Expectedly, business executives in the Middle East region are generally uncertain and cautious about the economy, their growth prospects, and their appetite to pursue M&A, as per the latest edition of the EY Global Capital Confidence Barometer (CCB). Of the executives surveyed, 77% expect the COVID-19 pandemic to have a severe impact on the global economy, while 25% think it will have a significant effect on the local economy. However, some executives remain cautiously optimistic, and there is a general acknowledgement that the impact will vary by region and sector. With airlines and mobility in the region heavily impacted, and global supply chains and production disrupted, MENA respondents of the survey agree that hospitality, automotive, discretionary retail, and transportation will be the sectors most negatively affected by the current crisis. In the United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA), respondents are more pessimistic about the impact of the pandemic, with 88% and 85%, respectively, expecting the global economy to be severely impacted. When asked about the local economy, 35% of UAE executives and 32% of KSA executives are bracing for a significant negative impact. In Egypt, only one-fifth anticipate a severe impact locally, while one-third expect it to have no impact at all. Overall, half of MENA respondents agree that the pandemic will have a minor impact on profitability and margins. Matthew Benson, MENA transaction advisory services leader, EY, said, "Given the significant disruption caused by the crisis, MENA governments have pursued a range of initiatives to create an environment for businesses to survive through this period and eventually thrive. "While regional companies initially felt financially insulated from the pandemic due to most being well-capitalized, the large breadth and duration of the impact has forced a shift in thinking. MENA corporates are now balancing between cautious optimism that the region will be less impacted than the rest of world and preparing for tough times ahead. "Every sector will follow a different path, with some emerging unscathed, while others fight for their survival. We are hence beginning to see a level of stress that is catalyzing some businesses to shore up liquidity and divest non-core assets." Digital transformation plans pre-crisis now supporting recovery A more positive trend emanating from the MENA region is its emphasis on rapid digitization. The survey found that 80% of MENA executives say that their company is already undergoing a significant business and technology transformation to meet profitability goals, which presents opportunities in the current market. Additionally, 67% and 73% of MENA executives, respectively, are re-evaluating or taking steps to change their digital transformation and speed of automation initiatives, in response to the pandemic. Supply chain reinvention has become essential The CCB reports that 92% of MENA executives are considering or making changes to their global supply chain. MENA economies rely on imports, not only for discretionary goods, but also for day-to-day essentials, making them vulnerable to supply chain uncertainties. As a result, GCC governments are also considering a range of options for industries to flourish, from policy interventions, to promotion of local manufacturing, to building local or regional supply chains, to creating digitally networked supply chains that are data-driven and can react to events in real time. M&A appetite remains healthy Although overall M&A sentiment has decreased and percentages are lower than the first half of 2019, 62% of MENA executives remain optimistic that the global M&A market will improve in the next 12 months. Locally, MENA executives are equally optimistic, particularly among those who responded later during the survey period. In the immediate term, MENA executives in the region expect a slowdown in conventional M&A activity as companies focus on shoring up liquidity, driving cost efficiencies and, preserving value. However, the pandemic and lower oil prices are expected to accelerate consolidation across sectors and sale of non-core businesses held by merchant families. Across the region, 54% of MENA executives say they plan to actively pursue M&A in the next 12 months, only slightly lower than six months ago. In the UAE, intentions are actually higher, with 56% looking to pursue M&A in the next year, versus 45% in October 2019. Conversely, in KSA, intentions are down from 63% six months ago to 57% in this survey. In Egypt, although it would appear executives have lowered their expectations, with 49% expecting to be active in the M&A market, deal intentions remain higher than the long-term average of 39%. Of the MENA companies surveyed, 45% will use M&A to strengthen their resilience and position for recovery through bolt-on acquisitions and 30% for transformative deals that could fundamentally reshape their business. Others that are less well-capitalized may find themselves forced to raise capital though divestments, either through full-enterprise sales processes or sale of minority stakes. Anil Menon, MENA M&A and Equity Capital Markets Leader, EY, said, "COVID-19 is a great reset that will provide amazing acquisition opportunities. Sovereigns, large merchant families and corporations are aggressively looking at tactical buying opportunities. "The established totems of capital allocation will be re-examined as many companies with weak business models curate capital sources and structure to weather the pandemic. We expect consolidation, distress M&A, and accelerated digitization to drive deal volumes." — SG
