PwC Middle East - Webcast Series 30 June 2020
Transitioning to the new normal
Middle East Updates
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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.
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3
PwC Middle East - Webcast Series - 30 June 2020
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
PwC Middle East - Webcast Series - 30 June 2020
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
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PwC Middle East - Webcast Series - 30 June 2020
Example: Interruption of infection chains in companies
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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
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?
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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
PwC Middle East - Webcast Series - 30 June 2020
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%
PwC Middle East - Webcast Series - 30 June 2020
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
PwC Middle East - Webcast Series - 30 June 2020
Family businesses should begin strategizing to prepare for the post dual shock landscapeRecovery Phases and Key Objectives
Source: Strategy& analysis 15
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
PwC Middle East - Webcast Series - 30 June 2020
Family businesses should adopt a new risk management lens, rationalize their portfolio, adapt business models, and redeploy capitalStrategize Pillars and Initiatives
Source: Strategy& analysis 16
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
PwC Middle East - Webcast Series - 30 June 2020
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
PwC Middle East - Webcast Series - 30 June 2020
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
Source: Strategy& analysis 20
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
PwC Middle East - Webcast Series - 30 June 2020
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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