2023 will be a year of multifaceted risks; make sure your supply chain is up for the challenges ahead - Nordea
By Richard Hayes, Head of Trade Solutions Denmark, Nordea Bank Abp
2023 will be a year of continued challenge and turbulence in the world of trade. With economic and geopolitical factors at play, corporate treasuries will be balancing a broad range of risks in their planning and strategy discussions. We are now in the fourth year of the COVID-19 Pandemic/post pandemic recovery, the second year of the Russian invasion of Ukraine and we are seeing ongoing stress across financial markets and national economies. 2022 was in fact one of the worst performing years in the last 150 if you look at the returns across both equity and treasury markets. So what do we need to keep an eye on in 2023 and how will it impact trade?
First of all, inflation: The series of macro shocks seen over the period of 2020-2022 have all contributed to the inflationary pressures we are seeing today. In many instances central bankers will be hoping that inflation is transitory and will reduce at a similar speed to its emergence. However inflation can be caused by structural factors such as a mismatch between supply and demand, changes in monetary policy, or long-term changes in the economy. These types of inflation are more persistent and may be more difficult to bring under control. It's important to note that even transitory inflation can have negative effects on an economy. For example, it can lead to uncertainty, reduce purchasing power, and create challenges for businesses and households.
What about geopolitics? We are now on the cusp of a new paradigm in word trade and the old approach to globalisation and greater integration is firmly on the back foot. The latest series of events to undermine the globalisation doctrine was Russia’s invasion of Ukraine. The world seems to be tethered to a series of crisis, or the threat of them. Looking ahead, the challenges we face are likely to only become more acute. At the recent World Economic Forum in Davos, attendees were asked to highlight the most pressing risks in the near term and also further out to the next 10 years. It is interesting to note that the current cost of living crisis was the number one risk in the near term but coming in at number three and five were major geopolitical risks which would have been historically much lower in the ranking. Contrast this though to the longer term 10 year view; failure to mitigate climate change, biodiversity loss and ecosystem collapse; the top 4 most severe risks over the next 10 years are all environmental. The cost-of-living crisis drops out of the top 10 entirely, while geoeconomic confrontation drops to 9. From a near term trade perspective, energy, cost of living and geopolitics are all key issues that companies must be aware of and attempting to mitigate. However strategic business leaders must also be aware of the longer term risk of climate and human development whilst they battle the here and now issues.
Market Impacts are felt throughout the supply chain. The notable deceleration in major economies has reduced demand for goods and services from many emerging and developing economies who form a key and integral part of the global supply chain. Moreover, the slowdown is occurring just when governments in many of these economies are running out of policy space to respond, if necessary, to the emerging challenges: COVID-19 recovery, persistent supply-chain bottlenecks and inflationary pressures, rapidly evolving sanctions regimes and heightened financial vulnerabilities in large parts of the world. The combination of these threats could increase the risk of a hard landing in these economies.
How can larger corporation support their key suppliers?
Smaller emerging market suppliers are a vital component of the global economy, contributing to the growth of many large multinational corporations. However, these suppliers often struggle with a lack of working capital, which can have a significant impact on their ability to operate and grow their business. Implications for the suppliers include:
Restriction in the ability to finance their operations; purchase raw materials, manufacture product to fulfil orders and pay wages or cover other expenses associated with running a business.
Suppliers may also struggle to keep up with demand or meet their contractual obligations. This can result in delays, production shutdowns, and missed opportunities to fulfil orders, which can lead to reputational damage and a loss of business.
A lack of working capital can also limit investment in new technologies and innovation. These suppliers often operate in highly competitive industries, and it is critical to invest in new technologies and innovation to remain competitive. Without sufficient working capital and the associated technological and process investment, suppliers can lose their competitive edge and attractiveness to anchor buyers.
Many of the emerging and developing market suppliers rely on loans or credit facilities granted by local banks often at much higher interest rates than seen in developed economies. Not only are financing costs high but lenders are often reluctant to lend to suppliers without a solid financial track record. Without access to credit, suppliers may be unable to expand, grow their business or simply fulfil their ongoing obligations which can further exacerbate their cash flow issues. Ultimately a lack of working capital can impact the long-term viability of smaller emerging market suppliers. Many of these suppliers operate on a razor-thin profit margin, and any disruption to their cash flow can have a significant impact on their bottom line. If suppliers are unable to secure sufficient financing or generate enough revenue to cover their expenses, they may be forced to close their doors permanently. This has the potential to be a major risk for importers and anchor buyers who will rely on these suppliers to provide crucial raw materials or components within their global supply chains.
Stay in close dialogue with suppliers and know the key risks:
With the complex risk environment we are seeing in 2023 it is important for companies to keep up to date on the latest risks and work with their bankers and advisors to ensure they have the right financial strategies and tools to mitigate them. It is also equally important to be in close contact with strategic suppliers. Understand their situation, provide support where possible and consider what financial solutions could be used if they struggle with working capital. A supply chain is only as strong as it weakest link and in times of market stress, the smaller suppliers are usually impacted first.
Richard Hayes, Head of Trade Solutions Denmark, Nordea Bank Abp