Transitioning to the new normal Middle East Updates...Jun 30, 2020 · PwC Middle East - Webcast Series - 30 June 2020 Indeed, traditional risk management, with geographic, sector,

PwC Middle East - Webcast Series 30 June 2020

Transitioning to the new normal

Middle East Updates

1

Our focus for today

Welcome

Stephen AndersonStrategy and Markets LeaderPwC Middle East

Economic update

Richard BoxshallChief Economist PwC Middle East

Q&AWhat’s next for GCC family businesses

Marc-Albert HamalianPartnerStrategy& Middle East

PwC Middle East - Webcast Series - 30 June 2020

Helpful resources

PwC ME COVID-19 website - prior webcasts, insights and resourceswww.pwc.com/me/covid-19

Digital Fitness for the WorldPwC’s upskilling contribution to the world in response to COVID-19. Access our free Digital Fitness App available from the Apple App store and Google Play store.

If registering with your personal email, use invite code (LRNALL) to access today

3

http://pwc.com/me/covid-19


If COVID-19 were to end today, how long would you estimate it would take for your organisation to get back to “business as usual”?

4

Quick poll


CoronaManager Overview

✔ Ready to use

✔ Modular design

✔ Proven platform

✔ User and citizen-centred

✔ GDPR conformity

Bluetooth contact tracing with de-central standard

Location-based information on points of interest and statistics

Location-based notification and contacts for help

Full and transparent data control

Anonymous collection and analysis of health data

Pass function

6


Example: Interruption of infection chains in companies

7

Without “CoronaManager”: Non-traceable spread of the virus and risk of site closure

Sick employee

(not tested)

In the worst case, an untraceable spread of the

virus can lead to temporary closure of entire sites.

The employee spreads the virus without being able to trace the chain of infection.

Risk contacts must be tracked manually via the public health department,

which is very time-consuming and

error-prone.

The employee is tested positive for COVID-19. The health department informs

the employer.

Employer receives information from

public health department

??

?

?

??

??

??

??

?

?

?

?

With “CoronaManager”: Interruption of the chain of infection and continuation of operations

Sick employee

(not tested)

After the two-week quarantine period,

operations continue at full strength.

Warned employees are asked to take the precaution of

self-isolation for 2 weeks - operation will be maintained.

Using Bluetooth tracing, the employee's contacts are

recorded and stored anonymously on users’

devices.

Traced contacts of the employee automatically

receive a warning about the risk contact.

The employee is tested positive for COVID-19. Verified by the corporate physician, he can

change the health status in the app to protect his colleagues.

+Information from public health department/ test result copy

TAN

Corporate Physician 2 Weeks

CoronaManager - Overview

SpecificsApp coverage can be

monitored via back-end administration

Provision of TAN procedure via web service possible at

short notice

Infection-Monitoring (e.g. X employees with risk

contact at location Y newly reported)

Risk contacts receive alerts when crossing the

"Geo-Fence"

Automatic change of health status in the app

after two weeks

1 Economic update

Richard Boxshall

PwC Middle East - Webcast Series - 30 June 2020 9

Economic forecasts have been ‘chasing the data down’but expect them to stabilise for 2020

Sources: IMF World Economic Outlook, IHS Markit

Kingdom of Saudi Arabia GDP forecast (SAR bn, constant prices)

Forecast 2020 2021

IMF (June)

KSA -6.8 3.1

IHS Markit (June)

KSA -8.5 2.5

UAE -7.1 2.4

Qatar -2.2 1.6

GCC forecasts (percent change)

2 What’s next for GCC family businesses? Marc-Albert Hamalian

GCC Family Businesses

June 2020

Navigating the dual shock of COVID-19 and low oil prices

Today, we will outline the measures that Family businesses should take to overcome the dual shock

Source: Strategy& analysis 12

The dual shock posed by the drop in oil price and COVID-19 pandemic has led to global uncertainty. This document outlines the implications of the crisis for Family businesses in the GCC

Outline a framework that Family businesses should consider when strategizing for the post dual shock era, touching upon three key areas:

2Provide an overview of the impact of the dual shock on Family businesses

1

COVID-19Closure of borders,

stay-at-home orders, and social distancing globally

Oil Price DropThe price war was exacerbated by a

decrease in demand due to the

pandemic

Adopt a New Risk Management Lens

Rationalize Portfolio and Adapt Business Model

Redeploy by Assessing Opportunities in Line with Current Exposure


Family businesses entered the dual shock on a weak footing with increasing leverage and lower liquidityPreparedness of Family Businesses Going into Crisis

1) Focusing on industries with a strong foothold of Family businesses and available financial data 2) Includes Industrial, Materials, and Energy 3) CAGR growth for years 15-18 Source: Tadawul Stock Exchange, IMF, Strategy& analysis 13

+29%

+16%

+3%

2017 2018 2019

-8%

+2%

-18%

+6%

201920182017

-14%

Industry1 Revenue(CAGR; 2017-19)

Consumer Staples 1%

Consumer Discretionary 4%

Real Estate 3%

Industrial2 5%

Debt to Assets(in %)

Leverage

-30%

-22%

-27%

2018 20192017

-22%

Receivables Outstanding(in days)

Cash to Sales (in days)

Liquidity

Least to most prepared

Non-oil GDP Growth3 3.6%


50

0

3/8

4/5

4/12

60

4/19

90

4/26

5/3

5/10

-40

6/14

5/17

5/24

-180

5/31

6/7

6/21

6/28

-70

-60

-30

-50

-20

-10

0

10

100

10

30

3/29

70

3/15

80

3/22

120110

20

130

40

2/23

1603/

1140

COVID Cases (000s)

Returns

The effect of oil dominated that of COVID on the Tadawul; noting that the pandemic linked demand collapse triggered the oil dropTASI, S&P 500 and Oil Price Returns (24 Feb – 22 Jun 2020)

Note: 1) Worldwide increase in travel restriction including US and EuropeSource: Tadawul Stock Exchange, Google Finance, MoH KSA, Jadwa Investment, World Health Organization, Strategy& analysis

14

Oil ReturnsTASI ReturnsS&P 500 ReturnsCOVID Cases (Cumulative, 000s)

KSA Closes Borders

March 15

SAR 120 Bn Aid Package

March 22

March 27US $2 Tn Stimulus

March 11: Pandemic DeclaredMarch 12: Drop in Oil Demand1

March 13: US National Emergency

March 11-13

Oil Prices Turn Negative

April 20

KSA’s Public Sector Employees Return to Work

June 14

Return since Feb. 24• TASI: -6%• S&P 500: -3%• Oil: -22%

Restrictions Easing in Few European Countries

April 26


Family businesses should begin strategizing to prepare for the post dual shock landscapeRecovery Phases and Key Objectives


Strategy Pillars and Initiatives

Mobilize and Stabilize

Immediate Actions

Optimize Financial Resources

Ensure Business Continuity

Protect Top Talent1

2

3

Strategize

Redeploy by Assessing Opportunities in Line with Current Exposure

Consider investing in digitalExplore growing areas of Private Sector Participation (PSP)Invest in local production

Adopt a New Risk Management Lens1

3

Risk factors in portfolio construction and management

Rationalize Portfolio and Adapt Business Model2

Portfolio liquidity and geographical diversification Revisit business model to adapt to stay-at-home trends


Family businesses should adopt a new risk management lens, rationalize their portfolio, adapt business models, and redeploy capitalStrategize Pillars and Initiatives


Adopt a New Risk Management Lens1Risk factors in portfolio construction and management

• Cycles have become more frequent, sharper, and more global. As such, traditional risk management has failed to shield portfolios from the dual shock• Focus risk management on assessing value and cash flow drivers• Simulate risk factors to optimize portfolio exposure by reducing the impact of risk factors

Redeploy by Assessing Opportunities in Line with Current Exposure3

Rationalize Portfolio and Adapt Business Model2Portfolio liquidity and geographical diversification

• Reevaluate exposure through: partly divesting, investing in equity, diversifying geographically, and increasing exposure to govt. support

• Carve out assets that don’t fit with vision or misaligned with risk appetite

Revisit business model to adapt to stay-at-home trends

• Adapt business models of businesses to stay-at-home trends• For example, offering services remotely and digitally, providing an

omnichannel experience that reduces exposure to any single conduit

Invest in local production • Invest in local production to reduce import

dependence, with attractive segments in food processing, chemicals, and local tourism

Consider investing in digital• Family businesses should consider investing in

the digital space (e.g., cybersecurity, digital learning and working platforms, and e-banking)

Explore growing areas of PSP• PSP opportunities are growing due to increase

in government deficit and exist in renewables and water desalination, among others


10

-5

0

5

1986 201119761961 200119711966 1981 1991 1996 2006 2018

Economic growth cycles have become shorter and crises sharper and more global, upheaving traditional risk management approachesEvolution of Economic Cycles across Countries

Source: ECRI, World Bank, Strategy& Analysis 17

-10

10

-5

15

0

5

-10

-5

0

5

10

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2018

0

-4

-2

6

24

8Japan

France

InsightsGDP Growth Rates (in %; 1961 – 2018)

Italy

Shaded areas represent business cycle recessions

3 cycles 7 cycles 3 cycles 6 cycles

6 cycles4 cycles5 cycles3 cycles

Canada

Shorter business cycles and more frequent and global recessions are now a reality for the developed economy

Consequently, businesses need to be better prepared for the changing economic dynamics

In the 27 years between 1961 and 1987 the four countries saw 2-4 cycles

While in the 30 years between 1988 and 2018 the countries suffered 5-7 cycles


Indeed, traditional risk management, with geographic, sector, and asset class lenses, has failed to shield portfolios from the dual shockTraditional Portfolio Risk Management

1) Morningstar classification of sectorsSource: Strategy& Analysis 18

Airlines

Oil Field Services

Financials

Utilities

Steel Production

Industrials

Local (emerging)

Healthcare

International (developed)

Shortcomings

• The dual shock has not differentiated between developed and emerging countries, leading to losses across geographies as witnessed with drops in MSCI global indices

• During the crisis, investments in oil field services and airlines declined in value, with a sharp drop in oil prices and a decline in demand

• The traditional sector view failed to hedge portfolios with declines in almost all sectors

• Asset classes might need to be revisited based on each portfolio’s exposure

Geo

grap

hySe

ctor

sA

sset

Cla

ss

Characteristics of a Traditional Portfolio

Illustrative

Cyclical Industries1

Sensitive Industries

Defensive IndustriesPwC Middle East - Webcast Series - 30 June 2020

Allocation in oil field services was known

to yield positive results when oil

prices rise

Airline investments were considered a

good hedge against oil price

shocks

As a scenario test example, the impact of the dual shock on a Fast Moving Consumer Goods investment has been analysedRisk Management through a New Lens

1) Impact is assessed as compared to the status quo situation pre-crisis assuming no e-channelSource: Strategy& Analysis

The following simulation considers the impact of a dual shock on each of the components of the new lens for the Fast Moving Consumer Goods sector (FMCG)

Dual Shock

Health Pandemic

Oil Price Shocks

• Health Pandemic: similar to COVID-19, a health pandemic would lead to social distancing and disruption of normal business

• Oil Price shock: a sharp decline in global oil prices

Scenario Test Dual Shock Impact1

Negative impact

Demand

Variable Cost

Ability to Adjust Fixed Cost

Ability to Benefit from Govt. Stimulus

Liquidity

Ability to Meet Demand

Price

Revenue

Profitability

Leverage and

Liquidity

19Positive impact

Portion of raw material contracts on take or

pay provisions

Ability to leverage payroll support

Ability to access credit lines

Availability of unutilized debt

capacity

Indirect benefit from government issued coupons (demand)

Ability to benefit from equity market’s faster response to stimulus

Increase in Input Costs

Government intervention to adjust capital costs

Portion of interest payments with

floating rate

Product delivery cost

Ability to procure raw

material

Ability to offer product or

service

Government restrictions

Price regulations

Demand spikes

Ability to benefit from payroll protection

Raw material procurement

cost

Efficiency in inventory mgmt.

Ability to collect receivables

Pressure to meet payables

Decrease in demand

Portion of manpower as contractors

Ability to reduce utilization of fixed

assets

Ability to benefit from government debt

support

No ImpactPwC Middle East - Webcast Series - 30 June 2020

Depending on their existing portfolio exposure, Family businesses will choose different opportunities to complement their investmentsAssessment of Emerging Trends


By assessing opportunities in localization, PSP, digital investments and M&A against the portfolio value drivers, the key impact drivers are identified

Investment in Digital Space

Diversified channels for offering products or services

Higher efficiency in inventory management

Increased adaptability with utilization of fixed assets

Lower product delivery cost due to established infra.

Private Sector Partnership

Guaranteed demand due to offtake agreements

Better access to government funding support

Localization of Production

Procurement of raw material (e.g., time, cost)

Looser government restrictions (ie: import caps)

Better access to government funding support

Increased ability to offer competitive prices


Q&A

PwC Middle East - Webcast Series - 30 June 2020 22

Stephen Anderson Strategy and Markets Leader

PwC Middle [email protected]

Contact us

Richard BoxshallChief Economist

PwC Middle [email protected]

Marc-Albert HamalianPartner, Strategy&

Strategy& Middle [email protected]

pwc.com/me

Thank you

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.Established in the Middle East for 40 years, PwC has 22 offices across 12 countries in the region with around 5,600 people. (www.pwc.com/me).PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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Documents

Transitioning to the new normal Middle East Updates...Jun 30, 2020 · PwC Middle East - Webcast Series - 30 June 2020 Indeed, traditional risk management, with geographic, sector,