LO 3: Understand the Financial Statement and Decision Analysis, Including Risk Management Assignment Answers

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What’s keeping UAE businesses awake at night?

The Middle East encompasses a broad range of economic, financial, political and social risks on a regional and country-specific basis. ICAEW’s Economic Insight: Middle East is a quarterly economic forecast specifically for the finance profession, which has shared the following outlook as at Q4 2016:-

  • Risks to an already-weak oil price. Even in a more positive scenario, oil prices will not return close to the $100 per barrel (pb) averaged in 2010–2014. Our baseline forecast remains below $60pb until 2019.
  • Rising tax burden. Businesses are concerned about potential tax increases and spending cuts to shore up government finances. This could prompt lower demand, administrative burdens for businesses (a particular blow to small and medium-sized enterprises), or loss of retained earnings for future investment. Moves to boost employment of national born workers could also place a strain on business.
  • Exchange rate risk. •. While pressure on exchange rate pegs has eased, businesses remain worried about the potential impact on costs if a move to more flexible exchange rates seems likely.
  • These worries are keenest where set government budgets mean large deficits. Oman, Bahrain and Saudi are most exposed with fiscal ‘breakeven’ oil prices $30–$50pb above current levels.

“A full implementation of President-elect Trump’s policy proposals would lower oil prices by $10pb by 2020.”

Question 3:

Evaluate the above given information in terms of impact underpinning organizations in UAE requiring to  embrace for a long term effort by the government to close fiscal deficits and raise increased revenues from the non-oil economy. This could also place many pressures on businesses, particularly w.r.t higher labour costs, weaker consumer demand, and the loss of retained earnings for future investment strategies & better liquidity practices.

[15 marks]

 

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