Arabtec, Garuda, Turkey: Private and public financial obligations are mounting concerns in Islamic nations

“With the worldwide economy dipping into economic downturn, payment default risks are growing.” That’s the cooling financial outlook from Andreas Tesch, the Chief Market Officer at trade credit insurance company Atradius.

The aftermath of the COVID-19 pandemic sees decreased demand paired with increased monetary tension that impacts huge and little, corporate and public.

CORPORATE DEBT

Due to the virus pressing the world economy into recession, international business insolvencies will increase by 26% in 2020, Atradius projections.

The UAE contributes a current, prominent example.

On October 1, Arabtec announced that its shareholders voted to liquify the business due to its “illogical monetary scenario”. It reported a bottom line of 794 million dirhams ($216 million) in the first half of 2020. The business renowned for building the Burj Khalifa and Louvre Abu Dhabi had total liabilities of about $2.75 billion at the end of June, consisting of almost $500 million in bank borrowing.

Debt, be it conventional or Islamic, is not shunned however it is a concern on the debtor if not kept under control, and this year’s financial slump has struck the ability of lots of companies to get a grip on their finances.

“The building sector will face headwinds in 2021 with a slow healing, however the speed of healing will be uneven across countries in the area,” Yasmine Ghozzi, Economist at data and analytics company GlobalData stated, after cutting the projection for the UAE building and construction output development to (-4.8%) from an earlier forecast of (-2.1%). With organization and leisure travel at record low levels because the coronavirus break out, air travel, in particular, feels significant financial pressure.

Indonesian airline Garuda’s very first six-month report shows its $78 million earnings earned during the January to June 2019 duration dropping to a $728 million loss. Deep at a loss and with really little income incoming due to flight still being grounded by the pandemic, the flag provider is having a hard time to service its financial obligations. At the half-way mark this year Garuda’s net debt was $6.896 billion compared to $1.539 billion at the end of 2019.

Next door, Malaysia Airlines is still in discussions with lenders on its restructuring workout. It’s bring 16 billion ringgit ($3.86 billion) worth of financial obligation.

Both Garuda and Malaysia Airlines have actually delayed on their sukuk repayments this year.

Turkish Airlines’ bottom line more than tripled within twelve months and stood at $654 million at the end of June.

The provider’s cash and cash equivalent position dropped by over 15% from $2.075 billion at the end of 2019 to $1.761 billion within six months, while short term loanings grew by 26% to $1.567 billion. Total non-current and existing liabilities for the first half of the year came to almost $19 billion.

Yet, Turkish Airlines denied media reports about seeking capital support or new financing in a public disclosure on its website in early October.

The alarming trend of rising debt does not stop at the corporate level.

PUBLIC FINANCIAL OBLIGATION

Even before the onset of the COVID-19 pandemic, public debt levels were installing for some Islamic countries.

“Debt is what enables governments to have extra resources they require to invest in health systems, education, or facilities,” stated World Bank Chief Economic Expert Carmen Reinhart on the event of the 2021 International Financial Obligation Stats (IDS) report launched on October 12.

“If you have a financial obligation problem, all those ambitions suffer. That’s why it is very important to get the debt onto sustainable ground as rapidly as possible. We can’t pay for another lost decade,” Reinhart added.

According to the report, middle and low-income countries’ total external debt climbed up 9.5% to a record of $744 billion in 2019.

The top 10 debtors are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Thailand, Turkey and South Africa. They represented nearly 60% of all low- and middle-income countries’ foreign debts, excluding China, with financial obligation increasing by 4.1% to $3.6 trillion in 2019.

Islamic countries

Within the previous 5 years Turkey’s gross external financial obligation grew by 10.2% to $440.78 billion, leading to an external financial obligation stock to Gross National Income ratio of 59%.

Indonesia’s gross external debt increased in the very same duration by over 30.6% to $402.08 billion, but handle a financial obligation to GNI ratio of only 37%.

Sovereign Financial Obligation Credit Rankings S&P Fitch Moody’s
TURKEY Jan 2020:

B+ Steady

Jul 2020:

B+ Stable

Nov 2019:

BB- Steady

Aug 2020:

BB- Negative

Jun 2019:

B1 Unfavorable

Sep 2020:

B2 (5 levels below investment grade) Negative

INDONESIA May 2019:

BBB Stable

Apr 2020:

BBB Negative

Jan 2020:

BBB Stable

Aug 2020:

BBB Stable

Feb 2020:

Baa2 Steady

Sep 2020:

Baa2 Steady

HOW TO ACHIEVE LONG-TERM DEBT SUSTAINABILITY?

“It will require a large-scale shift on the planet’s method to financial obligation and financial investment openness,” the World Bank Group President David Malpass said.

While he described the public sector, a mindset shift and openness will work similarly for the business sector.

Ensuring appropriate financial sustainability will be vital to survival for both.

Emphasizes of Atradius Survey Payment Practices Barometer Asia June 2020 (the survey consisted of China, Hong Kong, India, Indonesia, Singapore, Taiwan, UAE)
INDONESIA UAE
Late payments from B2B consumers increased considerably, reaching 50% of the total value of B2B billings released by respondents. Late payments impact approximately 72% of the overall worth of B2B billings released by UAE participants (substantially above the 52% average for Asia).
41% of respondents reported chasing late payments from B2B customers and increasing resources, costs and time to do so. For the majority of respondents (68%, well above the 49% regional average), late payments by B2B customers are chiefly due to liquidity concerns.
Indonesian business focus on payments in money or cash equivalents.

Credit-based

B2B sales balanced 64% of respondents’ total B2B sales value, 36% negotiated on a cash basis.

This percentage is the highest in Asia and is significantly above the 56% local average, indicating the crucial function that trade credit has in UAE B2B trade.

The typical 57 days from invoicing is the longest taped across all the nations surveyed in Asia and well above the 43-day local average.

Participants reported that they had the most problem collecting arrearages from B2B customers in the chemicals, ICT/electronics and food & beverage markets. Late payments in the UAE agri-food industry represent approximately 73% of the overall value of the B2B invoices released.

Clients in the UAE agrifood industry pay invoices late most often due to liquidity lacks (57% of study participants) while for 33% of respondents, late payments are attributable to B2B consumers using exceptional invoices as a type of financing.

(Reporting by Petra Loho; Editing by Emmy Abdul Alim [email protected])

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