Price discounting dents business margins in UAE private sector

Dubai: A decline in selling prices across the UAE private sector impacted the margins of companies in February, despite input price inflation inching up marginally, according to the latest Emirates NBD UAE Purchasing Managers’ Index (PMI).

The PMI reading for the UAE fell from 56.3 in January to 53.4 in February — its lowest since October 2016. The drop reflects slower growth in new orders last month after new export orders rose at their slowest pace in 11 months and private sector employment registered its steepest decline in the survey’s history.

“The employment index fell to 47.5 in February, as nearly 9 per cent of businesses surveyed reported lower headcount relative to January, while just 1.5 per cent reported increased hiring,” said Khatija Haque, Head of MENA Research at Emirates NBD.

“Some firms reported operating with the minimum level of staffing in a bid to keep costs down.”

Pricing remains challenging for private sector businesses, and stiff competition led more than 13 per cent of firms on the panel to offer discounts in order to secure new work.

Khatija Haque, Head of Mena Research at Emirates NBD

Despite the decline in headcounts, survey results revealed that staff costs were broadly unchanged last month, again reflecting a relatively soft job market.

The overall price environment seems to be hurting the profitability of private firms. Selling prices in February fell at the fastest rate in the survey history on a seasonally adjusted basis after taking into account the usual promotions offered during February.

“Pricing remains challenging for private sector businesses, and stiff competition led more than 13 per cent of firms on the panel to offer discounts in order to secure new work,” said Haque.

Data showed that backlogs of work outstanding increased at their fastest rate since June last year. This partly reflects lower employment, but some firms have also reported that delays in receiving payments from customers have led to corresponding delays in completing projects — resulting in the higher backlogs of work outstanding.

Data from the PMI survey suggested that the slowdown reflected challenging market conditions and competitive pressures. The quantity of purchases increased sharply in February, in line with output growth, but inventories rose only slightly following two months of declines.

While some firms reported holding stock in anticipation of future order growth, the majority are instead storing only what is required to fulfil their current requirements.

Business confidence dropped sharply in February as around half of all respondents predicted that activity would either remain unchanged or fall over the coming year.

Sentiment was at an 11-month low as some companies revealed their concern at the challenging market environment. On the other hand, firms remained optimistic that activity will expand amid expectations that business conditions will also improve over the next 12 months.