Risks and Opportunities for CFOs to Monitor amid Disruption
With a hazy future in light of global economic disruption, Bodhi Ganguli, Former Lead Economist at Dun & Bradstreet, helps clear up the forecast. CFOs are uniquely positioned to securely and profitably lead their organizations through the post-Brexit world. From geopolitical risks to interest rate fluctuations, Brexit has uncovered a multitude of new business and economic uncertainties, and CFOs need to be aware of the changing global landscape. With this knowledge, CFOs will be able to avoid costly business risks and harness profitable growth opportunities. In this interview, Ganguli discusses the current global economic climate and advises CFOs on what global trends they can monitor to help their organizations navigate global geopolitical uncertainty and a volatile financial market.
Q: Based on your research and analysis, what are the top risks that CFOs should be monitoring in the global markets right now?
Brexit presents a systemic risk to the global financial system because of the impact it has on the global markets. In general, the markets have a short memory. At first, they reacted very strongly to the news of Brexit. Now that the vote has passed, the markets have gone back to normal as if it hadn’t happened.
Technically, the actual process of Brexit hasn’t even started yet. That process will begin once the UK invokes Article 50 discussions. The discussions may cause fluctuations in the market again, but the actual process of exiting the EU will take at least two years of negotiations. Right now, the plan is for the UK to leave the EU by Q1 2019. That’s when the real Brexit will happen, and naturally there’s still a lot of uncertainty still surrounding this event.
Aside from Brexit, there are several other undercurrents of risk that are also flowing through the global economy that should be pointed out:
- Geopolitical risks: There are a number of trade agreements that hang in the balance now that the results are in for the recent and volatile US election. Both presidential candidates, Donald Trump and Hillary Clinton voiced their dislike with the Trans-Pacific Partnership and Trump has called both NAFTA and NATO into question.
- Foreign exchange risks: Amidst all of these changes, it’s important to examine how various currencies behaving globally.
- Interest rate risks: A handful of central banks are cutting interest rates to zero and a few now even have negative rates. But the US Federal Reserve might do the opposite and plan to raise rates. There isn’t enough evidence yet to say whether this is a good or bad thing.
Keeping all of these risks in mind, the one word I keep using to define the volatility of the market and the aura of uncertainty is “divergence.” Every country within the global economy is different and because of that, there isn’t a one-size-fits-all solution. There’s a divergence in terms of currencies, interest rates, politics, and even in terms of outlooks.
Some countries have a better outlook on the economy right now than others. Outlook is important because we don’t have a coherent global economy. By nature, there are imbalances that create risk and uncertainty, and businesses don’t like uncertainty because it implies risk.
Q: At what point do you think that we’re going to start to see the impact of Brexit? Will we see it before, during or after the negotiations?
We won’t see the real impact until after the negotiations begin. This is because what we’re seeing right now before the negotiations even start, is just a lot of posturing and theorizing from leaders in the UK and in the EU. It’s pure speculation at this point; no one really knows what will happen.
There are a few hypotheticals that are important to consider when looking to the future. A soft Brexit would mean that the EU renegotiates most of the trade discounts that it has for the UK and business is allowed to continue as usual, but the UK regains its sovereignty. Alternatively, a hard Brexit will occur if the EU doesn’t allow them to keep those discounts and instead forces them to re-negotiate new bilateral treaties with every country in the European Union—a process that would take years.
Q: Are there patterns that you see arising, as they pertain to the recent US election?
There are two major global trade negotiations that Donald Trump came out strongly against: The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Now that Donald Trump has been elected president and he opposed both the TPP and the TTIP, it doesn’t look like either of these agreements will pass. However, it’s important to note that this would most likely have been the case with a Clinton presidency as well.
Now that the UK will depart from the EU and it’s unlikely that these agreements will pass, global trade will become even more complicated. The US may even have to go back to the drawing board and start fresh on new trade deals. There’s going to be a new government and new opportunities for discussions and negotiations.
Q: How can CFOs best prepare themselves, in light of all of these economic shifts?
Whenever there is global uncertainty, especially of this magnitude, it’s difficult for CFOs to make informed decisions. Any decisions that can be pushed back until things stabilize should be pushed back for the time being. Additionally, we can expect to see consumers become more conservative with spending while things are uncertain. This is typical behavior, but it won’t necessarily last.
But there aren’t just risks to consider, there are opportunities too. For example, it could be to the US’s advantage to negotiate a new trade treaty with the UK due to Brexit. Also, it’s important to keep an eye on global currencies. The pound fell precipitously after the Brexit vote, but the US dollar could strengthen. If the dollar is strengthening, depending on whether you’re a net importer or exporter, your business could either benefit or hurt. If you know for sure the dollar is going to strengthen as a result of all the uncertainty, how do you hedge for that? How do you plan your cash flow? How do you plan your investment? So, all of these fluctuations aren’t necessarily bad.
Q: What are some signals, data points or forecasts that you recommend monitoring to track potential risks and opportunities?
I’d start by recommending that CFOs monitor how fiscal and monetary policies are doing globally.
Monetary policy has been a major player globally with all of the central banks handling most of the heavy lifting, before, during and after the recession. It’s clear that in many countries, monetary policy is running out of ammunition. This is why it’s important to prepare for the possibility that there could be another downturn in the near term. If that happens and interest rates in many advanced economies are already in the zero or negative percentiles, what more would central banks be able to do? This is one of the issues we’re monitoring closely and we would recommend that others monitor too.
Over the past few years, fiscal policy hasn’t complemented monetary policy very well. Governments need to step up to coordinate with each other to develop a coherent fiscal policy that supports monetary policy to boost growth and buffer global economies so that they can weather the next slowdown.
Q: What changes can we expect to see in the global markets over the next few years?
Globally, we can expect advanced economies, like the US and the UK, to grow very slowly. Emerging economies, like India and China, will grow at a faster pace and remain ahead of the advanced economies. There are too many risks and uncertainties in the global economy, we won’t start to see much growth until we have dealt with those.
In 2017, we’ve forecasted a 2.7 percent growth globally and we expected the global economy to end in 2016 at 2.2 percent—which shows a very slow and low rate of growth. For reference, the growth rate in 2015 was 2.5 percent, so you can see that it’s slowed this year as advanced economies definitely are growing a lot more gradually this year than before. We expect that the recovery will begin in 2017 at 2.7 percent and then by 2018 it will increase back up to 3 percent, which is considered a strong number for global growth.
Commodity prices are also important to examine within the context of the global market. For example, when oil prices were at their peak they were close to $100 - $110 a barrel. At the end of 2016, oil prices were as low as $43 a barrel. They are expected to increase to $50 and then $63 in 2017 and 2018, respectively. But this means that they won’t reach their peak even within the next three years based on both supply and demand, as well as the global economy in general.
When the dollar appreciates, commodity prices fall. We expected a slight appreciation of the dollar at the end of 2016 when the Federal Reserve was expected to raise interest rates. When the Article 50 discussions begin for the UK at the beginning of 2017, the uncertainty will most likely cause the value of the pound to decrease and increase the dollar. Whenever there’s uncertainty, money flows out of emerging markets and back into safe-haven currencies, like the US dollar for example.
For CFOs, it’s a good time to consider opening operations in countries where there are emerging markets and the growth rate is high—even though business continuity is riskier. You should also avoid industries that are weaker globally, such as manufacturing. Instead, focus on consumer-based industries as consumers are driving growth in almost every country, especially in the US.
Navigating Economic Uncertainty Post-Brexit
Navigating disruption is becoming a core aspect of the finance leader’s daily life. For more expert insight about Brexit, economic trends—and how finance can make more informed risk decisions in 2017—download ‘The 2017 Global Outlook Post-Brexit.’