Regional Focus

Treasury in the Middle East: shifting sands

Published: Mar 2016
Sand pouring out of someones hand

Over the last century, the Middle East has transformed into a global economic powerhouse, driving the world forward with its plentiful oil supplies. Yet, as oil prices plummet, the region and its businesses are heading into uncharted waters. In this article, Treasury Today explores the impact this is having on the corporate treasury function and what it is like to work in the profession across the region.

Key economies in the Middle East

GDP real growth:
2.2% (2014 est.)
Egyptian pound
GDP real growth:
4% (2014 est.)
Qatari rial
Saudi Arabia
GDP real growth:
3.5% (2014 est.)
Saudi riyal
Abu Dhabi
GDP real growth:
4.6% (2014 est.)
UAE dirham

During the course of history, the Middle East has been a region of vital importance, politically, economically and culturally, due in large part to its strategic position at the meeting point of the Asian, African and European continents. In the modern era, the Middle East has arguably risen to even greater importance following the discovery of oil in 1908. Today the region is best known for its wealth of national resources, making it the world’s major oil exporter and home to 66% of the world’s oil reserves.

Despite its abundant resources, the region’s economic prospects are beginning to stagnate. This is the view of the World Bank, who, in their Economic Outlook for the Middle East and North Africa October 2015 report, predicted that for the third year running growth across the region will be less than 3%. Losses in revenue from oil exports – which the IMF predict will have reached $300bn by the end of 2015, or 21% of the Gulf’s GDP – is a major contributor to this decline in growth. Moreover, continued low oil prices, conflicts, the global economic slowdown and the US interest rate hike, make the short-term prospects of a recovery unlikely, according to the World Bank.

Governments across the region, as a result of the slowing growth, have seen the need to diversify their economies in order to build a sustainable economic future. The UAE, and in particular Dubai, has set the example in this regard by focusing on international finance and high quality tourism.

Of course, this diversification will open up new opportunities for businesses domiciled in the region and also further afield. Yet the Middle East – with a particular focus in this article on Kuwait, Bahrain, Qatar, the UAE, Oman, Saudi Arabia and Egypt – remains a complex region with well-publicised geopolitical challenges and great diversity. But, it is also one filled with much promise and opportunity for businesses.

Uneven development

The diverse economic landscape across the region corresponds with the varying levels of corporate treasury sophistication. Some companies match, and in some cases exceed, international best practice, whilst others remain underdeveloped. “There are a number of large MNCs that operate out of the region that run very mature treasury departments, leveraging the head office treasury systems and mirroring their processes where possible,” explains Sunil Veetil, Regional Head of Payments and Cash Management – Middle East and North Africa at HSBC. “On the other hand, there are the large local companies (typically referred to as family owned businesses) that have started to recognise the importance of the treasury function. Finally, there are those mid-level companies and SMEs that for the most part have some way to go before they match their peers in Europe and the US.”

The reasons for this uneven development in treasury sophistication across the region vary, and are influenced by internal and external forces. Location, for one, is a big driver. The economic development of countries like the UAE and Bahrain in particular has encouraged the expansion of the financial services sector and investment in infrastructure, attracting an influx of talent from overseas and affording corporates access to international best practices and services.

The nature of the region’s companies also has a large role to play. As Irshad Jooma, Head of Treasury Advisory Services Deloitte Middle East, explains: “It is typical for family-owned businesses to have wealthy shareholders who have been able to pump cash into the company at times of stress,” he says. “As a result, the need to develop high quality skill levels around cash and liquidity management and financing has been limited due to this safety net.” Similarly, despite many family owned businesses being very large, their growth has typically only been regional, again limiting the complexity of the function. “The result is a limited role for the corporate treasury in these companies and little room to influence as a strategic partner.”

New drivers of change

These conditions however, have begun to evolve. As HSBC’s Veetil – who is currently enjoying his second term in the region – outlines: “When I returned to the Middle East in 2013, after eight years away, the dynamics had changed. Both the economies and businesses had expanded and now operate with a global outlook.”

As a result of these companies growing in size and complexity, the role of the treasury function, as has been the case in other regions, has become increasingly important. “Many of these companies couldn’t have survived with their original treasury systems and frameworks,” he adds. “Today the treasury requirements of a large family owned business, are for the most part, as sophisticated as those from MNCs.”

External factors, like tightening liquidity conditions across the region brought on by the dramatic drop in oil prices, may also be having an impact. The low oil prices have initiated a domino effect where governments have begun to pull their substantial cash deposits from the region’s banks to plug budget deficits. Banks as a result have been required to seek alternative funding, and are borrowing at higher rates, primarily from the loan market. The net impact is reduced access to funding and higher costs for corporates.

According to Deloitte’s Jooma, current conditions are raising the profile of cash and liquidity management, particularly in the family run businesses. “The current environment has increased the need to bring in greater control, improve visibility and become more efficient in terms of liquidity management,” he explains. “For many businesses, which have typically been cash rich and afforded the luxury of cheap funding, this is a new challenge and one that can’t be solved by simply throwing money at the problem. Real changes have to be made and best practice treasury management has to be utilised.”

A wealth of treasury tools

To help treasurers obtain best practice and scale up operations, there may be a need to invest in treasury systems and look to use innovative products. Thankfully, the region is well serviced in this regard. For instance, on the cash management side, corporates are able to pool (physical and notional) and concentrate their cash – typically USD – domestically in the majority of countries across the region. Cross-border pooling structures however are more restricted due to regulatory restraints, and, for the most part, are afforded only to those companies based in the more open economies such as the UAE and Oman.

On the payments side, the usage of cash remains heavy in the region. Cheques are also used frequently in the UAE by some businesses and are perceived to provide an extra layer of security due to the illegality of issuing a cheque that bounces – something that individuals moving into the country should be wary of in their personal lives. That being said, payments innovation is occurring in the region and corporates are increasingly able to move to more efficient cashless solutions. Some leading companies in the region, for instance, deal with few cheques and instead use electronic forms of payments, including SWIFT messaging. Although again the diversity and uneven development of the payments infrastructure across the region creates challenges for corporates looking for a consistent and uniform payment process.

Today the treasury requirements of a large family-owned business, are for the most part, as sophisticated as those from MNCs.

Sunil Veetil, Regional Head of Payments and Cash Management – Middle East and North Africa, HSBC

As well as the solutions offered by the banks in the region, corporate treasurers are also afforded access to cutting-edge treasury technology in the form of TMSs and ERPs. But whilst access to this technology is helpful, Deloitte’s Jooma sees a regular pitfall that many privately owned family companies are falling into. “There is a trend to just install these solutions without having robust processes in place first,” he says. “The outcome is that they are most likely going to be putting garbage in and getting garbage out which is not helping them manage the treasury more efficiently.” In some cases as well such technology is not being utilised.

Differing strengths

With most markets serviced by both local and international players, there is a good breadth of products and services available. However, there may be certain nuances when compared to other regions such as Europe and the US. Pricing, for instance, may sometimes be more expensive and also the documentation can be different in order to comply with local regulations.

Moreover, the strengths of the local banks compared to international banks can differ. Local banks are unable for the most part to match the US dollar clearing strength and international payment network of the global players. Yet, when processing dirham payments and basic domestic services such as payroll, the local banks excel. Then there are those areas where they are equal in terms of both quality and pricing, FX and interest rate risk management and debt financing, for example.

Aside from the traditional banks, the region is home to a number of large Islamic finance centres – namely Saudi Arabia and the UAE – whose banks offer various Sharia compliant solutions to corporates. Yet, it must be noted that for the most part the vast majority of companies still use conventional banking solutions, unless the treasury policy strictly dictates that Islamic products must be used. Corporates will however tap these banks for funding purposes.

Living and working in the Middle East

Although a good range of products and services are on offer, readily available talent is not. Treasury departments across the region have therefore turned to the west and brought in experienced treasury professionals to lead their treasury teams and even fill some operational roles. This can be boiled down to the fact that the treasury profession is fairly young, meaning that there is limited talent being produced locally. Moreover, there is a very shallow pool of labour looking for work, or looking to move roles because of visa requirements in countries like the UAE – an individual’s residency visa is typically tied to their employment visa, creating an issue when trying to switch jobs, a challenge that is quite unique to the region.

Most companies have established a structured programme for developing and sourcing local talent from the graduate level upwards

Ricky Thirion, Group Treasurer, Etihad Airways

To help change this dynamic and reduce the costs associated with importing talent from overseas, a concerted effort is being made to develop local talent at all levels. “Most companies have established a structured programme for developing and sourcing local talent from the graduate level upwards,” explains Ricky Thirion, Group Treasurer at Etihad Airways. “At our company alone we have recently established two internal programmes, one for our existing team and the second for a newly established specialised Emirati graduate scheme.” The ACT have also been active in the region for eight years, promoting the profession.

In the meantime, whilst the profession looks to grow the local talent pool, there may be more opportunities for treasurers overseas to move to the Middle East and help continue to develop the profession. For those that decide to make the move it can be very rewarding, if not slightly challenging at first.

“The region is extremely culturally diverse when you look at corporate treasury and financial industry and a large focus is placed on relationships,” explains Etihad’s Thirion. “As professionals we therefore need to be more culturally aware of the various ways in which to interact with the different profiles of counterparts that we encounter. These considerations impact on style of negotiation and also social engagements. This is true both within our own organisation as well as when dealing with external counterparts.” As well, as a result of the emphasis on relationships some technology solutions used elsewhere, e-dealing for instance, are seeing a slower take up in the region.

Geopolitical instability may also be a concern to some and can have an impact on business – many companies across the region can no longer do business in Syria for instance. Yet, in countries that are largely stable such as the UAE there is little impact, however.

Despite these challenges, businesses are continuing to grow in the Middle East and as the role of corporate treasury develops and becomes of greater importance across the full-spectrum of companies, the future looks bright. This is the view of Etihad’s Thirion: “Our playing field is made up of economies that have great opportunity for growth and evolution supported by leaderships that are focused on the future and in bringing in efficiency, innovation and technology as a key enabler to everything that we do,” he says. It therefore seems that the role of the corporate treasury function will continue moving from strength to strength and that the role treasurers play in companies of all shapes and sizes will almost certainly increase.

A hub for the region and beyond

In recent years, there has been an increased desire to establish local treasury centres to support operations across the Middle East, the Levant, Africa and occasionally, parts of Asia. The UAE in particular, has seen the emergence of a number of centres because of its position as a financial centre and its skilled workforce, a high quality of living, competitive cost bases and excellent infrastructure.

Treasury centres have many advantages. However, there are also a number of challenges that need to be considered when looking to establish such operations in the Middle East; traditional practices and habits are being challenged and as a result, are beginning to evolve. “Education is pivotal, especially in light of many treasury professionals relocating from western countries, where advances including, digitisation, centralisation, in-house banking and even shared service centres have been a reality for decades,” explains Nicoletta Stella, Head of Liquidity and Investments MEA, Head of International Cash Management MEA at BNP Paribas. “Central banks and regulators are also taking positive moves to push forward best-in-class treasury operations by encouraging large local corporations to embrace and implement state of the art banking solutions, such as SWIFTNet or electronic billing.”

Another topic, which requires attention and is often not considered with the gravitas required, is the evolving regulatory and reporting environment. “Whilst regulatory procedures are optimised to support fully fledged treasury centres, organisations need to be aware of the changing landscape,” explains Stella. “A particular example of this is in relation to taxation. Many still think that tax is a non-issue; this could be a significant error. We strongly encourage corporates to seek advice from tax professionals who have the expertise and are able to advise on sophisticated treasury set-ups.”

Another example which Stella believes isn’t always optimised is the understanding of different forms of company structures: JVs and partnerships, local sponsors, professional advice on possible set-ups can be a key catalyst for success. “What is clear however, is that the current pace of change is set to continue and this will be exemplified through a combination of education, diversity, evolving demographics and regulatory developments,” she adds.

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