Working Capital Management in the Middle East: Trends and Strategies

Effective working capital management in the Middle East is critical for navigating economic pressures, with companies seeing varied success across different sizes and sectors.

By Giulia Interesse

In the rapidly evolving economies of the Middle East, effective working capital management has become increasingly crucial for businesses across all sectors. The region demonstrated robust growth in 2023, with a combined revenue increase of 6.2 percent year-on-year, largely driven by the energy sector and strategic investments in the United Arab Emirates and the Kingdom of Saudi Arabia. Despite this growth, many businesses have faced declining profitability due to rising costs and global economic pressures. Against this backdrop, optimizing working capital has emerged as a key strategy to unlock value, enhance liquidity, and build resilience against market volatility.

For both large corporations and small and medium-sized enterprises (SMEs), maintaining a healthy working capital cycle is essential not only for sustaining day-to-day operations but also for supporting long-term growth initiatives. However, challenges such as international supply chain disruptions, increased costs of goods sold, and higher financing costs have made effective working capital management more critical than ever. The disparity between companies that excel in this area and those that lag behind continues to widen, highlighting the importance of strategic improvements in working capital practices.

In this article, we explore the vital role of working capital management in the Middle East as reported in a recent study, examining how businesses can optimize their practices to navigate economic challenges, enhance their financial stability, and position themselves for sustainable growth. We also discuss the broader implications of working capital management on regional economic resilience and the opportunities it presents for investors and business leaders.

2023 financial trends in the Middle East

In 2023, companies in the Middle East faced mounting financial pressures, with key metrics painting a challenging picture. Interest expenses surged by 37 percent, driven by rising interest rates, leading to a 130-basis point drop in profitability. This increase in costs also translated into an additional US$5 billion in financing burdens for shareholders. Although total debt levels only grew by 4 percent, the figures indicate that companies were cautious about taking on new debt amidst an uncertain economic environment. This conservative approach highlights a broader concern about the sustainability of current debt levels, especially in a high-interest-rate context.

The slight fall of 0.5 days in Net Working Capital (NWC) days in 2023 reversed some of the efficiency gains made from 2020 to 2022. This decline was mainly due to a reduction in Days Payable Outstanding (DPO), which decreased by one day, counteracting a modest improvement in Days Sales Outstanding (DSO) by 0.7 days.

The stability in Days Inventory Outstanding (DIO) amidst ongoing supply chain disruptions suggests that companies have been forced to maintain higher inventory levels as a safeguard.

Analysis of working capital by company size

Very large companies

Very large companies experienced a general enhancement in their working capital performance over the four-year period, with an average reduction of seven days in NWC. However, this improvement faced a setback in 2023, as these companies saw an increase of three NWC days compared to the previous year, primarily due to an extended DIO. The buildup of inventory was largely a strategic move to counteract supply chain disruptions and capitalize on favorable market conditions.

Despite the year-on-year increase in NWC days, the performance of very large companies was bolstered by an increase in DPO. By 2023, their DPO was still 10 days shorter than the 2019 level of 86 days, reflecting their efforts to accelerate payments to suppliers and support the broader supply chain. This adjustment was enabled by a notable 17-day improvement in DSO over the same period, driven by the implementation of best practices and advanced systems for billing and cash collection, which also helped in mitigating credit risk.

Large companies

Large companies showed the most significant improvement in their working capital metrics in 2023. They achieved a reduction of three days in both DSO and DIO, coupled with a two-day increase in DPO.

This progress aligns with a consistent five-year trend starting from 2019, where large firms have focused on refining their working capital management. This approach has been particularly beneficial in a challenging debt market, helping them enhance their balance sheets and overall financial stability.

Medium-sized companies

In contrast, medium-sized companies faced a deterioration in their working capital efficiency, with a year-on-year increase of four days in NWC. This decline was mainly due to an extended DIO cycle, driven by supply chain disruptions and the accumulation of buffer stock.

Medium-sized companies also struggle with the second longest DIO cycle among their peers and the slowest DSO cycle, compounded by the fastest DPO cycle. This segment shows considerable room for improvement, particularly in aligning their DSO and DPO cycles with market averages and enhancing their inventory planning and management practices.

Small companies

Smaller companies achieved a slight improvement in working capital efficiency in 2023, continuing a positive trend observed over the past five years. Despite their size, these companies have demonstrated that effective internal controls and optimized systems can lead to significant improvements. They recorded the second-best collection cycle performance, showcasing that even smaller firms can achieve notable results by focusing on internal efficiencies and strategic management of working capital.

Regional insights by country

Saudi Arabia

Saudi Arabia continues to experience the longest working capital cycle in the region, although there has been some positive movement in recent years. Since 2019, the country’s working capital trend has seen gradual improvements. In 2023, Saudi companies managed to enhance their DSO by an average of two days compared to the previous year. This progress can be attributed to government initiatives aimed at expediting cash flows and companies refining their internal practices.

Despite this improvement, challenges persist. The average DPO for Saudi firms increased by six days, returning to levels observed prior to recent improvements. Conversely, the DIO deteriorated by six days, marking the longest inventory cycle in the region. This increase in DIO is largely due to delays in construction projects and poor planning within the engineering and construction sector, particularly affecting building materials.

United Arab Emirates (UAE)

The UAE has managed to maintain its working capital performance stability in 2023, following a significant adjustment in 2022. After a period of decline due to the pandemic, UAE companies achieved a balance in their DSO, DPO, and DIO metrics, with the average NWC days holding steady at 83, unchanged from the previous year.

Recent developments in the UAE reflect a heightened focus on working capital management, driven by investors and shareholders, including sovereign wealth funds and private equities.

Working capital practices in Egypt, Jordan, and other GCC countries

While specific data for Egypt, Jordan, and other GCC countries may not be as detailed, overall trends suggest a varied landscape in working capital practices. In general, businesses across these nations are grappling with similar challenges, including managing inventory levels, optimizing receivables and payables, and adapting to the regional economic environment. The focus remains on improving operational efficiencies and adapting to both regional and global economic pressures.

Working capital trends by industry

Engineering and construction

The engineering and construction sector remains notable for its extended working capital cycle, marked by significant deterioration over the past year. This sector faces severe financial strain due to ongoing operational delays and cash flow issues that exacerbate these delays. The average DIO has increased by 15 percent, reflecting a rise in stock accumulation due to project delays. Additionally, the DSO has deteriorated by 2 percent, reverting to levels seen in 2021 after a brief improvement in 2022.

Healthcare

In contrast, the healthcare sector has demonstrated a consistent improvement in working capital performance. The sector has seen a reduction in the overall working capital cycle, with the most substantial progress in DPO, which increased by 20 percent to 87 days—its highest in the past five years.

However, despite improvements in DIO and DSO, the latter remains high at 151 days. Addressing this could further enhance the working capital cycle and relieve pressure on suppliers.

Other notable sectors

Across other industries, the performance varies. In 2023, 54 percent of companies reported improved working capital efficiency compared to the previous year, a slight increase from 52 percent in 2022. This incremental progress highlights a growing recognition of the importance of sustainable working capital improvements.

Sectors like aerospace, defense, and chemicals have shown varied performances, with some experiencing slight improvements while others face stagnation or decline. The retail and consumer sector, for instance, has shown resilience with modest gains, while sectors such as pharmaceuticals and life sciences continue to manage complex working capital challenges.

Strategies to improve working capital management in the Middle East

In the Middle East’s evolving business landscape, optimizing working capital management offers significant opportunities for enhancing financial stability and operational efficiency in 2024.

Strengthening analytics is key; by leveraging data across customer behavior, inventory needs, and payment trends, companies can make more informed, agile decisions. This helps streamline working capital cycles and quickly adapt to market changes.

Improving billing and collection processes is also crucial. Timely, accurate invoicing reduces collection delays and disputes, while automated and targeted strategies can unlock capital tied up in receivables.

Effective inventory planning, guided by accurate demand forecasts, prevents both overstocking and understocking, optimizing cash flow. Additionally, establishing robust governance with clear policies, roles, and performance metrics ensures sustainable improvements in working capital management.

Focusing on these strategies will enable businesses in the Middle East to strengthen their working capital and support long-term growth in a challenging economic landscape.

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