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Managing change

Hisham Farouk Hisham Farouk

The UAE economy has remained somewhat resilient in comparison to other markets, as a result of diversification, government initiatives and the ease of doing business. Whilst the country’s economy has remained fairly impervious, tightening of liquidity across the GCC, the impact of low energy prices and a deceleration in financial growth, credit and increased regulation still remains a challenge for businesses this year.

Globally, the outlook remains somewhat strained with the IMF having lowered its 2016 global growth forecast to 3.6% (from 3.8% in July 2015) with managing director, Christine Lagarde, warning that any increase in output this year will be “disappointing and uneven”. The fund has also revised down its world trade growth projection for this year from 4.4% in July 2015 to 4.1%.

Many believed that changes in the global economy and a decrease in growth in emerging economies like China coupled with the ‘oil crunch’ would herald another 2008 downturn, which seems to have remained a hypothesis, given for now we have avoided a similar economic crisis which historically, caused a pandemic around the world.

Although the current market conditions has seen another economic crisis being avoided, it has however allowed business leaders around the world to stop and take stock. In the famous words of Heraclitus ‘change is the only constant’ – but what happens when change is inevitable, unplanned for and comes without warning?

The current economic condition has enabled business leaders to stop and reevaluate their business purpose, approach and internal structures to ensure the business is operating at optimum efficiency. Alongside this, the outlook has also inevitably promoted a stronger regulatory environment and platform, particularly in the UAE which continues to further compete with international best practice, providing further security and aids in reducing any prolonged risk.

Business leaders are also digging deeper to analyze working capital and cash flow management. Working capital and cash flow management is essential for any business but more so for SMEs who are entering the market and looking to grow.

Positive cash flow specifies that the businesses liquid assets are on the rise, which will support in meeting supplier payments, paying debt, reinvestment into the business, amongst other commitments.

Negative cash flow specifies that the liquid assets are decreasing and thus can be a key indicator that the growth strategy may need to be revisited with payment terms and financial commitments being renegotiated (if required). 

Both financial elements impact all businesses, especially SMEs and their business operations. The higher the liquidity and cash flow, the more equity can be reinvested into the business, as well as providing a safeguard for any unforeseeable market changes. When market conditions are volatile, liquidity can support cash flow (if required), therefore being essential.

Alongside the regulatory environment and a greater emphasis on cash flow and working capital management, such economic conditions can also elicit business leaders to look deeper at economic cycles. Bridgewater's billionaire founder, Ray Dalio who has recently been called the Steve Jobs of investing wrote ‘How the economic machine works’ which highlights the basic driving forces behind the economy, along with explaining why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging.

Dalio believes that three main forces drive economic activity including trend line productivity growth, the long term debt cycle and the short term debt cycle. He believes that ‘by overlaying the archetypical short-term debt cycle on top of the archetypical long-term debt cycle and overlaying them both on top of the productivity trend line, one can derive a good template for tracking most economic/market movements” as illustrated in the diagram below which gives business leaders a ‘uncomplicated’ view of economic activity. He has credited such approach to his growth and believes that business leaders can unlock potential growth areas by analysing economic cycles using a similar method.


Predicament can often be looked at with hesitation, however by taking stock during challenging times and taking into account factors such as regulation, working capital management, cash flow management and looking at alternative methods to reevaluate the economic cycle, can ensure that businesses continue to ‘stand out’ in challenging times, with a view to emerging defiant, resilient and stronger as a result of managing economic change effectively. 

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