Overview of payment practices
Weather conditions and high irrigation costs mean that most of the United Arab Emirates’ food needs are imported, and some are re-exported. The hospitality sector represents the main pillar of the industry. Business performance in this segment remains poor due to the negative impact of the pandemic, particularly on hotels and restaurants where consumer confidence and demand is extremely
low. Lockdown measures have also negatively impacted the industry sales due to a decreasing population, as many expatriate workers returned to their own countries after the outbreak of the pandemic. Competition seems to have intensified in this segment as the customer base has reduced and supply remains at an elevated level. As a result, payment defaults have sharply increased in the industry.
DSO far higher than regional average
The average DSO (days sales outstanding) for the local agri-food industry is 172 days; far higher than the average 119-day for the industry at the regional level. In an attempt to protect their businesses from the liquidity constraints caused by late payments, 61% of the industry withheld payment to their suppliers (regional average: 41%).
Credit management tools employed by the industry include letters of credit (reported by 59%; regional average: 55%), and payment terms set according to the customer’s credit risk (reported by 57%; regional average: 51%). 57% of agri-food businesses in the United Arab Emirates (consistent with the response rate for the region) offered discounts for early payment of invoices.
However, despite this diversified approach to managing credit risk, 56% of the agri-food industry in the United Arab Emirates appears to be impacted by late payments, compared to an average of 49% in Asia. Similarly, when it comes to bad debt losses, businesses in the United Arab Emirates appear to be worse off than their Asia-wide peers. On average, the former wrote off 10% of the total value of their B2B receivables, compared to a 6% average for Asia). This fairly high percentage of write-offs is despite active engagement in chasing overdue invoices, as reported by 26% of businesses polled in the United Arab Emirates and 29% in Asia.
Majority of agri-food industry expects improvement in business performance
More agri-food businesses in the United Arab Emirates (28%) than in Asia (17%) are concerned about ongoing depressed demand for their products and services over the coming months, as well as ongoing disruptions to the industry supply chain impacting their business operations and profitability. concern about maintaining adequate cash flow levels is expressed by 24%, compared to a 32% response rate for Asia. Despite these concerns, nearly 60% of the businesses polled in the both the local and regional industry were optimistic about the potential improvement to their business performance (sales and profits).
Significantly more businesses in the United Arab Emirates industry (33%) than in Asia (14%) believe their business performance will improve chiefly due to an increase in export trade flows. 33% of businesses believe that improvement will arise from either a rebound in the domestic economy or from a combination of increased exports and more favourable economic conditions (regional average: 57%). 44% of the industry believe that trading on credit will become more widespread to stimulate demand from customers over the coming months (regional average: 38%).
Deterioration in demand from key buyer sectors has negatively impacted the payments performance of the industry’s chemicals segment. In the plastic and related segments, payment performance of businesses remains
poor. In contrast, the payments performance of the industry’s pharmaceutical segment is better, driven in part by the increased global demand for medicines and medical products caused by the pandemic.
Local industry impacted by more late payments than in Asia
70% of businesses in the chemicals/pharma industry in the United Arab Emirates prefer to retain and manage customer credit risk in-house (this is equal to the percentage reporting the same in Asia). Trade debt collection is an important aspect of this, undertaken by nearly 60% of the businesses in the local industry and in the industry in Asia alike. Businesses across the region as well as in the United Arab Emirates also expressed a greater preference for selling on terms other than open credit. Despite this, the local industry appears to be more impacted by late payments than their Asian peers. 62% of the total value of industry credit sales was reported to be overdue (higher than the 54% average for the industry in Asia).
A similar pattern can be seen with long-term overdue invoices of high value, where the local industry appears to be less successful at achieving prompt invoice-to-cash turnarounds than its peer across Asia. This is reflected in the 126-day average DSO, longer than the 95-day regional average . An average of 7% of receivables were written off (on par with the industry in Asia). 44% of respondents delayed paying suppliers (more than the regional average of 37%). Interestingly, more businesses in the local industry (30%) than in their industry peers in Asia (20%) told us they either delayed paying bills and staff, or delayed investing in plant and equipment. 25% of respondents (higher than 19% in the industry in Asia) told us they reduced the workforce.
Liquidity issues are a focus of concern for businesses in the industry
Like their industry peers in Asia, over one quarter of the businesses in the United Arab Emirates chemicals/pharma industry told us they are concerned about maintaining cash flow in the coming months. More businesses in the United Arab Emirates than Asia as a whole expressed concern over a potential fall in demand for products and services, possible bank lending restrictions that could hamper their financial flexibility and their ability to access cash to weather fluctuations in their business activity. However 44% anticipates no change in their business performance over the next months (regional average: 36%), although fewer businesses in the local industry (49%) than in Asia (57%) anticipate improvement. Unsurprisingly, in light of the increased global demand for medicines and medical products due to the pandemic, twice as many
businesses in the United Arab Emirates industry than in its peer in Asia (15%) predict this improvement will come from increased foreign demand. 37% of businesses believe growth will be driven by an improvement in the domestic economy over the coming months (lower than the regional average of 43%). Similarly, fewer businesses in the local industry (31%) than in Asia (41%) believe growth will come from a combination of better domestic economic conditions and stronger export flows. Against this backdrop, most businesses in the United Arab Emirates and Asia agree that open credit will continue to play a great role in both domestic and foreign B2B trade relationships. This is, reportedly, both to strengthen demand that may have weakened in some sectors due to the pandemic, and to allow customers more time to pay, should they need to sell goods on or to obtain bank finance.
of the total value of industry credit sales was reported to be overdue (higher than the 54% average for the industry in Asia).
Atradius Payment Practices Barometer – June 2021
Steel / Metals
The pandemic-triggered economic crisis has severely hit businesses in the steel/metals industry in the United Arab Emirates, further worsening an already subdued performance dating back over two years. This may explain the strong approach to cash flow management reported by the majority of businesses we spoke to. These include a focus on invoice collection aimed at safeguarding liquidity levels,
containing credit management costs and protecting business profitability and viability going forward. Ensuring cash flow is paramount in order to be able to actively participate in the expected rebound of the economy. This is forecast to trigger improvements in the industry’s business performance, sustained by a bigger role played by open credit as a facilitator of B2B trade relationships.
Focus on liquidity protection paramount for business in the industry
In a bid to bring cash in sooner than the invoice due date and therefore safeguarding the business liquidity levels, 76% of the businesses polled in the United Arab Emirates steel/metals industry told us they frequently offer discounts for early payment. This helped half of the businesses polled in the industry to stabilise, or even reduce DSO over the past year to the current 100-day average (down from last year’s 110 days). Businesses adjusted their payment terms to match the credit risk profile of the customer almost as often as they offered discounts for early payment. They also took in to consideration the availability and cost of capital needed to finance the time gap between invoicing and payment. Reliance on their own internal resources for credit risk management was reported by seven in ten businesses polled in the industry, while a lower percentage told us they opted to outsource protection of the business against the risk of customer payment default to a credit insurer.
Due to the severe impact of the pandemic-induced economic downturn on many segments of the United Arab Emirates steel/metals industry, customer payment default affected 60% of B2B invoices issued in the local industry over the past year. 7% of long-term overdue receivables (over 90 days overdue) was written off as uncollectable. This has tripled over the past year, indicating pressure on cash flow due to a deteriorating efficiency in the collection of long outstanding overdue invoices of high value. This is despite an increase in the time, costs and resources spent on chasing up overdue payments over the past year (reported by 47% of the industry). As a consequence of pressure on cash flow, which deprives businesses of funds that could be used in their operations, the survey respondents told us they needed to delay payments to their own suppliers and reduce the workforce (42% of respondents in both cases).
Cash flow is primary concern for the steel/metals industry
Businesses in the United Arab Emirates steel/metals industry told us they will be increasing efforts to maintain adequate liquidity levels and to reduce pressure on profit margins over the next months. containment of credit management costs to safeguard business profitability remains paramount for this.
Meanwhile, a significant reason for concern expressed by many businesses is the potential for a further weakening of demand from both local and offshore re-export businesses caused by the pandemic. However, business confidence is good due to an optimistic outlook for improving sales and profits (48% of respondents in the industry) despite continuing uncertainty about the duration of the pandemic-triggered economic crisis.
However, most steel/metals businesses in the United Arab Emirates (46%) believe any improvement in their business performance will be due to a rebound of the domestic economy, whereas 35% anticipate improvement will come from healthier export flows. Being confident that economic recovery is underway, nearly one in three businesses polled in the United Arab Emirates industry are of the opinion that trading on credit with B2B customers will become a more widespread practice over the coming months to allow customers more time to pay invoices as well as a tool to stimulate both domestic and foreign demand.