How positive or negative are the region’s finance professionals regarding the state of economic recovery in 2014? The answer depends, to an extent, on the country they operate in.
According to the Global Economic Conditions Survey, carried out jointly by the ACCA and IMA from November to December 2013, finance professionals on a global level have more faith that a strong economic recovery is in progress than at any time over the last five years.
The Q4 survey covered some 1,450 ACCA and IMA members globally, including 600 senior finance professionals and over 130 CFOs.
Survey results showed 55% of respondents believe conditions are improving or about to do so, up from 53% in Q3 2013, while only 42% feel that economic conditions are declining or stagnating, from 43% in the previous quarter.
The slightly less positive news lies in finance professionals’ confidence in their own organization’s performance, which dipped marginally in the same period. Although 30% reported they are more confident, up from 28% previously, 35% reported a deterioration in confidence – up from 32% from the previous quarter.
What About Asia?
Closer to home, another study commissioned by Bank of America Merrill Lynch (2014 CFO Outlook Asia) surveyed 639 CFOs and other senior financial executives in the Asia Pacific in January 2014. It found that the region’s CFOs are more optimistic that revenues will rise in 2014 compared to last year (76% vs. 72%).
This finding is consistent with the CFO Innovation Asia First Half 2014 Business Outlook survey, which was done from January to February this year. The 141 Asia CFOs and other senior finance executives surveyed were more optimistic about the prospects of the economy where they are based (48% vs. just 28% in the second half of 2013), and even more optimistic about the prospects of their own company (56% vs. 37%).
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Level of optimism, first half of 2014
Source: CFO Innovation Business Outlook Survey, First Half 2014
The Bank of America Merrill Lynch survey asked respondents whether they expect profit to increase in 2014. While 60% said yes, that is down from the 65% who expected profits to rise in 2013.
Steven Victorin, Head of Asia Pacific Corporate Banking and Global Corporate Banking Subsidiaries at Bank of America Merrill Lynch, believes margin pressure is a real issue among CFOs this year.
“Costs associated with labor, materials and financing have been rising as the [US Federal Reserve] normalizes its monetary policy through tapering of its quantitative easing program,” he said. “Long-term rates may go up and certain countries – such as India and Indonesia – have already hiked interest rates.”
Victorin added the depreciation of some currencies last year would also equate to rising imported material costs.
But the CFO Innovation survey finds that consumer demand, government regulations and foreign competition are still the top-of-mind external issues for CFOs in Asia, although 28% of respondents point to currency risk as a top-three issue, while 17% are concerned with interest rates.
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Top-three external issues
Source: CFO Innovation Business Outlook Survey, First Half 2014
The ACCA/IM global survey saw business confidence rise fastest in the Asia Pacific and Middle East. On the other side of the fence, business confidence fell significantly in Africa and Central and Eastern Europe, and was either flat or down marginally in North America and South Asia.
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Confidence index, selected markets
Source: Global Economic Conditions Survey 4Q 2013
According Emmanouil Schizas, Senior Economic Analyst at ACCA, this trend has continued into the first quarter this year. But “traditional big government spenders such as China and Malaysia are starting to reel in, which will likely impact the rest of the region,” he warns. “I wouldn’t say it’s worrying, but it does mean a lot of demand is coming out of the system.”
And the major Asia Pacific markets have a lot of fiscal space and are not in immediate danger of economic stagnation, says Schizas. “China may have a good amount of debt and may be experiencing a slowdown but their ability to borrow is not in any question.”
“Malaysia is probably more vulnerable, but with elections behind them, members are no longer as strongly influenced by spending expectations.”
A macro look ahead
Most economies have yet to report first quarter GDP performance, but China has just released its numbers – and they confirm that a slowdown is in progress. According to the country’s National Bureau of Statistics, the economy expanded 7.4% in the three months to March compared to the same period last year.
That performance is the weakest expansion in six quarters, but is actually slightly higher than the median estimate of 7.3% in a Bloomberg survey of analysts. It also places China on course for the full-year target of 7.5% GDP growth – or even 7.7%, as Royal Bank of Scotland, for one, still forecasts.
Globally, more respondents believe the global economy is closer to recovery as compared to the last quarter, says ACCA’s Schizas, referring to the soon-to-be-published Global Economic Conditions Survey for Q1 2014.
The picture is different in Asia Pacific, however. Respondents from the region who believe their national economies are improving in Q1 2014 went down from the previous quarter. “There was a big confidence surge in Q4, some warranted, some overreaction,” Schizas said. “Q1 2014 saw respondents adjusting their expectations to become more realistic.”
Just 39.5% of respondents in Asia Pacific were optimistic about an economic recovery in Q1 2014, down from 44.3% in Q4 2013; while pessimists made up 51.4% in Q1 2014, up from 50.2% the previous quarter.
Respondents in certain markets, however, felt more optimistic about business opportunities this year. Singapore’s finance professionals appeared to feel the implications of the ongoing economic toil and rising costs at home during Q4 2013, but optimism is rising this year.
In Q4 2013, 19% of the Singapore sample reported confidence gains and perceptions of the economy also improved slightly and crossed over into positive territory. For the first time, more than half of the Singapore sample (51%) expressed optimism about the state of the economy, while pessimists made up 46%. This optimism has continued into Q1 2014.
“Perceived business opportunities were up quarter-on-quarter for Singapore in Q1 2014,” says Schizas. “They continued to rise in Q1 2014 for the second quarter in a row and are now above the global average, though not quite at the previous peak seen in Q4 2012.”
Some 20% of respondents from Singapore surveyed in Q1 2014 expect business opportunities from investing in innovation, a marked improvement from the same period a year ago.
Losing momentum in South Asia
According to Schizas, South Asia (Bangladesh, India and Pakistan) saw a loss of momentum investment wise in Q1 this year, although no such problems plague the Asia Pacific. “There’s a big issue around inflation in almost all the emerging markets, but not in Western countries yet.”
Inflation will feed back into commodity prices and will likely go to the West after a bit of a lag, so policy makers are not happy they don’t have to deal with this problem, Schizas added.
The Bank of America Merrill Lynch study, however, indicates a more positive outlook for India investment wise. According to Chua Hak Bin, Head of Emerging Asia Economics at Bank of America Merrill Lynch, investment in Southeast Asia and India is holding up despite Fed tapering concerns.
Political uncertainty in Malaysia
Rising business opportunities and improved demand and cashflow conditions encouraged Malaysia’s businesses to invest more in capital and staff in the last quarter of 2013, says the Global Economic Conditions Survey. Both business confidence and economic sentiment improved, with 21% of the Malaysian sample reporting confidence gains, up from 13% the previous quarter.
The outlook is, however, less positive this year. “Business confidence is still up year-on-year in Malaysia, though we expect it to fall further in the medium term,” Schizas.
“Business confidence and faith in recovery were boosted by the electoral cycle in early 2013: our members were hoping for an end to political uncertainty and looking forward to a substantial increase in public spending. These circumstances are unlikely to be repeated and members’ hopes were generally not met.”
According to the Bank of America Merrill Lynch study, 86% of CFOs surveyed in Malaysia did not feel political change would pose a threat to their business. However, 26% rated political unrest as their highest enterprise risk.
China and Hong Kong
China appears to be slowly recovering from a liquidity crunch, whose impact was most felt in Q2 and Q3 2013. The Global Economic Conditions Survey results from Q1 2014 indicate that cashflow and demand conditions are stabilizing in the mainland, with access to growth capital back to mid-2012 levels. Business opportunities are also rising slowly.
The first two quarters of the liquidity crisis in China did shake Hong Kong respondents’ confidence and reduced access to growth capital and investment opportunities, but no further influence is being seen now.
“Reported access to growth capital in Hong Kong improved in Q1 2014 and is now better than at any point during the last two years,” said Schizas. Cashflow and demand conditions also improved in Q1 2014 for the second consecutive quarter to a hit a three-year high.
The liquidity crunch has, however, postponed a lot of investment in both the mainland and Hong Kong. In both markets, business capital spending and new hires peaked in Q2 2013, but have remained on a downward trajectory.
“The tail risk seems to be China this year, where investors have turned more cautious. Concerns over shadow banking and more trust defaults will likely weigh on confidence for the rest of the year,” says Chua of Bank of America Merrill Lynch.
Ukraine and Asia
What about rising tensions between North and South Korea, and territorial disputes between China and Japan, and Bejing and Manila?
Schizas declines to go into specifics. But he observes: “Most dynamic businesses in almost any market covered by the Global Economic Conditions Survey are mid-market businesses, just over the SME threshold, and they have traditionally thrived on regional economic integration. In Asia Pacific, this segment has not shown the dynamism we have seen everywhere else.”
“Any conflict threatening the building of further cross-border ties in the region,” he points out, “weakens this group further.”
The current crisis in Ukraine could also negatively impact Southeast Asia. Global Economic Conditions Survey figures from Q1 2014 indicate a significant fall in business confidence in Central and Eastern Europe in Q1 2014.
The ACCA/IMA survey has traditionally suggested a strong link between business cycles in Central and Eastern Europe and Southeast Asia, due to supply chain links in a number of key industries such as electronic components, Schizas explained. In general, the impact of reduced investment or higher energy prices on these business cycles would be seen within six months.
According to Schizas, the most realistic risk will stem from the crisis in Ukraine feeding through to higher energy prices, not unlike a “similar but less dramatic” stand-off between Ukraine and Russia in 2009.
On the Ground
Meanwhile, the Bank of America Merrill Lynch report has nuggets about the way forward from the perspective of the company and the CFO. These include:
- CFOs in the manufacturing sector are the most bullish on both top line and bottom line expectations: 83% expect revenue growth, and 67% forecast higher profit this year.
- Effect of Federal Reserve (Fed) tapering: A minority (41%) of CFOs agree that the end of quantitative easing in the US will lead to major problems in Asia, while 59% have no opinion or disagree.
- Financial markets risks top CFOs’ list of concerns for 2014: In the financial markets risks category, CFOs are most concerned about currency volatility (35%), liquidity risk (30%) and interest rate movements (20%). Counterparty risk is at the bottom of the list at 15%.
- Bank borrowing is the top choice for financing, despite interest rate uncertainties: 57% of CFOs expect to finance their business with bank loans, more than doubling the 25% in 2013. Appetite for this mode of financing is highest in the manufacturing sector (66%), followed by 64% in pharmaceuticals and 61% in the metals and mining sector. Self-funding is favored by 29% of CFOs region-wide.
- In M&A, the focus is on South and Southeast Asia this year: Overall there is a preference for organic growth over M&A throughout the region – 62% of respondents do not plan to participate in M&A activity this year. Those who do will focus on Southeast Asia, emerging Southeast Asia (Vietnam, Myanmar, Laos and Cambodia) and India/South Asia. Interest in China has waned, with only 15% of CFOs indicating interest compared to 24% in 2013.
About the Author
Melissa Chua is a Contributing Editor based in Singapore for CFO Innovation.
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