UAE businesses lack integral approach to inflation response

17 August 2022 3 min. read

Businesses in the United Arab Emirates are taking a relatively one-sided approach to their inflation response. While leveraging the power of pricing can do the trick on the short term, on the longer-run a more integral approach will be needed to protect margins – and capitalise on opportunities.

In its latest ‘International Business Report’, a regular survey by Grant Thornton among 5,000 mid-market businesses across 25+ countries, the accounting and advisory firm gauges the sentiment of leaders on key economic themes. Unsurprisingly, inflation is the talk of the town in the latest edition.

On the back of geopolitical pressures, supply chain stress and rising prices for oil & gas and commodities, inflation has hit its highest point in decades across most (advanced) economies.

Samer Hijazi, Abu Dhabi Managing Partner, Grant Thornton

In the US and several European countries, inflation is now above 10%, but closer to home, both Western markets pale against the inflation rates currently seen in Lebanon (which according to its central bank was over 150% in 2021 mainly due to the to the deterioration of the Lebanese pound’s exchange rate versus the US dollar) and Turkey (the government stated its inflation rate in 2021 was 20%).

Both countries however have seen their inflationary pressures exacerbate in the first six months of the year.

In the UAE, things are a lot rosier, from an inflation perspective. With the rate forecasted to hit 3.7% in 2022 and 2.8% in 2023 (according to the IMF), the region enjoys one of the lowest levels of inflation worldwide.

Margins under pressure

But honing in deeper to business operations, Grant Thornton’s report does warn business owners that a proactive stance is needed to counter margin erosion. Among the surveyed businesses in the UAE, 18% reported cost increases for energy and utilities, 17% for raw materials, 16% increases were reported for equipment, bank and interest costs and taxes, and 14% for wages and staff compensation.

The natural response by companies is to raise their prices. Indeed, the survey found that 87% of companies are raising prices at the same level or above cost increases. Over half are seeking to maintain their pre-inflation profitability (hiking prices to exactly match cost increases), while around one third are capitalising on the opportunity to increase process by more than cost increases, improving margins.

Yet effectively dealing with inflation stretches beyond just a pricing response, said Samer Hijazi, Abu Dhabi Office Managing Partner at Grant Thornton. “Mid-market businesses need to take a range of different, proactive steps to deal with inflation in the longer term. They can't simply continue to price their way out of this problem.”

Indeed, only a quarter of respondents are taking action beyond price increases. Actions that should be considered include product or service differentiation, debt / capital restructuring, consumer-led innovation, outsourcing, revamping pricing strategy, and performance improvement across the value chain to enhance margins.

For companies seeking to mature their inflation response, Hijazi provided a roadmap: “The first step for any UAE-based organisation, whether trading locally or internationally, must be to identify and mitigate the risks of inflation to the business. Inflation touches all parts of a business, so the best plans will have the most points of view.”

“Once a plan is in place, businesses need to take action to limit external cost increases. This could include locking in prices, bulk buying, renegotiating terms with suppliers or even changing suppliers. In a high inflation environment, these basic countermoves can make a significant difference in limiting costs and protecting margins.”