Quarter 4 2010 is one that will be remembered for many generations, Ireland succumbed to mounting international economic pressure when, on November 19th, the Government announced that they were seeking an economic rescue package from the EU and IMF. Ireland’s mounting budget deficit crisis had become a critical debt crisis. With Irish bond yields increasing to over 8% in the previous six months and expenditure still well in excess of receipts the writing was on the wall for the Irish economy. While the bailout itself was a shock to the Irish public, the rate of the decline of Irish financial stability was the most shocking aspect and shows just how reliant Ireland is on external factors for its financial well being. In a global economy no country is fully in charge of its financial destiny. This has been clearly demonstrated in Ireland and is reflected by the financial crisis that may potentially impact other EU Member States. The full implications and fallout of the bailout may not be known for months but what is clear is that the impact will be felt for years to come.
For these reasons, the Q4 survey report on CFO sentiment during one of the most important, dramatic and unprecedented periods in Irish history makes interesting reading. The survey responses reflect some of the anxiety and frustration business leaders felt during this period. The survey looks at a number of areas including predictions on company turnover and profitability, the use of debt finance in addition to CFO reaction to Budget 2011. This article will provide an overview of some of the key findings.
CFOs’ concerns turn away from cost reduction but expectations on profitability and turnover fall
This quarter’s survey does show that CFOs’ expectations for their companies’ turnover and profitability have fallen somewhat. The number of CFOs expecting their company’s profitability to increase over the next six months has fallen by nearly 20 percent. 42% of CFOs surveyed now expect profitability to increase, compared with 61% in Q3 2010. Similarly, CFO sentiment with regards to turnover has also deteriorated, although the drop in confidence is not as severe. 46% of CFOs believe that their turnover will increase over the next 6 months, compared with 58% in the previous quarter.
Despite this fall in sentiment, the survey shows that CFOs’ areas of priorities are shifting somewhat. For the first time since the survey commenced, cost management is not in the top three financial challenges facing CFOs, suggesting that most companies have now been through the heavy cost cutting phase associated with economic downturns. Revenue growth and profit margins still remain as priorities, as identified by 26% and 22% respectively, but there is now an increased focus on working capital management and pensions costs/deficits.
I believe that it is important to appreciate that CFO expectations on turnover and profit are still positive despite these falls in sentiment. These changes in outlook on turnover and profitability could well be a reflection of the underlying lack of confidence and certainty in the domestic economy. Q4 2010 was a tumultuous end to 2010 and that sentiment fell in the quarter which saw Ireland receive a bailout from the IMF and EU is most likely no coincidence at all.
The findings on CFO sentiment with regards to the economy reflect this underlying lack of confidence in the domestic economy. An increased number of respondents, up 14% on Q3 2010 to 38%, now believe that it will be the first half of 2012 before the economy returns to growth. 34% of respondents believe that the economy will return to growth in H2 2011. 12% believe the economy has already returned to growth.
Use of debt finance is to decrease significantly in the coming years
The survey also examined how CFOs plan to use debt finance over the coming years. The most emphatic finding in this regards is that 96% of CFOs believe that their company’s ability to service debt will remain the same or improve in the next three years - indicating a positive outlook on cash flow. With regards to the availability of credit from Irish banks, 40% of respondents expect to see an increase in 2011. That said, 32% of CFOs expect their company’s level of debt financing to decrease significantly over the next 3 years due to an overall deterioration of debt finance available in the market and rising interest rates.
It follows therefore that market risk is still the key concern for CFOs. 62% identified this as their number one concern. Continuing volatility and uncertainty surrounding the Irish economy and Government, the impact of Budget 2011, interest rates, foreign exchange rates and price pressures (equity markets) all pose a considerable concern for respondents to the survey.
Reaction to Budget 2011 is strongly in favour of maintaining our corporate tax rate
Unsurprisingly, the survey findings show that CFOs are overwhelmingly (90%) in favour of retaining the 12.5% corporation tax rate and believe this to be a vital part of Ireland’s strategy to attract and retain foreign direct investment.
Further findings on the reaction of CFOs to Budget 2011 and the four year plan include:
· 74% of those surveyed did not see that the employment measures regarding imposing PRSI on share based remuneration would make it more difficult to take on employees.
· Three quarters of those surveyed felt that the proposed VAT increases to 22% in 2013 and 23% in 2014 would have a somewhat negative impact on our economy.
Interestingly, while 67% of respondents indicated that their company was availing of R&D tax credits, and a third indicated that they were availing of accelerated allowances for expenditure on energy saving equipment, none of the respondents to the survey indicated that they were availing of tax reliefs on intellectual property.
Positivity needs to be sustained!
I think that it is fair to say that some of the negative events of this quarter have succeeded in drowning out some significant positive developments. But I firmly believe that we need to focus on the positives that are there. For example, 2010 was Ireland’s best year yet in terms of exports. The value of Irish exports reached €161 billion in 2010. This shows that a significant section of the economy is booming despite the uncertainty surrounding it. Similarly, in terms of FDI, IDA client companies created almost 11,000 new jobs in 2010, well in excess of 2009’s outcome of 4,615 jobs.
From a CFO perspective, the fact that cost management has now dropped out of the top three challenges facing CFOs is also positive. This indicates that many companies feel they have hit the bottom in terms of cost cutting and austerity measures and are looking now to consolidate and grow from leaner platforms.
Q4 2010 may have posed a significant speed bump for Irish companies on their journey to recovery and growth. However, despite a less positive outlook amongst respondents, there does appear to be a clearer picture of the way forward, and a readjusting of priorities accordingly. With a change of government expected in Q1 2011, it is to be hoped that this will see an end to the instability and turmoil of the last number of months and CFOs will be able to look forward with increased certainty.
The Deloitte CFO Survey is a quarterly survey of Chief Financial Officers of major Irish based companies. The Q4 survey was conducted in December 2010 and January 2011, and CFOs of listed companies, large private companies and Irish subsidiaries of overseas multi-national companies participated. The Deloitte CFO Survey is the only survey that seeks to establish the views of CFOs in relation to the financial markets, economic outlook and business trends and as such provides a useful snapshot of business sentiment in Ireland.