PwC

COVID-19 Middle East Updates

PwC Middle East

17 March 2020

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WelcomeStephen Anderson

Strategy and Markets Leader, PwC Middle East

Coronavirus: Economic implications for the Middle EastRichard 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 prioritiesMo Farzadi

Business Restructuring Services Leader, PwC Middle East

Tax, VAT and customs implicationsMark Schofield

Tax and Legal Services Leader, PwC Middle East

Q&A

Our focus for today

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COVID-19 checklist and resources available

www.pwc.com/me/covid-19

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Coronavirus: economic implications for the Middle East

01

Richard Boxshall

Chief Economist, PwC Middle East

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EARLY PEAK

Rapid rise in cases, peaking in Q2 2020.

DELAYED PEAK

Public health measures spread the peak

over a longer period of time.1 2

2020 2021 2022 2020 2021 2022

Ne

w c

ases / w

k Assume

vaccine

available –

June 2021

Assume

vaccine

available –

June 2021

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.

Assumptions:

• Contact tracing and population distancing controls

have some effect, spreading the impact of the

disease over a longer period of time.

Two critical uncertainties frame the potential scenarios, first the duration of COVID-19

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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

Mitigation Containment

Targeted isolation Complete lockdown

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

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

Examples

Increasing Severity

The second critical uncertainty is the response from governments and individuals to contain the spread of COVID-19

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Short Duration

(~3-6 months)

Long Duration

(6+ months)

Containment

(Mass isolation)

Health Prioritisation● 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)

Prolonged Lockdown● Permanent loss in demand

● Many viable business at risk (subject to

gov’t response)

● Slow rebound as economies need to

rebuild

Quick Recovery● 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 ● Lost demand in some sectors, slowdown in

demand elsewhere

● Many business fail, particularly in most

affected sectors

● Steady rebound after the peak

The critical uncertainties - duration and response - help to understand the potential outcomes

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Key channels Potential impact

Oil marketRegional 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 travelTravel 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.

TourismInitial 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.

A global slowdown will be felt through five main economic channels

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GCC governments have started introducing policies to support their economiesCentral 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.

(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

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

● Bank back-office operations to continue during 2 week closures

(i.e. process cheques, ensure ATMS are filled, operate call

centers, etc.)

No public actions announced as yet

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

● State entities requested to propose cuts of at least 20% to their

budgets

United Arab

Emirates

● Urged banks to consider loan forbearance

● AED 50B in zero interest loans for banks to support SMEs

● Reduced banks’ voluntary capital buffers to free up AED50B in

capital

● Lower real estate LTV ratios; limits on bank fees for

interest/credit cards

● Dubai announced small but targeted AED 1.5B stimulus

package in the shape of targeted fee reductions for 3 months

(0.4% of GDP)

● Ghadan 21 in AD expanded to include 16-point stimulus plan

with fee exemptions, fine waivers, SME support, and a AED 1B

market makers fund.

Qatar 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.

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Gov’ts in the region need to respond by supporting demand, injecting liquidity and rebuilding confidence

Break the linkBreak the link from global slump

in demand and their local

economy (e.g. resist passing

through oil price declines to gov't

spending)

Support local demandthrough target, temporary and timely

fiscal measures e.g. remove

business licensing fees, tax

deductions, cash handouts

Inject liquidityinto banking system e.g. increase

LTV ratios

Forbearance for

businessese.g. rescheduling loans, temporary

differals on monthly loan payments,

reducing fees and commision

Rebuild confidenceCommunicate the sense of a plan, use large scale interventions actions and suggest more to come if needed e.g. ‘whatever it takes’

International and regional cooperationCoordinated 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

02

Ms Zhou Xing

North Markets Leader / COVID-19

Response Centre Lead Partner,

PwC China

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12

The Epidemic Response Management Framework for Governments

Emergency management mechanisms and organisation

Epidemic assessment, response strategy and action plans

Political governance

structure

Security of supplies and

logisticsSocial organisations

International relations

and cooperation

Infrastructure

Collection and

processing of

information and data

ReligionMacroeconomic policies

Medical system and

epidemic preventionFiscal support Politics and law

Public support and

public management

Epidemic management targets

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Cash management and working capital priorities

03

Mo Farzadi

Business Restructuring Services,

PwC Middle East

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● 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

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

Who is affected?

● Emergency cash control

measures are likely to be

needed

● Introduce rapid controls to

maximise cash conservation

● Prepare a contingency plan

What can be done?

There are three key priority

areas to pursue in parallel:

1 Cash flow forecasting

2

3

Working capital

Prepare financial

contingency plans

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● 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?

1.Cash flow forecasting

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 13-

week 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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● 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?

2. Working capital

management

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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● 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?

3. Contingency planning

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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Tax, VAT and customs implications

04

Mark Schofield

ME Tax and Legal Services Leader,

PwC Middle East

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Global tax measures

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

● 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.

Countries around the world are turning to emergency tax breaks to support

their economies against the Coronavirus (COVID-19) pandemic

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Areas of consideration

20

Cash flow

management

Managing

refund

claims

Supply

chain

disruption

Tax implications & considerations

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

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

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

KSA

● 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

Lebanon

● 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)

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

Qatar

● 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)

UAE

● 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

Palestinian Territories● 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

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

23

Stephen AndersonME Strategy and Markets

Leader

PwC Middle East

stephen.x.anderson@pwc.com

Richard BoxshallChief Economist

PwC Middle East

boxshall.richard@pwc.com

Mark SchofieldME Tax and Legal

Services Leader

PwC Middle East

mark.schofield@pwc.com

Mo FarzadiBusiness Restructuring

Services Leader

PwC Middle East

mo.farzadi@pwc.com

Zhou Xing North Markets Leader /

COVID-19 Response

Centre Lead Partner

PwC China

xing.zhou@cn.pwc.com

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Established in the Middle East for 40 years, PwC has 22 offices across 12 countries in the region with around 5,600 people. (www.pwc.com/me).

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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