COVID-19 Middle East Updates
PwC Middle East
17 March 2020
PwC
Our focus for today
Welcome
Stephen Anderson
Strategy and Markets Leader, PwC Middle East
Coronavirus: Economic implications for the Middle East
Richard Boxshall
Chief Economist, PwC Middle East
Experience from China: PwC’s epidemic response management
framework for governments
Zhou Xing
North Markets Leader / COVID-19 Response
Centre Lead Partner, PwC China
Cash management and working capital priorities
Mo Farzadi
Business Restructuring Services Leader, PwC Middle East
Tax, VAT and customs implications
Mark Schofield
Tax and Legal Services Leader, PwC Middle East
Q&A
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COVID-19 checklist and resources
available
www.pwc.com/me/covid-19
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01
Coronavirus: economic
implications for the
Middle East
Richard Boxshall
Chief Economist, PwC Middle East
PwC
Two critical uncertainties frame the potential scenarios, first the duration
of COVID-19
New cases / wk
1
EARLY PEAK
Rapid rise in cases, peaking in Q2 2020.
2020
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DELAYED PEAK
Public health measures spread the peak
over a longer period of time.
2
Assume
vaccine
available –
June 2021
Assume
vaccine
available –
June 2021
2021
2022
2020
2021
2022
Assumptions:
Assumptions:
• Contact tracing and population distancing controls fail
to prevent a rapid growth in cases.
• Cases peak in summer 2020, with a decline as
population immunity levels increase.
• Potential for further peaks depending on the
seasonality of the virus.
• Contact tracing and population distancing controls
have some effect, spreading the impact of the
disease over a longer period of time.
The second critical uncertainty is the response from governments
and individuals to contain the spread of COVID-19
Containment
Mitigation
Complete lockdown
Targeted isolation
Examples
1. SARS - Quarantine with school
closures and entertainment restrictions
● The Singapore Government enforced
compulsory quarantine of any infected
persons
● The US government also issued travel
advice to US citizens not to travel to the
region
● Singapore, Hong Kong and China
governments closed schools
● Chinese authorities closed down
theatres, discos, and other entertainment
venues in Beijing
2. Ebola - Targeted isolation with
closure of border crossing and
schools
● Targeted isolation of areas with
confirmed cases of Ebola
● Liberia shut down border crossings
● Sierra Leone closed its borders with
Liberia and Guinea and closed a number
of schools around the country
Increasing Severity
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3. COVID-19 - Country lockdowns,
travel bans and forced isolation
● Wuhan and Italy placed in lockdown
● US issues travel bans to Europe and the
United Kingdom
● Overseas arrivals into Australia required
to isolate for 14 days
● Saudi Arabia suspend all international
flights due to COVID-19
● Spain and Philippine government’s
impose a nationwide near-lockdown in
hopes of tempering a coronavirus
The critical uncertainties - duration and response - help to understand the
potential outcomes
Short Duration
(~3-6 months)
Health Prioritisation
●
●
●
Quick Recovery
●
Delayed demand across all sectors
(consumption, investment, trade)
Weak businesses fail, strong survive
Sharp rebound in economic activity after
the peak has passed
●
●
Mitigation
(Targeted isolation)
Containment
(Mass isolation)
Prolonged Lockdown
●
●
●
Delayed demand in some sector (travel,
tourism, retail…)
Some weak business fail, but most survive
Sharp rebound in economic activity after
the peak has passed
Economic Preservation
Permanent loss in demand
Many viable business at risk (subject to
gov’t response)
Slow rebound as economies need to
rebuild
●
●
●
Lost demand in some sectors, slowdown in
demand elsewhere
Many business fail, particularly in most
affected sectors
Steady rebound after the peak
Long Duration
(6+ months)
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A global slowdown will be felt through five main economic channels
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Key channels
Potential impact
Oil market
Regional dependence on oil is high with a significant proportion of exports linked
to hydrocarbons. Falling demand, rising supply, and falling oil prices will limit the
fiscal space governments have and lower oil sector spending.
International travel
Travel restrictions imposed on air and maritime travel are impacting transit hubs.
Flight cancellations and reduced passenger hauls put airline companies and GDP
generated from transit and travel at risk.
Shipping and
logistics
Declining demand suggests supply chains and international trade will be
significantly impacted by the coronavirus. Declines in demand for imports will lead
to declines in logistic and shipping operations in the region.
Tourism
Initial indications show large declines in hotel occupancy; travel restrictions will
likely drive demand down further. Tourism contributes significantly to GDP in the
region and will be adversely impacted.
Investor sentiment
Investors sentiment towards emerging markets is declining as international
investors seek safer assets in uncertain times. Gulf countries are not immune and
have seen investors withdraw money from equities and bond spreads increase,
but the impact on FDI flows has yet to be seen.
GCC governments have started introducing policies to support their
economies
Central banks have moved policy rates in line with the Federal Reserve’s emergency rate cuts(1), and the region’s
governments are now beginning to roll out fiscal and financial market interventions to support their economies.
Financial market intervention
Fiscal policy
Bahrain and
Oman
No public actions announced as yet
● Oman MoF has issued a circular that all budgeted spend will be
reduced by 5%.
Kuwait
● Urged banks to consider loan forbearance
No public actions announced as yet
● Bank back-office operations to continue during 2 week closures
(i.e. process cheques, ensure ATMS are filled, operate call
centers, etc.)
Saudi Arabia
● SAR 50B loan package made available for banks to support
SMEs with loan deferral and, general operations
● Provides banks with SAR 800M to cancel all POS and
ecommerce fees for customers for 3 months
United Arab
Emirates
● Urged banks to consider loan forbearance
● Dubai announced small but targeted AED 1.5B stimulus
● AED 50B in zero interest loans for banks to support SMEs
package in the shape of targeted fee reductions for 3 months
● Reduced banks’ voluntary capital buffers to free up AED50B in
(0.4% of GDP)
capital
● Ghadan 21 in AD expanded to include 16-point stimulus plan
● Lower real estate LTV ratios; limits on bank fees for
with fee exemptions, fine waivers, SME support, and a AED 1B
interest/credit cards
market makers fund.
Qatar
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● State entities requested to propose cuts of at least 20% to their
budgets
Qatar announced a QAR 75B package (~10.7% of GDP); it includes QAR 10B of investments into the stock market, additional liquidity
for banks, and exemptions of food and medical supplies from customs duties.
(1) Only Kuwait has matched the Federal Reserve’s full percentage point rate cut in full, while the other central banks
have opted for smaller cuts
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Gov’ts in the region need to respond by supporting demand, injecting
liquidity and rebuilding confidence
Rebuild confidence
Communicate the sense of a plan, use large scale interventions actions and suggest more to come if needed e.g. ‘whatever it takes’
Break the link
Support local demand
Inject liquidity
Break the link from global slump
in demand and their local
economy (e.g. resist passing
through oil price declines to gov't
spending)
through target, temporary and timely
fiscal measures e.g. remove
business licensing fees, tax
deductions, cash handouts
into banking system e.g. increase
LTV ratios
Forbearance for
businesses
e.g. rescheduling loans, temporary
differals on monthly loan payments,
reducing fees and commision
International and regional cooperation
Coordinated response to support regional and global demand and discourage competitive actions
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Experience from China:
PwC’s epidemic response
management framework
for governments
PwC
Ms Zhou Xing
North Markets Leader / COVID-19
Response Centre Lead Partner,
PwC China
The Epidemic Response Management
Framework for Governments
Epidemic management targets
Emergency management mechanisms and organisation
Epidemic assessment, response strategy and action plans
Medical system and
epidemic prevention
Fiscal support
Public support and
public management
Political governance
structure
Security of supplies and
logistics
International relations
and cooperation
Social organisations
Infrastructure
Collection and
processing of
information and data
Macroeconomic policies
Religion
Politics and law
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03
Cash management
and working capital
priorities
Mo Farzadi
Business Restructuring Services,
PwC Middle East
PwC
Who is affected?
Most sectors are feeling the
current situation - consumer,
hospitality and retail markets
are particularly exposed
Middle East is experiencing a
double liquidity impact with both
COVID 19 and recent oil price
shocks
What can be done?
● Rapid drop-off in sales will squeeze
margins
● Weaker players will have little buffer to
absorb such a high and rapid shock
● Traditional financiers may be slow to
act given current volatility
● Uncertainty is creating short term cash
‘freeze’ on liquidity and decision making
There are three key priority
areas to pursue in parallel:
1
Cash flow forecasting
2
Working capital
3
Prepare financial
contingency plans
● Emergency cash control
measures are likely to be
needed
● Introduce rapid controls to
maximise cash conservation
● Prepare a contingency plan
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1.Cash flow forecasting
● Do you know the size of the
cash challenge for your
business?
● How can you manage this to
survive key pinch points?
● What controls and restrictions
need to be put in place?
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Challenges or concerns
● Unclear cash position and cash
forecasts
● Developing robust cash plans and
‘what if’ scenarios to model
impacts (e.g. changes in customer
demand etc)
● Weak cash controls need to
change so that those responsible
for cash recognise that ‘business
as usual’ principles no longer
apply
Next steps
● Develop a dynamic, rolling 13week short-term cash flow
forecast (“STCF”) and ongoing
process
● Flex the STCF to model various
scenarios and mitigating actions
including covenant impacts.
Develop a list of mitigating actions
that could be taken
● Identify any net funding shortfalls
and engage with shareholders and
other funding providers
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2. Working capital
management
● What levers are available to
pull?
● How can you prevent inventory
levels spiralling upwards, with
longer lead times and
production delays?
● Opportunities to optimise
receivables and payables will
be reduced - have you
developed a risk-based strategy
in this area?
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Challenges or concerns
● Fragmented sales, production and
cost planning - unable to assess
current sales demand with
adjusting production schedules
and purchasing
● Unclear who critical suppliers are,
to continue your operational
delivery
● Inadequate processes around
collections or invoicing, causing
further ‘lock-up’ in customer
payments
Next steps
● Prepare a list of key suppliers and
critical payments that must be
made to ensure operational
continuity
● Establish cash conservation
levers, including existing purchase
order review and purchasing
needs to assess the ability to
cancel or defer
● Establish inventory flow visibility
and optimise stock management
in the face of potential lead time
changes and demand volatility
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3. Contingency planning
● What options do you have if
there is insufficient cash to run
your business?
● Who are your stakeholders,
what are you saying to them,
and when?
● How well do your stakeholders
understand your business?
● Can you articulate the ‘return to
normal’ story?
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Challenges or concerns
● What alternative strategic options
are available to your business?
● Increasingly difficult conversations
with your financial stakeholders
● Responding to requests from
other financial stakeholders where
additional liquidity is being sought
or considered
● Recent impacts creating a need to
fundamentally re-think current
plan?
Next steps
● Establish a realistic plan and
timetable for any new or
alternative strategic scenarios
including risks, financial and non
financial considerations
● Understand your range of options
and test them with friendly
relationships
● Identify surplus or non-core assets
that could provide you with more
time
● Establish alternative plans,
scenarios and mitigation
strategies to maximise range of
options / value
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04
Tax, VAT and customs
implications
Mark Schofield
ME Tax and Legal Services Leader,
PwC Middle East
PwC
Global tax measures
Countries around the world are turning to emergency tax breaks to support
their economies against the Coronavirus (COVID-19) pandemic
China has cut VAT on the following
services:
● Medical services
● Catering and accomodation services
● Sundry personal services
● Public transport
● Masks and protective clothing
Extensions:
● Extending the Tax Filing Deadline in
March to March 23, 2020
● The General Administration of
Customs has temporarily extended
the deadline for tax payments
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●
●
●
●
●
Japan has delayed Consumption Tax
filing deadlines and payments by 1
month until 1 April 2020.
South Korea has cut VAT for small
businesses and given tax deductions
on personal credit card spending.
Vietnam is proposing cutting VAT for
restaurants, hotels, transport and
tourism companies.
Indonesia has said it will waive taxes
on hotels and restaurants in Bali and
nine other tourist destinations for the
next three months.
Nigeria is considering suspending its
recently introduced VAT regime.
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Tax implications & considerations
Areas of consideration
Cash flow
management
Decrease in sales will lead to additional cash flow burden on businesses that have incurred VAT
on purchases and expenses.
● Cost reduction exercises
● Accelerated input tax recovery
● Identify and assess purchase invoices
● Bad debt relief
Managing
refund
claims
For most, VAT is intended to be ‘tax neutral’ because it can be offset against input VAT in the
supply chain. But in reality, VAT can create burdensome costs that must be actively managed.
● Review unclaimed input tax and missed or delayed refunds
● Claim refund of the accumulated VAT refundable balance
● With routines disrupted, taxpayers should consider options for managing tax authorities’
requests related to refund claims in an effective and timely manner
Supply
chain
disruption
As businesses respond to the crisis, they will likely encounter customs and supply chain
challenges, which if not addressed properly, could escalate into bigger issues.
● Short term supply chain challenges
● Customs constraints
● Long term considerations
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Key tax measures taken across the region
Country
Measures
●
The General Secretariat of the Tax Committees “GSTC” announced that all the appointments of the
scheduled hearing sessions in front of the Tax Committees (Resolution and Appellate) will be suspended
until further notice, and all parties will be notified with the new appointments
●
E-filing for all types of income tax declarations is now mandatory. Persons who are not yet registered in
the e-filing services can register online
Communication and liaison with general tax authority through emails (no physical visits)
KSA
Lebanon
●
Oman
●
Oman PRI filings are currently due by 31 March. If further lockdowns are announced similar to other GCC
countries (other than essential services), it is likely an extension would be granted
●
The income tax filing deadline for year ended 21 Dec 2019, is extended from 30 April 2020 to 30 June
2020
Communication and liaison with general tax authority through emails/phones (no physical visits)
Qatar
●
UAE
Palestinian Territories
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●
●
Dubai Customs have put audits on hold
Part of the stimulus package released by the Dubai Government includes a refund of 20% on the customs
duties paid for locally sold imported goods, cancellation of bank guarantee required to clear goods, and a
90% reduction of clearance fees
●
No changes on the tax submission dates in the West Bank but tax authorities suspended tax settlement
sessions and are providing limited services only
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Looking beyond the immediate concerns
Organisation for Economic
Cooperation &
Development (OECD)
The OECD is coordinating with
governments to assess the tax
policies and administrative
measures announced by
governments in response to the
COVID-19 pandemic
The OECD is also monitoring the
situation and providing guidance on
this area
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Economic Substance
“Trapped” directors and senior
employees are not able to physically
meet and make decisions as a
collective group, creating pressure
on businesses’ ability to evidence
that economic substance
requirements have been met
Jersey has announced that a
company would not fail the
economic substance test due to a
change in operating practices as a
result of the outbreak
International tax landscape
& long-term impact
The COVID-19 pandemic has
highlighted the importance of
technology to ensure business
continuity
130+ Inclusive Framework member
countries are currently working
towards a globally-coordinated and
unified approach to address tax
challenges on the digital economy
The potential impact of the
pandemic on the ‘BEPS 2.0’ project
progress should be monitored
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Contact us
Stephen Anderson
Richard Boxshall
Zhou Xing
Mo Farzadi
Mark Schofield
ME Strategy and Markets
Leader
Chief Economist
North Markets Leader /
COVID-19 Response
Centre Lead Partner
Business Restructuring
Services Leader
ME Tax and Legal
Services Leader
PwC Middle East
stephen.x.anderson@pwc.com
PwC Middle East
boxshall.richard@pwc.com
PwC China
xing.zhou@cn.pwc.com
PwC Middle East
mo.farzadi@pwc.com
PwC Middle East
mark.schofield@pwc.com
PwC
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