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East
& Partners third and final Research Note in this three-part
series explores corporates’ behavioural responses to the COVID-19
crisis versus how they navigated previous periods of financial
instability. The insights are presented by regional business
banking product market across Australia, Asia and Europe.
This research note evaluates the impact of the current global
COVID-19 pandemic on corporate’s foreign cashflows in Europe
compared to that of the 2008 Global Financial Crisis (GFC).
Similarly to the GFC, the coronavirus pandemic has been a global
phenomenon limiting normal global market operations to some degree.
Europe in particular is one of the world’s largest global trading
hubs and accounts for 15 percent of global trade volume. The impact
of financial crises on European business’ ability to manage
tightening foreign cash flows and liquidity is a major threat to
growth and stability.
Liquidity Crunch
The main trigger for the current corporate liquidity crunch is
different to the GFC. In 2008, irresponsible lending and risk
management in the global banking system amplified the impact of the
subprime mortgage lending and collateralised debt obligation (CDO)
shock in the United States (US). This had a domino effect on bank’s
liquidity in Europe as interbank loans between the US and Europe
fell flat.
In today’s crisis, the issue of liquidity has primarily stemmed
from business closures and limited social contact which has
supressed revenues, hampered productivity, increased unemployment
and reduced corporate cash buffers.
Today’s corporate liquidity issue can undoubtedly coalesce with
other mitigating factors to become a bank credit quality risk,
matching the GFC. If banks continue to extend lines of credit to
corporates, they will encounter even greater challenges than simply
failing to make an adequate return on investment given the
prevailing low interest rate environment or if corporates default. This
makes the COVID-19 crisis the biggest risk to the European and
global financial system in modern history, particularly if business
productivity does not swiftly recover post COVID-19.
“Output in both the Euro area and the European Union
(EU) is not expected to recover its pre-pandemic level in 2022”
– European
Union’s Executive Commission
How long do corporates expect before a full recovery is made from
the crisis? East & Partners upcoming Global Insight Report details
expectations of the Top 100 revenue ranked corporates in eight
countries globally, including the United Kingdom (UK) and Germany
in Europe.
Direct interviews with CFOs and corporate treasurers uncovered
vastly different levels of forward dated confidence and sentiment,
in some cases anticipating for the crisis to be over by early Q1
2021 and in others as late as Q3 2021, contingent on a vaccine
distribution touted as “the largest logistics effort in the world
since World War II" according to Deakin University's Centre
for Supply Chain and Logistics Senior Research Fellow, Dr Roberto
Perez-Franco.
It is essential that trade barriers are reduced through greater
action from the World Trade Organisation (WTO) and that corporates
are fully equipped to manage extreme currency fluctuations when
trading with foreign markets as this will help increase liquidity
and stimulate growth.
Exchange Rate
Volatility
Over the past ten months currency markets have displayed extreme
volatility due to uncertainty stemming from rising COVID-19 cases.
As a result, business valuations have fallen flat as currency
fluctuations make cashflow predictions increasingly difficult.
Even for domestic businesses that sell only to local customers,
they may also experience cash flow issues derived from exchange
rate volatility because most of the raw materials they purchase are
priced in foreign currency. In these instances, it has become
essential for corporates to understand the underlying impact of
currency volatility on their balance sheets and the risks to
valuations and financial reporting.
East’s Global Business Foreign Exchange (FX) programme confirms
that in the UK, importers and exporters with revenues between £20 -
100 million (Lower Corporates) posted forecasts that significantly
undershot Sterling (GBP) against the US Dollar (USD) for June 2020.
In contrast, businesses with revenues between £1 – 5 million
(Micro) nominated forecasts that exceeded the GBP/USD exchange
rate.
Source: East
& Partners UK Business Foreign Exchange (BFX) (N = 2,212)
Volatility has made it difficult for British firms to predict
future exchange rates on major currency pairs. Similar hurdles were
also present in the 2008 financial crisis, however, sterling
gradually stabilised against majors within the space of a year.
This made trade and foreign cash flows easier to manage and
predict. How quickly major currencies will stabilise post the
current pandemic remains unclear.
Business
Valuation
Ultimately the implications of business’ currency losses on
corporate liquidity are immense. It diminishes the value of
monetary assets, raises potential liabilities and reduces cash
flow. This can have a considerable impact on business valuations
making it difficult for investors to purchase corporate bonds and
equity. Since the beginning of the pandemic, stock market
valuations in Europe have fallen by a resounding 32.2 percent.
Currency Loss
Value - H2 2020
Average Currency Loss
Reported (GBP Thousand)
Source: East
& Partners UK Business Foreign Exchange (BFX) (N = 2,212)
However, since the announcement of the COVID-19 vaccine markets
have become discernibly bullish. Once the vaccine has been widely
distributed, businesses in the UK and Europe can project future
cash flows in anticipation of ‘business as usual’.
Consequently, this has raised expectations on corporate liquidity
and, in the short run, has inflated business valuations. In the
United Kingdom, the FTSE 100 jumped nearly five percent after the
announcement of the vaccine. Other European stock market indices
have also displayed similar bullish reactions.
The Future ahead
Corporates have depended heavily on their financial providers to
support them with flexible working capital solutions and lending
facilities driven by technology and innovation. Virtual accounts,
open accounts distributor finance and other products are examples
currently deployed by corporates to improve liquidity - all of
which must be harnessed through digital documentation and execution
technology.
This contrasts the approach taken in the 2008 crisis where
corporate liquidity was mainly managed through traditional methods
such as credit lines.
The long-term impact of a liquidity crunch will depend on how
quickly businesses can recover from this historic event.
East & Partner’s upcoming Global Insight Report will provide
addition insights around corporate’s experience with their primary
bank’s response to COVID-19 in areas such as balance sheet finance
and liquidity solutions.
Other areas that the report will cover are:
- Influence on Banking Provider Selection by
Product
- Primary Provider Wallet Share Impact
- Lead Offering Needed to Navigate COVID and
Switching Driver
- Key Digital Functionality Accessible Now
- Key Digital Functionality Urgently Required
- Most Important Value Add from Relationship
Management
- And more…
Contact us today to access market leading insights that will assist
you in your strategic business development plans in 2021 and
beyond.
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