As economic growth in the GCC slows from 3.4 per cent in 2014 to 2.8 per cent in 2016, small and medium enterprises (SMEs) are expected to suffer more than larger corporations with deep pockets.

An uptick in the number of distressed SMEs and bankruptcy filings is expected, although the outlook varies widely by sector.

Business sentiment, as measured by the Dubai SME quarterly pulse, is weaker than late 2013 and 2014, even when taking seasonal variations into account. The purchasing managers index (PMI) fell to 111.6 for the second quarter, compared to 115.5 for the second quarter of 2014.

“The SME sector is at the bottom of the pyramid. It can grow very fast and be pushed out of business very fast,” says Qais Al-Maskati, CEO and managing director of Manama-based First Equity Partners. “A fair share of SMEs will be pushed out of business in the next few years, the ones who survive will be the ones with a very clear, distinct, selling proposition.”

Sector by sector

Sectors such as construction, oil and gas services, tourism and luxury consumer goods could see a rise in the number of SMEs filing for bankruptcy.

“Service providers around oil and gas, and that is a big proportion of the economy, will be heavily hit” says Ben Constance, a partner at UK-based Taylor Wessing. “Investors will be getting nervous and holding onto their money, so that will affect real estate which is a core investment locally, and flow on to construction, which will also be hit by lower government spending.”

In the second quarter of 2015, 28 per cent of surveyed SMEs in Dubai’s trading sector expected profits to fall in the third quarter, with 25 per cent expecting a fall in new orders. They cited the seasonal slowdown, regional instability and lower oil prices, according to Dubai SME.

In the manufacturing sector, 17 per cent expected a fall in profits and 24 per cent no change. Services was the most optimistic sector, with 48 per cent of responders expecting profits to rise in the third quarter.

Some SMEs shielded

Even in sectors highly affected by falling oil prices and government spending, certain companies can continue to thrive. This depends on spotting opportunities, which will vary from country to country and finding niches and essential government spending.

“Qatar has no choice but to invest for the World Cup, so they’re hiring contractors, but the Saudi government reduced their sports budget and cut the stadium programme,” says Al-Maskati. “For the Saudis it’s not that important but for the Qataris it’s a must.”

Therefore, as the rest of the GCC construction market slows, construction and building supply companies with a foothold in Qatar can thrive as its imports soar.

Other sectors will be untouched by the wider slowdown, such as health, education and food. These consumption-driven sectors would only feel the effects if low oil prices persisted for five years or more and middle class target markets began to suffer or even leave the region.

Technology such as IT and energy efficiency could also be an important growth market as consumers and governments look to reduce costs.

Bankruptcy laws

A rise in bankruptcy filings will bring the GCC’s bankruptcy laws back into focus. Current systems are vague, opaque and lengthy. They focus on liquidation rather than allowing for restructuring and helping companies to continue operating and paying off debt.

“We need more robust liquidation procedures,” says Constance. “The legislation could do with more detail, in line with other regions, that sets out a more defined process, a clear timetable, how to appoint a liquidator and the requirements for that.”

Given the natural attrition rate of SMEs and their already poor access to finance, this limits the scope entrepreneurs have to set up and expand their companies.

“SMEs have a higher tendency to fail,” says Al-Maskati. “You have to allow them to fail in a healthy way, and allow a person who had one or two companies that failed to be able to raise money and start up his third company, which might be successful.”

SMEs’ contribution to the economy is already undersized in the GCC, and slowing growth could stifle the area even more if governments do not show more flexibility.