SMEs in the Emirates struggle to cope as oil fall bites

Small and medium-sized enterprises in the UAE felt the heat from the plunge in the price of oil in the third quarter amid belt tightening as payment collection and raising finance became more difficult, according to a survey by Gulf Finance.

SMEs are also grappling with a slowdown in orders, and they cited a drop in the third quarter compared to the second quarter, Gulf Finance, the financing unit of the Dubai-based investment bank Shuaa Capital, said in the survey results published today.

Looking ahead, Gulf Finance's chief executive said the lull in the price of oil, a key driver of growth in the Middle East, may yet dampen business confidence some more.

“We’re not out of the woods yet,” David Hunt said. “The overall market, the bias is towards the downside at the moment and towards lower growth expectations and the market is expecting tightening liquidity.”

The survey, which polled mostly Dubai-based SMEs, also found for the first time that SME orders weakened. Seven per cent of respondents said their orders had decreased in the third quarter. In the second quarter, respondents reported no change in orders.

Meanwhile when it came to collecting, only 55 per cent of respondents said that their payment collection ability remained strong in the third quarter compared to 72 per cent in the second quarter. About 13 per cent of respondents said they found it more difficult to raise money. In the second quarter no one expressed difficulty getting money to fund growth.

UAE Government officials have been counting on small businesses to play a key role in the development of the economy. SMEs account for 86 per cent of the workforce in the private sector, according to the Ministry of Economy. And 300,000 companies can be classified as part of the SME sector, according to ministry data.

The push to promote SMEs however has been handicapped by the slowing economy, after the steepest drop in the price of oil since 2008.

That nervousness on the hiring front has also hit SMEs, with the survey showing that 4 per cent of SMEs surveyed in the third quarter reduced staff compared to the second quarter when the headcount was steady.

As a result of the oil slump, many economists – including those at HSBC, Standard Chartered and the IMF – have lowered growth forecasts for Arabian Gulf countries this year. The UAE is forecasting growth in excess of 3.5 per cent this year, according to Sultan Al Mansouri, the Minister of Economy. The economy grew by more than 4 per cent last year.

Banks have been more open to lending to SMEs in the past few years as the margins they make on loans to big corporations tighten amid low interest rates. Because small businesses are riskier, loans to them command higher interest rates.

Not all banks are having a happy time with SMEs. United Arab Bank, the Sharjah-based lender, said this month that it lost Dh272.6 million during the third quarter because of bad commercial loans.

While the bank did not specify which segment it was from exactly, the Egyptian investment bank EFG-Hermes said it most likely involved SMEs, and could be a harbinger of more problems to come related to bad debt at banks.

Not everything, however, is gloomy, Mr Hunt said, and a reversal in the price of oil could bring about a burst of confidence.

Craig Moore, the chief executive of Beehive, a peer-to-peer platform that brings lenders and borrowers together online, said that many SMEs that depend on businesses reliant on commodities, or are engaged in exporting to other emerging markets where currencies have depreciated heavily, have suffered.

But he said that there were many SMEs in the technology field that are thriving, and lining up to take on more debt.

“We see a lot of businesses that don’t have any credit, so they are coming to us for the first time to get credit and they are doing that because they see the opportunity for growth,” Mr Moore said. “They have not needed credit to get to where they are today, but they will do it if they see an opportunity.”

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