World Economy

Runaway Firms, Delayed Payments Increase in UAE

Runaway Firms, Delayed Payments Increase in UAERunaway Firms, Delayed Payments Increase in UAE

UAE companies are struggling to make payments on time as liquidity tightens in the region, and some have even been forced to flee the country to escape debts they cannot repay, new data reveals.

In the metals and construction sector, notifications of overdue payments soared by 26% between the fourth quarter of 2015 and first quarter of 2016, according to research from credit management company Coface, Arabian Business reported.

It found that average payment terms of companies operating in the sector rose from 120 days to 243 days–an increase of 102%.

Average payment terms in the information technology and electronics sector increased by more than three times from 30 days to 105 days, a 250% rise, while the petrochemicals sector saw average payment terms more than double from 30 days to 78 days, a 160% rise, Coface said.

The company monitors a sample of 33,000 companies in the UAE and Saudi Arabia, including the payments they make.

It said it had identified a significant increase in firms suffering from payment delays following an analysis of data collected between Q4 2015 and Q2 2016.

It calculated a total of 239 runaway, or ‘skipping’, companies–those that fled the UAE altogether to avoid paying debts–between July 2015 and March 2016. More than half (54%) of those were in the general trading business, it said, while the food sector saw 32 runaways, the IT and electronics sector saw 29 and the petrochemicals sector saw 18.

Coface Middle East CEO Massimo Falcioni told Arabian Business: “There is no proper insolvency law in the UAE (to help smaller companies restructure in times of financial stress)–if there was one, we would undoubtedly see a lower number of ‘skipping’ firms”.

Around 80% of Coface’s sample comprises small-to-medium-sized businesses while the remainder are larger, more established companies, Falcioni said.

  Lower Demand

He said the metals and construction sector was one of the hardest hit in terms of late payments because of rising commodities prices and lower export demand.

The markets that have traditionally requested metals and construction materials, such as China, have reduced their demand in the past year. “The profit margins of companies in this sector tend to be pretty low to start with, so if exports are impacted, there is the risk that their margins are totally eroded,” said Falcioni.

Runaway cases between the third quarter of 2015 and first quarter of 2016 were three times higher than the previous year, he added, but preliminary data from Q2 2016–not yet aggregated–suggests the situation is stabilizing.

Companies have sought to reduce their labor costs, renegotiate credit facilities and payment terms with banks and take out commercial insurance in response to tougher market conditions.