The potential for the coronavirus (COVID-19) outbreak to lead to a global recession topped the list of concerns among finance leaders based in the United States and Mexico, according to a new survey released Monday by PwC. Other top concerns include decreased consumer confidence and the potential adverse impact on financial operations and workforce productivity.
Of the 50 chief financial officers and other finance executives who responded to the survey from March 9 to March 11, 80 percent sit in Fortune 1000 companies, with others in healthcare non-profit associations or in privately held companies. Forty-four of the respondents are from the United States, while six are from Mexico.
Of the finance executives who responded to the survey, 90 percent said that if COVID-19 were to end immediately, their business would return to normal in less than three months. “I would expect going forward that their ability to bounce back as quickly will be challenged the longer this virus goes,” Amity Millhiser, U.S. vice chair and chief clients officer at PwC, said on a Monday media call.
On the flip side, 80 percent cited a potential global recession as their top concern. “What this means is that leaders are more confident in their own business visibility to weather the storm than they are in the health of the overall global economy,” Millhiser said.
As it relates to their business operations directly, 54 percent said the outbreak has the potential for “significant” impact, while another 58 percent said they expect a decrease in their company’s revenue and/or profits this year. Forty percent said it’s too difficult to assess right now. Thirty-four percent said the impact has been limited to specific regions but that they are monitoring developments closely.
When asked what financial actions their companies are considering in response to COVID-19, the top responses were “implementing cost containment” (62 percent); adjusting guidance (44 percent); deferring or canceling planned investments (32 percent); and changing company finance plans (28 percent). Just 14 percent of finance leader respondents said that their company isn’t considering any financial actions as a result of COVID-19.
Separately, when asked about their disclosures, 48 percent said they’re planning changes as a result of COVID-19, while 9 percent answered “significant.” Disclosures around risk, business disruptions, and supply chain are all expected to increase.
“I expect the number of going-concern analyses that companies need to do, and their auditors will need to do and look at, will increase, particularly when you look at liquidity, when you look at impairments or valuations,” said Tim Ryan, PwC U.S. chair and senior partner. “Those are issues that will move to top of mind, as companies look to deal with a whole set of unique financial reporting issues that are presented by the virus.”
In that same vein, Ryan said, it’s important for boards to work with management teams on stress-testing plans and stress-testing disclosures and building transparency around risk. “It’s a great opportunity for boards to exercise their governance responsibility to make sure that happens,” he said.
Findings from the survey further signal that most finance executives are focused on near-term cost containment versus long-term decisions, like pulling back on strategic investments. For example, 80 percent of respondents noted a decreased appetite for M&A in the near-term, but only 10 percent said they were changing their M&A strategy.
“In the near-term, we have to acknowledge that M&A activity will slow down significantly, as market uncertainty will clearly be no friend for deal-making,” Neil Dhar, U.S. financial services leader at PwC, told reporters. “Doing deals in uncertain times is far more difficult just practically speaking. It’s much harder to do due diligence. It’s much harder to price risk. There is the added complexity of doing scenario planning—and in this specific scenario, doing diligence on health and people matters will be critical.”
Dhar pointed out that finance executives are weighing a lot of different questions right now: What do my cash flows and expenditures look like? What is a necessity versus what is a nice-to-have? How does it tie to my strategy? What sort of scenario planning do I need to do?
“We are seeing certain companies in certain sectors making decisions to either hold off a deal or hold off capital expenditures in relation to waiting to see how things play out,” Dhar said. Some companies weighing certain geographic expansions are also in a wait-and-see mode right now.
Supply chain considerations
Regarding supply chain considerations, 30 percent of respondents said their companies are considering changes to their supply chain, “with many having adopted short-term alternative sourcing strategies during the first quarter,” PwC noted. “However, the duration of the impact is the most important factor, and we expect that learnings from the outbreak will likely move the competitive forefront of supply chain operations toward more comprehensive proactive modeling.”
PwC noted, however, that this survey was conducted before the stock market volatility intensified and before the United States banned travel from some European nations for 30 days, effective as of March 13. Because the business risk landscape is changing so rapidly for finance leaders around the world, PwC said it intends to repeat the survey every two weeks “to track changing sentiment and priorities.”
“Since the trade wars began, supply chain has been a top-of-mind topic not only for executives, but also for boards,” Ryan said. “We are seeing, and expect to see, certain supply-chain disruption, but we also should feel good about the fact that there is some resiliency built into the system, which is allowing goods to flow at some level.”
Yes, finance executives are having to work through a myriad of complex items right now, “such as impact on fair values, the stress on new credit-loss models, liquidity in cash management, impact on consumer lending and capital requirement planning and scenario planning in certain industries,” Dhar said. However, what we’re also seeing is a lot of cross-sharing across companies and industries and the leveraging of best practices. In that vein, PwC announced that it has launched the COVID-19: Navigator, an online tool to help companies “assess the potential impact to their business and gauge readiness to respond to disruption created by the coronavirus pandemic.”