4 minute read 11 Jun 2019
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Optimism continues to drive growth prospects and M&A appetite in MENA

By

Phil Gandier

EY MENA Transaction Advisory Services Leader

Experienced transactions leader. Advising MENA-based conglomerates, international investors, state-owned enterprises and governments on issues related to their capital agendas.

4 minute read 11 Jun 2019

Executives in Middle East and North Africa are optimistic about prospects for economic growth and dealmaking.

Against a backdrop of economist and analyst predictions of a global economic slowdown, global trade tensions, Brexit uncertainty and global trade and economic stumbles, we see how optimistic executives in the Middle East and North Africa (MENA) region are about the economy, their growth prospects and their appetite to pursue M&A.

According to the EY Global Capital Confidence Barometer, 87% believe the global economy is improving; 82% share a similar sentiment about their domestic economy.

According to a recent World Bank report, growth in the MENA region has improved and is projected to strengthen over the next few years. Further, almost all MENA countries have moved to reduce or eliminate energy subsidies, identify new sources of non-oil revenues and expand social safety nets to shield the lower-income class. The World Bank also noted that economic growth in MENA is forecasted to reach an average of 2.6% in 2019 and 2020. In more encouraging economic news, oil prices are on the rise once more, giving oil exporting countries in the region a boost.

Based on their confidence across the macroeconomic landscape, 67% of MENA executives say that they anticipate revenue growth rates of between 6% and 15%. Interestingly, no respondents forecast negative growth.

Despite their optimism for growth, MENA executives are aware of the risks that lie ahead

Our M&A report suggests that MENA executives are keeping an eye on the risks. For one-third (33%) of MENA executives, slowing economic activity poses the greatest external risk. Executives in the Kingdom of Saudi Arabia (KSA) and Egypt express greater concern for this risk than their peers in other geographies.

Within their own organizations, concerns are divided among new market entrants, slowing demand and increased production costs. The UAE’s ongoing ease of doing business, including tourism efforts, continues to draw new entrants from across the globe. This could be affecting the growth of domestic entities.

Across the region, consumer-facing businesses are experiencing a new normal as demand has reduced, particularly for high-end products. At the same time, cost structures have risen.

Executives step up reviews as they look to reshape their portfolios

Many companies across the region are experiencing pressures around liquidity and financing. As a result, MENA companies are finding innovative ways to raise capital.

This may explain, in part, why companies in the MENA region have stepped up the frequency of their portfolio reviews — 61% of MENA executives say their companies are reviewing their portfolios every quarter or more frequently — more often than global executives (46%). The UAE and Qatar appear to be more aggressive than others, with 68% of UAE companies reviewing quarterly (and 16% say they review continually), and 77% of Qatar companies reviewing quarterly or more.

With more frequent portfolio reviews as one of the key factors, it’s inevitable that dealmaking appetites remain healthy. It explains why, based on their last portfolio review, 28% of MENA executives say they identified assets to divest.

Portfolio reviews

61%

of MENA executives say their companies are reviewing their portfolios every quarter or more frequently.

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An evolving regulatory environment becomes a fundamental consideration in M&A strategy

On the buy side, 59% of MENA executives say they will actively pursue M&A opportunities in the coming year. MENA executives say the current regulatory environment is evolving across major jurisdictions, and is the leading fundamental concern to understand when executing dealmaking. However, they are also considering other factors in their deal strategies, including the changing political landscape, technological disruption and innovation, as well as understanding how demographics will change demand patterns.

Actively pursue

59%

of MENA executives say they will actively pursue M&A opportunities in the coming year.

Given the demographic trend, one in five (21%) MENA executives say that responses to changing customer behaviors is the main strategic driver, while an almost equal number (19%) see M&A as a means to address regulatory or tariff and trade issues, or to secure their supply chain.

Interestingly, where private equity firms had previously played a rising role as net buyers in the region, they have become net sellers. That said, 28% of private MENA companies say they are looking for PE to help them fund their growth strategies in the next 12 months, particularly when other private debt financing options fall short. Additionally, MENA executives expect PE to rebound, with 84% anticipating PE firms to become major acquirers of assets in the coming year.

MENA plan for significant technology investment

MENA executives look to improve their resilience even as they pursue ambitious growth

Looking ahead, we expect MENA companies to continue to reshape their portfolios to remain resilient to potential headwinds on the horizon, even as they actively pursue their ambitious growth objectives.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By

Phil Gandier

EY MENA Transaction Advisory Services Leader

Experienced transactions leader. Advising MENA-based conglomerates, international investors, state-owned enterprises and governments on issues related to their capital agendas.