Regional Focus

Navigating treasury in the Middle East

Published: Mar 2024

For treasurers in the Middle East, cash management continues to be high on the agenda. At the same time, budgetary constraints arising from geopolitical tensions are making it more critical for treasurers to be able to demonstrate the ROI on technology solutions.

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Located at the intersection of Europe, Asia and Africa, the Middle East has a population of over 370 million people, with its largest economies including Saudi Arabia, UAE and Turkey. The region is famed for its rich cultural history, as well as for its modern architecture, low taxes and abundant oil and gas reserves.

In recent years, significant efforts have been made to diversify the region’s economies away from hydrocarbons. In 2016, for example, Saudi Arabia launched its Saudi Vision 2030 roadmap, the goals of which include diversifying revenues and establishing Saudi Arabia as a global hub connecting three continents.

Meanwhile, the Middle East continues to be affected by geopolitical tensions and upheaval, including the Israel-Hamas war. Despite this, tourism in the Gulf Cooperation Council (GCC) – a political and economic alliance of six countries in the region – is experiencing robust growth, led by the UAE and Saudi Arabia.

Treasury landscape

For treasurers operating in the region, the region presents both challenges and opportunities. For one thing, the maturity level of treasury practices varies between countries, explains Irwin Medford, Director, Treasury Advisory at PwC in the Middle East.

“For example, in the UAE, and particularly in Dubai and Abu Dhabi, the markets are more mature,” he says. “As well as focusing on cash and liquidity management, treasurers are becoming more sophisticated and are looking at centralisation structures such as payment factories. Many also have treasury systems in place.”

In other countries, including Saudi Arabia and Oman, Medford observes that treasury practices are often in earlier stages of development. “Again, cash management is still high on the agenda, and some entities have dedicated treasury functions. But in some places, you see finance doing some treasury work.”

The Middle East is also characterised by the variety of client profiles that can be found there, adds Sleiman El Homsi, Director – Treasury at PwC. On the one hand, the region has numerous family businesses across different sectors, which may be focusing on opportunities for centralisation and rationalisation. “Then in Saudi, specifically, there are ‘giga-projects’ that are in building mode, striving towards a self-sufficient model, but currently still under the auspices of the KSA central government and its leading sovereign wealth fund.”

El Homsi says the relationship between holding companies and subsidiaries is not necessarily akin to a parent/child set up, “but more of a spousal relationship.” Medford adds: “In family businesses, you find that some of the subsidiaries are more autonomous than you would probably see in a more international company with a high degree of centralisation.”

Growing sophistication

As companies ramp up their activities, says El Homsi, “the sophistication of treasury grows, because it needs to cater not just for cash management, but also for improved bank connectivity, process automation, more effective internal business partnering, and coverage of ancillary activities like trade finance.”

For capital intensive clients looking to execute their ambitious investment plans, he adds, “the right competencies need to be sourced or built internally to drive asset-backed financing, which entails more complexity.”

Alongside family businesses and government-related entities, El Homsi notes the region also includes many international players, which often choose to set up their treasury operations in the region’s two main free zones: Abu Dhabi Global Market (ADGM), and the Dubai International Financial Centre (DIFC).

“We’re seeing a trend towards using places like Dubai and Abu Dhabi as regional centres,” comments Medford. “The free trade zones are a key driver for companies setting up as regional treasury centres, because they can be a bit more sophisticated in terms of the work they do and the scale of their operations.”

Treasury in the Middle East: challenges and opportunities

Nabeel Albloushi, Head of Markets & Securities Services, Middle East, North Africa and Türkiye (MENAT), HSBC Bank Middle East

How would you describe the landscape for corporate treasury in the Middle East?

As a region, the Middle East is witnessing more and more corporates focused on growing their footprint. We continue to see growth in the non-oil sector and positive demographics thanks to the youthful, regional population. Optimism remains strong that the region will continue to perform well in the medium and long-term which, in turn, provides abundant opportunities for corporates to expand or establish their treasury operations in the region.

What do you see as the most significant challenges for treasurers in the region?

Clearly one of the biggest challenges is managing the impact of geopolitical challenges. This variable is something to be aware of and prepared for. Other challenges include liquidity constraints as well as regulatory pressures in some countries in the region. Whilst these produce difficulties for treasurers, the complexity required in tackling them is something specialist treasurers understand.

What are treasurers in the Middle East doing to improve the efficiency of their cash management activities?

Treasurers have an abundance of options these days with regards to making the most of their cash. It could be through crystalising higher yields with excess cash or implementing effective, yet simple-to-use cash pooling structures across their regional entities. Investment in technology in this space is ever-increasing and treasurers will continue to gain access to new solutions that match their requirements and make their cash management activities more seamless. Full automation of their FX transactions can now even be applied to their payments and receivables flow, minimising the need for manual input and, therefore, the associated risk of human error.

Cash management and the role of technology

El Homsi says that while different clients have different levels of maturity, a major focus on cash and liquidity management is a common theme. The use of cash pooling is not often maximised, with structures such as cross-border pooling and notional pooling relatively uncommon. Nevertheless, different companies will have different ways of centralising cash.

“For example, we’ve seen one enterprise that has a regional treasury centre in the Netherlands, and an operating company in Saudi Arabia,” he comments. “They include cash in the European cash pool by having that cash go to a local correspondent bank.”

With many companies focusing specifically on cash and liquidity management, El Homsi says the way that treasuries approach system enablement “is increasingly becoming modular. They prefer a cost-effective, building block approach, ramping up capabilities in tandem with business requirements, allowing them to simultaneously de-risk the project while also showing some tangible wins along the way.”

Indeed, there is a clear realisation that technology will drive significant gains, observes Rahul Daswani, founder of LHD Research in Dubai, who has previously held treasury roles at Microsoft and Nokia. “The challenge is being able to showcase the ROI, as currently budgets are being cut back due to conflict and the wider risk of geopolitical issues spilling over,” he adds.

Challenges and risks

Treasurers operating in the Middle East also need to navigate a number of obstacles. For one thing, the availability of trained resources continues to be a challenge for treasurers, notes Daswani. At the same time, he argues that the greater complexity of technology systems and the rapid pace of change “is making it very difficult to make longer-term decisions.”

Where financial risks are concerned, El Homsi says that foreign exchange (FX) risk management doesn’t tend to be a major consideration, as many companies in the region operate domestically. He notes that the focus tends to be on plain vanilla forward hedging, and not so much on the use of options or other structured products. “It is not uncommon for formal policies on financial counterparty risk management to be absent,” El Homsi adds, “while treasury involvement in managing commercial counterparty credit risk is a rarity.”

Meanwhile, geopolitical tensions have brought interest rate risk management to the forefront for some companies, “particularly more heavily levered entities, or entities that have ambitious expansion or capex plans.” But generally speaking, El Homsi says the decision to hedge interest rate risk is done on an ad hoc basis.

“For most companies, the typical approach is to have around 50-50 fixed to floating,” he comments. “If you were to dig down and see how they manage interest rate risk – for example, whether they do the required sensitivities, and look at the impact on debt servicing – these things might be done, but probably not as rigorously as one would want.” Likewise, he says that companies tend to focus on the impact of interest rates on debt, without placing much emphasis on the implications for commercial cash flows.

Growth vs efficiency

Despite the challenges presented by the region, Daswani notes that there is nevertheless a significant opportunity for growth. “Most companies are now busy with corporate governance, considering the strong growth seen in the last two years, and this requires them to organise the finance function and set up a dedicated treasury team that is equipped with systems and tools. This requires a lot of investment in treasury management systems (TMSs).”

Daswani says the addition of tax rules has made this even more important, “as intergroup financing now needs to be looked at from an arm’s length perspective, and thus in-house bank capabilities become critical.” But alongside the growth opportunity, Daswani notes that conflict in the Middle East is resulting in a significant sales impact for many consumer-facing companies, as spend has been pulled back.

“This has led to budgets being recalibrated, and 2024 is expected to be more of a year of efficiency vs growth,” he says. “Thus the corporate treasurer and CFO’s roles are becoming much harder, as they have to make tough decisions on investing.”

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