Deloitte: Middle East CFO optimism among highest globally in Q2 2012

Entitled 'Retrenching Again,' the report provides highlights of recent CFO survey results gathered by Deloitte from around the globe, gauging attitudes towards the general economic outlook, financing, valuations and risk.

"Globally, pessimism amongst CFOs is growing, having increased from the first quarter of 2012," says James Babb, Deloitte Middle East CFO Program Leader.

"Continuing worries associated with the Eurozone debt crisis, fears of potential slowdowns in China and India, and renewed concerns about the U.S. economic situation have collided to make CFOs rethink their positive vibes. Yet, the main exception out of the 11 geographies surveyed is the Middle East, where optimism amongst CFOs is growing," he added.

In the Middle East, more than half of CFOs say they are optimistic about their company's prospects, but that is down from 72% in the first half of 2011. The price of oil and market growth in that region continues to bolster optimism. But political tensions in the region, coupled with the Eurozone crisis, are giving some finance chiefs pause, with 74% of them rating the general level of external financial and economic uncertainty as either above normal or at a high level.

Highlights from the 2012 Middle East CFO Survey include:

• CFOs continue to have a "risk off" attitude toward protecting their balance sheets. Still, some 45% of CFOs expect the total debt on their balance sheets to increase a little over the next three years.

• Some 60% of CFOs expect the levels of M&A in the MENA region to increase, up from 43% in Q3 2011.

• Priorities for the next 12 months increasing cash flows and cash balances, reducing costs, as well as selective acquisitions, funded internally.

No appetite for risk

Many CFOs agree that now is not the time to be taking more risk onto their balance sheets — and given their cash holdings, they probably don't have to. CFOs in the Middle East continue to view risk negatively with 72% saying now is not the time to take more on, despite the fact that 60% expect levels of mergers and acquisitions (M&A) to somewhat increase in that region.

Optimism tempered

In the Middle East, CFO optimism for the first half (H1) 2012 remains somewhat low compared to earlier surveys, primarily due to the political tensions in the region and the crisis within the Eurozone. Factors that kept the CFOs in the Middle East optimistic are rising oil prices and regional market growth. Overall, however, 52% of CFOs are optimistic about their own company's prospects compared to the last survey. That is down from 72% in the first half of 2011.

Priorities for the future

Over the next 12 months, CFOs are focused on reducing costs and increasing cash flow. Disposing of assets and capital expenditure and raising dividends/share buybacks are not high priorities. In fact, some 35% of the CFOs expect free cash flow to increase by up to 10%, primarily driven by increasing revenues. Some 60% of the CFOs expect the levels of M&A activity in the Middle East and North Africa (MENA) region will increase. This is up from 43% in Q3 2011. The respondents are most likely to use existing cash or operating cash flow to fund these transactions. However, only 38% of the CFOs would look into acquiring in a new geographical region. This focus on potential acquisitions stems from the view of almost 50% of CFOs that equity values are somewhat undervalued; 27% believe they are at fair value.

Facing uncertainty

A combined 74% of the CFOs rated the general level of external financial and economic uncertainty as either above normal or at a high level. Due to this level of uncertainty, when asked if it is a good time to be taking greater risk with their balance sheets, 72% of the respondents said "no."

Cash is king

Some 45% of the CFOs expect the total debt on their balance sheets to increase a little over the next three years, with the expectation that their ability to service their debt to slightly increase or remain the same. When asked to rank their debt reduction strategies over the next three years, CFOs cited utilizing cash reserves as the top strategy, followed closely by asset sales and equity issuance.