The events of Quarter 3 2011 have continued this year’s trend of volatility and unpredictability both at home and abroad. Continued fiscal uncertainty in the Eurozone has been met with inaction by the major European economies resulting in volatile markets, regular downgrading of sovereign nation’s debt and a dawning realisation by global powers that this crisis in Europe, centred on Greece, may just be enough to bring the entire global economy over the edge into a double dip recession.
Ireland has been keeping a low but positive profile on the world and EU stage, quietly meeting our EU/IMF objectives with a consistency of approach that has boosted the markets’ appraisal of us considerably. A reduction in Irish government bond yields from 11.3% last quarter to 7.6% has been observed. There is a perception now that Ireland has cleared its decks and is making strides towards a real and sustainable recovery and a return to the international bond markets. However, while Ireland may be entering into a new phase of stability, the repercussions and impacts on us of what is happening abroad are yet to be determined.
Deloitte’s CFO survey continues to track sentiment amongst Irish CFOs as the crisis in Europe continues. Some of the key findings from the Q3 survey include:
Less positive view on the impact of the Programme for Government
In advance of Budget 2012, the survey provides an overview on how CFOs believe the Government is delivering on its Programme for Government. The key areas where CFOs perceive the programme is having a positive impact are restoring fiscal policy – 66% of respondents believe the Government is having a positive impact in this area, an increase of 24% on last quarter. 43% believe there has been a positive impact in the area of foreign direct investment, and unsurprisingly given the proposed interest rate cut announced in September, over three quarters of respondents believe that the Government has had a positive impact in the renegotiation of the EU/IMF bailout package.
However, there has been a fall of 9% to 29% in the number of CFOs who believe the coalition Government is making positive strides in political reform; a fall of 12% to 17% in those who believe there has been a positive impact in the area of employment and job creation; and a fall of 14% to 2% in the area of credit availability to small business. Just 5% of respondents believe there has been a positive impact with regards to the cost of credit.
The survey also gauged CFO sentiment on the impact of household debt on the economy - 97% of respondents identified this as a significant threat to the overall economy. Half of respondents also believe that the Government needs to put in place a programme to support homeowners.
Amidst the turmoil concerning the future of the euro during the quarter, the majority of CFOs (70%) do not believe that a break-up of the Eurozone is likely, although one in ten consider it a distinct possibility. It will be interesting to see how this might change in the final quarter of the year, as the situation in Italy adds more and more pressure to the Eurozone. However, 77% of respondents believe that if Ireland was to withdraw from the Eurozone, it would have a negative impact on their business.
Growth expectations are put on the long finger
In light of developments in the global economy, results show that CFOs have reassessed slightly their predictions with regards to growth, both with regards to their own companies, in addition to the overall economy. While the numbers of CFOs (40%) who believe that their company has already or will return to growth by the end of the year remains consistent with last quarter (39%), there has been an 8% drop to 34% in the number of CFOs who indicated that profitability may decrease over the next six months. That said, the remainder believe that profitability will increase (39%) or remain the same (27%).
Once again, the results show that CFO confidence in their own companies outstrips their confidence in the economy. 82% of respondents believe that it will be the latter half of 2012 or start of 2013 before the Irish economy returns to growth. However, 10% do believe that is has already returned to growth, an increase of 8% on last quarter.
Exchange rate risk still a priority for CFOs
Exchange rate sensitivities remain a priority for CFOs, however following increases in the previous three quarters, the net perception of exchange rate risk has stabilised somewhat, falling 2% to 39%. With regards to exchange rates, CFOs now expect both the US Dollar (48%) and the GB Sterling (53%) to strengthen against the Euro.
Market risk, when compared to financial, operational and strategic risk, remains the key worry among respondent CFOs. However, concerns in this area have fallen significantly after a sharp increase last quarter. 57% of respondents highlighted this as a key concern, compared with three quarters in Q2. Strategic risk has increased, rising by 9% to 20% in the number of CFOs who identified this as a concern.
This quarter’s findings suggest that Irish CFOs are continuing to make strides in their own companies amidst the economic turmoil. Confidence and growth predictions for their own businesses are relatively stable, which, with the continuing uncertainty in the global marketplace, is extremely positive. Yet, as long as any certainty in local and global markets remains elusive, long term strategic planning and forecasting will be troublesome. CFOs will be looking towards Budget 2012 to provide them with visibility on how 2012 might look like from an Irish standpoint.
Shane Mohan is a Partner at Deloitte. This survey is the ninth in a series of quarterly surveys by Deloitte of Chief Financial Officers of listed companies, large private companies and Irish subsidiaries of overseas multi-national companies. The survey was conducted in September 2011. The Deloitte CFO Survey is the only survey that seeks to establish the views of CFOs in relation to relation to the financial markets, economic outlook and business trends.