions are also up, with 54% of MENA companies looking to close deals over the next year, double the expectation from six months ago.

Improving economic conditions and strong PMI survey results give M&A an added boost

For MENA companies, improving economic conditions are a contributing factor to the growth in dealmaking, with 48% of respondents feeling more positive about the global economy, versus 22% six months ago.

Additionally, 57% of executives feel more positively about the local economy, versus 26% six months ago. The recent pick up in positive economic releases, coupled with very strong Purchasing Manager Index (PMI) survey results, is underpinning a strong upturn in the percentage of executives who see the economy as improving.

In the public sector, MENA countries are on track in terms of improved GDP growth in 2017 when compared with 2016 forecasts. That said, GDP levels remain low when compared with three or four years ago. Public finance in many MENA countries is still uncertain.

Executives remain positive about economic fundamentals, but liquidity is still tight

Although MENA executives are more confident about economic fundamentals, with 83% believing that corporate earnings are improving and stable at the local level, MENA companies are struggling to secure loans as liquidity among banks and other financial institutions continues to be tight. However, we expect this to improve in 2017, as some countries look to increase interest rates.

Among MENA countries, the UAE’s public finance appears to be faring best. Real estate, in particular, is flourishing when compared to countries in the region as the UAE prepares for Expo 2020. Despite the overwhelming confidence, MENA executives expect a slowdown in global trade flows and an increase in protectionism, high volatility in currencies and capital markets, and increasing geopolitical instability as significant economic risks.

Increasing government intervention in the region, both by establishing new laws or regulations, or through vocal public pronouncements, could impede economic growth over the next year.

MENA companies are putting organic growth first

When it comes to growth objectives, market volatility and lower oil prices have 54% of MENA executives looking at organic opportunities first. However, given the new taxes that some of the Gulf countries have imposed, and the difficulty in bringing skilled labor into the country, many companies are turning to automation.

They are not looking to reduce their workforce, as the numbers bear out — 16% expect to maintain the current workforce domestically; 20% anticipate doing the same internationally. Additionally, 15% suggest that they will automate more roles domestically, versus only 9% internationally.

For companies seeking to implement digital innovation, 26% say one of the main challenges is the change management needed to implement a digital innovation culture. This percentage jumps to 31% among Saudi Arabia respondents, whereas in the UAE, only 17% feel this is their primary challenge.

Public sector companies and governments are actively reviewing their portfolio mix

Disruptive forces and potential changes in trade policies are also compelling MENA companies to be more responsive in their portfolio and operational reviews. Public sector companies and governments are looking at significantly restructuring their portfolio mix, as they look to invest in areas beyond health care and education.

In the private sector, businesses are at times inclined to invest on the basis of intuition and the perceived brand value, and therefore may be less likely to undertake regular portfolio reviews. This, combined with the historical bias within MENA family groups away from asset disposals, may explain why 66% of MENA executives, versus 73% of global executives, have increased the frequency of their portfolio review process to capitalize on disruptive forces.

MENA executives are ready to get back to dealmaking

As oil prices continue to stabilize, and Government interventions foster greater economic certainty, MENA executives are feeling more optimistic that the economic conditions are right to return to dealmaking.

Add to this the fact that pipelines remain robust and companies are feeling good about the quality of deals in the market and we expect to see a significant uptick in deal activity over the next 12 months.
At the same time, however, companies will also be looking for organic growth opportunities to temper the volatile markets and geopolitical uncertainty.

As we look forward to the next 12 months, we will be keeping a close eye on the strides MENA companies take to address the digital innovation and disruptive technologies that threatens to impact existing business models, and the path they choose to follow in futureproofing their businesses.
EY - Phil Gandier

Phil Gandier

EY MENA Transaction Advisory Services Leader

+966 1 215 9850


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