Optimism’s good, but is it right?

Optimism’s good, but is it right?

Dynamic corporate leaders in the region are increasingly approaching their roles with optimism and energy. But this contrasts with analysts, who remain resolutely cautious about the economic environment.

June 22, 2010 2:29 by Katherine Azmeh

Middle East CFO’s are bullish on the general economic outlook for the region, Deloitte’s second Middle East CFO survey found.

Corporate chiefs overwhelmingly (75 percent) expect their company’s operating cash flows to increase over the coming 12 months, and they are increasingly optimistic about their companies’ financial prospects for the period. Most say they expect merger and acquisition activity to increase as well.

On a personal level, they express a dynamic energy about their professional functions, and a rather entrepreneurial approach to their role within the larger organization. Most CFOs say that ideally, they should be spending a greater proportion of their time as strategists, rather than stewards of the operation. Their optimism about the general business climate is accompanied by this energetic approach to their professional roles; they say they are best utilized as catalysts for business improvement, not as passive stewards of the operation.

Is this new found optimism good news? And is it justified? Let’s see how their upbeat attitudes square with those of market analysts.

The survey authors at Deloitte & Touche say that, with a view to their individual balance sheets, “CFOs do not seem to have achieved any significant deleveraging over the past six months so financial risks remain which should be monitored and tracked closely.”

And this cautious caveat has other supporters. Moody’s Investor Service said last month in a report on the GCC corporate sector that a huge wall of maturing debt will present itself by 2012, and will pose a major challenge for the GCC corporate environment. The majority of the maturing debt is held by entities in Dubai and Abu Dhabi, and this is expected to reverberate through the regional credit environment, constraining liquidity, particularly in the case of issuers that do not benefit from government support.

Despite this sentiment from observers, 64 percent of CFOs surveyed by Deloitte say that markets for external finance have improved over the past six months, particularly for bank borrowings and equity-raising.

And while Moody’s suggests that stabilizing the credit environment will require an improved regulatory framework, especially the insolvency regime, regional CFOs in the Deloitte survey say they do not see the need for further government intervention or stimulus measures at this time.

To juxtapose CFO sentiment and analyst predictions is instructive. While Moody’s analysis identifies liquidity and government support as two common denominator variables that cut across industries, the Deloitte survey finds that corporate heads in the region expect cash flows to increase, see improvements in the markets for external finance, and do not see the need for further government intervention.

Confidence is always good in the market place, but it remains to be seen whether the CFOs’ market optimism is warranted. The situation will be eagerly followed by the cautious analysts, not to mention shareholders and would be investors.