Middle East CFO Optimism at two year low in Q4 of 2011

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Global CFO optimism is wavering, according to a recent study by Deloitte entitled ‘Q4 2011 Global CFO Signals Report’. Conducted on a semi-annual basis for the past two years in the Middle Eastern region, the Deloitte CFO survey is the only report for major corporate users of capital that gauges attitudes towards the general economic outlook, financing, valuations and risk.
The decline in CFO optimism is tied to the continued social upheaval and conflict which the Middle East has witnessed since 2011, coupled with uncertainty and risk aversion in business dealings. The Deloitte survey also shows that decline in CFO positive sentiment is further reflected in expectations for operating cash flow to be generated in the coming 12 months, where only 47 percent of CFOs surveyed in the Middle East expect operating cash flows to increase, down from 82 percent in the previous year.
“While CFO optimism in the Middle East has declined, the economic fundamentals of the region remain strong, relative to other parts of the world. It is the prospect of unexpected events or ‘Black Swans’ which weigh heavily on the minds of CFOs at the moment,” commented James Babb, CFO program leader at Deloitte in the Middle East. “CFOs in the region would do well to assess the events of the past year and to focus more time in their roles as strategists and catalysts for their organizations in this time of uncertainty,” he added.

A net 68 percent of CFOs in the Middle East reported an above average level of financial and economic uncertainty facing their business. Findings also show that 46 percent of them do not believe now is a good time to be taking greater risk onto their balance sheets which is up from a net 5 percent in Q1 2011.

Globally the picture is not too positive either according to surveyed CFOs in many countries. By many accounts, 2012 may turn out to be a difficult year. Thanks to continuing sovereign debt troubles in the Euro zone, the social upheaval in the Middle East, dwindling global demand, and global concerns over economic uncertainty, CFO optimism remained at low levels almost worldwide during the fourth quarter of 2011. Moreover, this weakening sentiment dampened CFO expectations in many countries.

The situation is particularly pronounced in Europe. In the UK, in fact, CFOs have no doubt that the biggest threat to their businesses in 2012 comes from a potential breakup of the European Union. Almost 40 percent of UK CFOs see a high probability that one or more member states will leave the single currency in the course of 2012. In Belgium, 76 percent of CFOs report that the Euro crisis is impacting their companies negatively, and in Switzerland, the pessimistic outlook is compounded by the perception that the Swiss Franc is overvalued and by fear of a drop in demand, and 53 percent of them expect a recession in 2012, while their financial outlook for their own companies has decreased for the third consecutive quarter.
In North America, and while the focus appeared to turn back toward growth in Q4, CFOs remain worried that the debt crisis might not be contained and that a spillover might threaten consumer and capital markets throughout the world. CFOs in this continent also say they need talent with stronger analytical skills, political acumen, and macro-economic knowledge to deal in this environment.
Here is a summary of main findings of the Middle East region’s CFO views and expectations in the Deloitte survey:

Declining expectations for M&A activity

In addition, the Deloitte Q4 2011 Middle Eastern CFO Survey finds that expectations regarding the levels of M&A activity reached a two year survey low. A net 40 percent of CFOs reported an expected increase in M&A over the coming 12 months down from a net 63 percent in Q1 and a net 82 percent in Q3 2009.
Financing the corporate sector – Less attractive funding sources

Bank borrowings, equity and external debt sources of funding have each declined in attractiveness between Q4 and Q1 among CFOs in the Middle East, the Deloitte survey finds. Bank borrowings were viewed as attractive by a net 45 percent (Q1 68 percent) followed by equity with a net 11 percent (Q1 38 percent) and corporate debt 29 percent (Q1 61percent).

Regarding cost and availability of credit, 20 percent of CFOs view new credit as costly, down from a net 58 percent in Q1. While cost may have improved, new credit availability has become more difficult to secure according to 48 percent of CFOS compared to 23 percent in Q1.

Looking further out, a net 57 percent of CFOs believed that the availability of debt capital will increase over the next 3 years. This maybe an unreasonable expectation given that an approximate US$12-15 trillion in corporate debt globally is due for maturity over the next 3 to 5 years.

Furthermore, a net 56 percent of CFOs believe their companies weighted average cost of capital will increase over the next 3 years. In an uncertain market environment it is a reasonable expectation that a number of risk premiums have the potential to increase during that time period.

The Role of the CFO – More authority and support needed

As for their role within their respective organization, CFOs are still finding themselves spending more time in the operator and steward roles than they feel they should. One of the constraints CFOs may have in fulfilling their responsibilities as strategists and catalysts is the perceived lack of support provided from the Board and CEOs in these roles. Fifty-two percent of CFOs viewed lack of authority and support as a constraint to fulfilling their role as strategists, while 55 percent felt the same in their role as catalysts.

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