Bushfire and Coronavirus (COVID-19) have CFOs concerned

Rising uncertainty is challenging Australian CFOs and impacting their confidence about the financial prospects of their businesses going forward. The latest edition of Deloitte’s biannual CFO Sentiment survey finds that over half (54%) of CFOs remain optimistic about the future, but this is down from 68% in the previous six months. The rising uncertainty is increasing CFO cautiousness, with almost 40% of CFOs remaining neutral about their financial prospects in the future, up from a quarter of CFOs in the last half. Only 8% say they are pessimistic.

It is important to note that many of the survey responses were received before the worst of the bushfire season and the emergence of the coronavirus (COVID-19). We would expect both factors to exacerbate the levels of uncertainty noted by CFOs in this survey.

Key findings are that:

  • Overall sentiment amongst CFOs is more optimistic than negative, with net optimism at 46%
  • Net uncertainty about economic conditions has grown since mid-2019 – from 66% to 75%
  • 58% of CFOs are expecting profits to decrease or have no change over the next 12 months
  • 58% also believe they will face increasing risks (but also opportunities)
  • 50% expect interest rates to fall further through 2020.

Deloitte partner and CFO Program leader, Steve Gustafson, said: “In comparison to when we last surveyed CFOs in mid-2019, CFOs optimism has fallen, with a distinct uptick in CFOs identifying as neutral regarding the financial prospects for their business. This has coincided with 58% of CFOs expecting profits to decrease or remain neutral and 58% of CFOs bracing for an increase in risk/opportunity over the next 12 months.

“The climb in neutrality may indicate that Australia’s CFOs are adopting a cautious approach as the complexity of recent global events unfolds and their full impact is yet to be completely realised. Although it is pleasing to note that the numbers that are pessimistic remain low.”

Cautious optimism (despite an economy doing no favours)

“Optimism had fallen across our two previous surveys, covering H2 2018 and H1 2019,” Gustafson said.

“Yes, only 6% are highly optimistic, but none were highly pessimistic, and just 8% were pessimistic, leaving the bulk as either optimistic or neutral. This indicates overall sentiment is cautiously optimistic rather than pessimistic.

“But sentiment about the economy is still constrained, and business performance expectations are stalling as a result.

“Concerns about economic conditions in Europe and the Asia-Pacific, including a China slowdown, remain a drag on sentiment, despite a resolution on Brexit. On the other hand, this is the first time since late 2018 that US economic performance, driven by improved USA-China trade relations, has been a source of optimism, rather than pessimism.

“CFOs seem less impressed with record low interest rates, after previous rate cuts failed to deliver the hoped-for stimulus. Overall, economic gloom and uncertainty have dampened business performance expectations.

“If revenue and profit growth expectations stall, this does not bode well for business performance this year.”

Getting comfortable with economic uncertainty (but risks remain)

“Financial and economic uncertainty has continued to rise, with 75% of CFOs rating it above normal, up from 66% 12 months ago, and 48% at the end of 2017,” Gustafson said.

“But CFOs have reported being more willing to take on risk, bucking the usual inverse relationship between risk appetite and uncertainty.

“Business risk appetite usually moves inversely with levels of financial and economic uncertainty, however the second half of 2019 has seen a departure from this relationship, with the share of CFOs receptive to taking greater risk on their balance sheet increasing by 5% from the first half of 2019.

“This trend mirrors the net improvement in optimism that CFOs reported this period, despite rising levels of uncertainty, suggesting an increasing level of comfort by CFOs with today’s persistently uncertain times.

“Over half of CFOs also expect the cost of meeting increasing regulatory requirements, as well as securing and retaining key talent, will be crucial internal challenges to tackle in 2020.”

Rates and the dollar

Fifty per cent of CFOs expect interest rates to fall further through 2020, and most others expect them to remain at their current all-time low. Less movement is anticipated with the Australian dollar, with 60% expecting it to remain about the same through 2020.

“After three rate cuts by the RBA in 2019, and sluggish economic performance, it is unsurprising that 96% of CFOs expect rates to fall further or remain steady,” Gustafson said.

Digital transformation and skill shortages

Survey respondents also identified a lack of workforce skills, including analytics capabilities, as standing in the way of future-ready finance function digital transformation.

“CFOs still see the need for digital transformation to enable greater agility and competitive edge, although barriers include costs, integration issues with other digital platforms and workforces not having the needed skills,” Gustafson said.

“Nearly 80% said the greatest skill shortage they faced was in people with advanced business analytics capabilities, followed by financial planning and analysis and compliance.”

COVID-19 & Australian bushfires impact

The spread of the coronavirus is providing a major new challenge to the global economy with current paralysis of large parts of China’s society and economy.

“Australia is in the slipstream of these risks with iron ore prices falling substantially on reduced activity in China, and with travel bans impacting our international education and tourism sectors,” said Gustafson.

“If the travel ban blocking any foreign nationals arriving from China or transiting through China remains in place for an extended period of time, the negative impacts on Australia’s tourism and international education sectors will be substantial.

“Deloitte Access Economics estimates the economic costs could add up to $5.5 billion in the first half of 2020, noting this is not huge for a $2 trillion economy. But as we have seen with the share market drop in the past week, it’s the potential dent to confidence that we should be most concerned about.

“Beyond the terrible human tragedy, the current bushfire season has taken a toll on both consumer and business confidence, especially in directly affected regions, and key sectors such as tourism. Although there is positive role for the business community to play in supporting rebuilding and developing greater community resilience in areas hard hit by bushfires.”