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CFOs rank Brexit as top concern

By treasurytoday.com | 6th June 2016

CFOs rank Brexit as top concern

This article suggests that UK CFO’s are overwhelming in favour of remaining in the UK based on a recent survey.

This article was published by treasurytoday.com

Chief Financial Officers rank EU membership as highly beneficial for UK exports, FDI and global influence and are increasingly concerned about the risk a potential Brexit poses, a new report shows.

In the UK Chief Financial Officers are feeling increasingly nervous, and there’s no prizes for guessing the source of their anxiety.

According to Deloitte’s latest UK CFO survey – the first since the date of the EU referendum was announced – 83% of CFOs now rate the level of uncertainty facing their business as above normal, high or very high. This is the highest reading in more than three years.

“A fog of uncertainty has descended on the corporate sector,” says Ian Stewart, Chief Economist at Deloitte. “Perceptions of financial and economic uncertainty are back to levels last seen in early 2013 as the euro crisis abated.”

Deloitte’s survey, which questioned 120 Chief Financial Officers (CFOs) of the FTSE 350 and other large private companies, also found support for the EU amongst the UK’s financial executives is on the rise. A total of 75% of the CFOs surveyed believe it is in the interests of UK business for the country to remain in the EU, up from 62% in the fourth quarter of 2015. Only 8% said that UK business would benefit from leaving the EU (slightly up from 6% in Q4 2015).

When asked how they believed EU membership benefited the UK economy and UK businesses:

  • 89% said membership has helped UK export performance.

  • 86% said it has attracted foreign direct investment (FDI).

  • 71% said membership has contributed to the success of UK financial services.

  • 68% said it has boosted the UK’s influence and connections with the rest of the world.

The EU’s legal, regulatory and compliance frameworks were not ranked so highly – only 15% of CFOs said these benefit the UK.

Brexit headaches

But what CFOs are worried about is a potential exit from the EU. The UK referendum on the membership of the EU was ranked the largest risk to business (see chart 1).

Chart 1: Risk to business posed by the following factors

Weighted average ratings on a scale of 0-100 where 0 stands for no risk and 100 stands for the highest possible risk

Chart 1: Risk to business posed by the following factors

Source: Deloitte CFO Survey Q1 2016

In fact, the referendum is ranked ahead of longstanding concerns such as economic weakness in the euro area, weak demand in the UK and the prospect of higher interest rates in the UK.

“There is a period of possibly quite prolonged uncertainty about the tax, regulatory, legal and trading relationships in the event of a Brexit. We’ve seen in the last ten years that this kind of uncertainty can be associated with a drying-up of liquidity, volatility in the financial markets, a decline in risk appetite and a decline in the value of assets,” says Stewart.

This begs the question: are corporates prepared for the referendum? Of those surveyed, 26% of CFOs say their company has made, or is in the process of making, contingency plans for a possible British exit of the EU. Fifty three percent have made no such plans and 20% preferred not to say.

For Stewart, there are a variety of possible reasons why many businesses are unprepared. “Most opinion polls continue to show a lead for the remain vote so CFOs may well see that as the most likely outcome. Alternatively, they may feel that there are just too many uncertainties which hamper the ability to plan for it. Also, what we’ve seen in the past with these external events – like Grexit or the Scottish independence vote – is that planning tends to take place quite late.”

Dealing with rising uncertainties

However, the survey indicates “the unsettling effect of the referendum on business sentiment” is already being felt, says David Sproul, Senior Partner and Chief Executive, Deloitte.

For instance, risk appetite is declining among CFOs with only 25% saying now is a good time to take greater risk onto their balance sheets, down from 51% a year ago. There has also been a marked slowdown in M&A activity – only 18% say expanding by acquisition is a high priority, a fall for the fourth survey in a row.

Against this backdrop, CFOs are now favouring defensive strategies, the survey reports, with cost reduction and increasing cash flow ranked the second and third top priorities for the next 12 months – 40% and 37% respectively.

Brexit isn’t the only concern, however. A potential hard landing in China, weakness of European growth and geopolitical uncertainties in the Middle East and elsewhere, for example, add to the headache for businesses.

But with Brexit now not only adding to, but topping, the list of risks, and corporates being largely unprepared, it would seem there is work to do.

It’s not all bad news, though. According to Stewart, there are “things that organisations can think about now at a very limited, if any, cost which would put them in a better position to cope”. Setting up in-company Brexit groups to bring together employees from across the business – not just those at the centre, he explains, but those “who will be on the front line”.

The purpose of such a group is to keep an eye on developments, try to establish what the firm’s own potential exposures are and if there are any risk mitigation measures to be taken, he explains.

Stewart’s concluding advice, however: “Any preparations that businesses make need to be proportionate. In the greater part of probability, a Brexit won’t happen but nonetheless, with the way the polls are, I think for corporates it makes sense to consider what they can do.”

Treasury Today will be covering Brexit in an in-depth article in the May/June edition and recently conducted a poll of where our readers stand.