Lack of Public Trust, Russian Sanctions Hurt Business Environment, Say CFOs

Public mistrust of business and political leaders and a threat of severe Russian sanctions are harming the business environment, according to Chief Financial Officers polled for the latest Duke University/CFO Magazine Global Business Outlook Survey.

The CFOs also indicate that severe sanctions on Russia would hurt the economies of their home countries.

Other results indicate that companies are continuing to stockpile cash and that economic optimism is up in the U.S. and Asia, but down sharply in Latin American and Africa.

The survey shows nearly 60 percent of U.S. financial executives think the business environment has been harmed by a lack of public trust of business and governmental leaders.

An even larger percentage of CFOs in Africa (64 percent), Europe (68 percent), Asia (71 percent) and Latin America (79 percent) believe public mistrust is creating a drag on the economy.

“Public distrust inhibits the economy from reaching its full potential,” says John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey.

Graham explains that mistrust can reduce growth and it causes companies to devote time and resources to counteract mistrust’s negative effects.

Results also show the lack of trust has caused firms to alter business decisions, change governance and emphasize transparency.

“While all of these effects may not be negative, like increasing transparency, several of the effects are negative, and they all require companies to expend resources and can distract management’s focus,” Graham said.

Russian sanctions

Most companies with business connections to Russia believe that stepped-up sanctions would have a negative to a severely negative effect on their businesses (U.S., 53 percent; Europe, 82 percent; Asia, 51 percent; Japan, 82 percent; Africa, 78 percent; Latin America, 62 percent.)

“There are two interesting findings,” said Campbell R. Harvey, founding director of the survey. "First, a large number of firms are either considering reducing their footprint in Russia or already actively pulling back. This includes 22 percent of U.S. firms and 31 percent of European firms.”

“Second, there is a lot of talk about China benefiting from the sanctions. This is not what the CFOs are telling us." Harvey explains that 55 percent of the Chinese CFOs see stepped-up sanctions as bad news and 33 percent are either reducing exposure to Russia or are considering pulling back.

“The CFOs are telling us that the current sanctions as well as their expectations of future actions have already impacted their business plans for Russia. This is certainly bad news for the Russian economy,” adds Harvey.

Cash holdings

Respondents from U.S. and Europe are evenly split on whether they will begin to deploy cash reserves this year or will continue to hold the cash tightly.

By comparison, among firms that indicate a clear direction, 60 to 70 percent of companies in emerging economies (Asia, Africa, Latin America) plan to spend some of their accumulated cash during the next year.

“Most companies tell us that they do not have a narrow target for how much cash they hold,” said David W. Owens, director of research at CFO Publishing. “Rather, they accumulate cash when they feel they have to and spend it again when they are feeling more confident."

Owen said that those companies that expect to start spending down their reserves are primarily looking to invest in their own growth, which could be a positive sign.

Worldwide, among businesses that will unleash cash, the most common use by far will be for capital spending and investment.

Acquisitions and paying down existing debt trail distantly in the U.S. and Europe.

Asian and African firms will also use cash to hire and for marketing, while firms in Latin America are more likely to pay down debt but are reluctant to use their cash to boost hiring.

Among companies that will not begin to spend their cash holdings, those in the U.S. and Asia are more likely than others to say they won’t need to use cash to fund their businesses.

Firms in Europe and Latin America, on the other hand, either want to continue holding onto their cash as a buffer or simply don’t have excess cash to spend.

Labor unrest in Latin America, Africa, China

Almost three-fourths of Latin American CFOs expect there to be work stoppages and strikes during the next 12 months that will adversely affect their countries’ economies.

Labor concerns are particularly acute in Brazil (85 percent), though CFOs in Chile (68 percent) and Peru (52 percent) are also concerned.

In Africa, half of the CFOs expect economic damage from labor unrest, as do 29 percent in China and 22 percent in Europe. Only 9 percent of U.S. executives expect trouble from labor.

“Emerging economies have been grappling with reduced demand and slower growth over the past couple years,” said Graham. “Now on top of weak demand, business leaders are dealing with a restless and, in some cases, combative workforce. This is especially concerning in Brazil as it hosts the World Cup.”

When asked about the causes of labor unrest, CFOs say it stems primarily from wage pressures and general economic problems like slow growth.

In China, CFOs indicate that poor working conditions also drive labor unrest, while African CFOs say that income inequality is a notable cause.

CFO optimisim and top concerns

On a scale from 0 to 100, CFO optimism about the U.S. economy has increased to 61, only the second time the optimism index has been this high since mid-2007. U.S. optimism still trails Asia (65).

Other worldwide concerns include attracting a skilled workforce (especially in Asia) and maintaining employee morale. Half of Japanese CFOs believe that reaching an agreement on the Trans-Pacific Partnership (TPP) trade agreement would have a large positive impact on the Japanese economy, and another one-third think TPP would lead to a small positive effect.

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