The pandemic and its effects seem to have been a dress rehearsal of the effects that the Ukraine – Russia conflict are likely to have on the global economy. This was discussed yesterday in an interesting debate I participated in at the Malta Chamber. You can view a video of this debate by clicking HERE. However, the question any business leader needs to ask, is how can I be sure that my business is well prepared with regards the likely effects of this conflict.
Here are some insights from my end on this matter.
The conflict is likely to have the following effects:-
- An inflationary rise in various raw materials leading to higher inflation and a reduction in purchasing power.
- Consumer sentiment is likely to be dampened, leading to various consumers to postpone certain purchases.
- Disruptions in already stressed our supply chains, due to shortages and sanction effects.
- Governments will try as best as they can to cushion the inflationary effects, but this will lead to Governments increasing their expenditure and running higher public deficits
- Central Banks (ECB and Fed) will likely be under higher pressure to increase interest rates as a monetary policy response to higher inflation, but they would be in a conundrum as such inflationary pressures are not the result of an over heating economy but due to disruptions brought about by a back-to-back pandemic and conflict. So why increase interest rates, when we actually need to finance new production structures to make up for the lost of production due to the disruptions that the pandemic and then the conflict brought about?
Within the above background it would be prudent for businesses to take the following stance:-
- Preserve cashflow – Is your business cash rich enough, to sustain lower level of sales? What can you do to improve your cashflow position in the short-term?
- Supply Chain – Is the communication channel with your suppliers strong and vibrant? Are you well aware of how prices charged by your suppliers are developing? Can you look for suppliers from other regions if at all possible?
- Pricing strategy – Are you clear where and what are your margins? Do you know which level of increase in costs you can absorb and which you cannot? Can your pricing strategies be adapted to deliver perceived value?
- Investments – Are you sure that any planned capital investments will not drain cashflow, even when taking a worse case scenario? Is it the case of accessing further external financing or of postponing the investment?
The basis of all the above analysis and consideration is good Governance. Businesses who do not have strong corporate governance structures, with timely financial and KPI reporting, whereby the situation is analysed continuously and data driven decisions taken based on a discussion within the corporate governance structures, will find it difficult to adapt and survive.