Elevated geopolitical risks, persistent cybersecurity threats, lingering supply chain issues, and continued economic pessimism are expected to remain pivotal concerns for finance and treasury professionals in 2024.
Additionally, here are three more important considerations finance chiefs and treasurers will likely face next year and which they should keep their attention on:
With the exception of China and Japan, major global markets to maintain high interest rates for much of 2024
According to The Economist Intelligence Unit’s (EIU) white paper Industry outlook 2024, “High interest rates will persist into 2024 in most key global markets, with the exception of China and Japan.”
“We forecast that the central banks of these two Asian giants will keep money cheap in 2024 as inflationary pressures remain weaker than elsewhere and as they aim to stabilise their currencies in ways that boost their export-oriented economies. Those exceptions aside, rates are likely to ease only moderately in 2024”, the white paper noted.
Taking the US and the euro zone as examples, the EIU believes that the US Federal Reserve (Fed) and the European Central Bank (ECB) have likely reached the peak of their base rates, unless unforeseen inflationary events occur. Nevertheless, EIU’s forecast indicates that both monetary authorities will only commence interest rate cuts from the second half of next year, and such reductions will be moderate as price rises revert to their 2% inflation targets.
The EIU holds the view that “This scenario is painful for borrowers, as those with floating-rate loans must make higher periodic payments and those who must refinance existing credits will have to take on more costly financing. The impact will be especially severe for households with mortgages and highly indebted companies that do not have fixed-rate credit.”
Conversely, sustained higher interest rates are expected to continue for at least another year, as per EIU. This is likely to prove beneficial for institutional investors such as pension funds, as well as households with minimal debt. This trend will be particularly evident in 2024 as waning inflation leads to even more positive rates of return, reckons EIU.
High rates are also likely to curtail the demand for loans, as well as pose risks and challenges for the banking sector. “Many borrowers, both households and companies, will struggle to shoulder heavier burdens on their borrowing, and may miss repayments or default entirely. Levels of non-performing loans (NPLs) have already ticked up somewhat in most major economies, aside from China, where defaults by property developers have already triggered a crisis”, cautions the EIU white paper.
Nonetheless, mixed results ensue when interest rates remain high. Fixed-income investors stand to gain from elevated rates. As inflation trends downward towards central bank targets, fixed-income investors are likely to experience a positive upswing in returns, the EIU pointed out.
AI, data, privacy, and competition will be under more regulatory scrutiny
With the rise in regulatory activity in the US, the European Union (EU), and elsewhere, regulators are expected to increase regulatory scrutiny over developments in artificial intelligence (AI), data access, privacy and competition.
EU’s AI Act, the world’s first comprehensive legislation to regulate the use of AI takes a risk-based approach and categorises AI systems into four risk levels that range from minimal to unacceptable. “But the rapid development of generative AI has already led to a rewrite of the AI Act, showing the difficulties of keeping up with innovation. Moreover, the current draft makes all foundation models high risk, requiring monitoring and registration before entering the market, and
could prove restrictive”, states the EIU white paper.
EIU further explains that “Other EU regulations, such as those on data (the Data Act and Data Governance Act), privacy (the General Data Protection Regulation) and competition (the Digital Markets Act—DMA), will also have an impact on the evolution of the AI market. The DMA, with the Digital Services Act (DSA), will become fully enforceable in 2024, giving regulators a greater say in the internet market, especially for the largest companies, which will be under greater scrutiny.”
The US has also taken its first step in regulating AI. On October 30, US President signed an executive order (EO) on the safe, secure, and trustworthy development and use of AI. “Broadly summarized, the order directs various federal agencies and departments that oversee everything from housing to health to national security to create standards and regulations for the use or oversight of AI”, as was reported in an article published in Vox Media on October 31.
The EO includes various provisions that will generate both risks as well as opportunities for corporations. This necessitates corporate compliance and treasury teams to closely monitor development and deployment of AI technologies, ensuring that they adapt their strategies to align with the evolving landscape of AI standards and regulations, while prioritising security and privacy within their organizations to mitigate risk exposure and preserve brand reputation.
Need to take climate risk remarkably serious
The EIU white paper suggests that due to “Climate change as well as the El Niño climate pattern, 2024 is expected to be the hottest year ever recorded, resulting in threats to human health.”
The ongoing El Niño event is expected to last at least until April 2024, according to a new update from the World Meteorological Organization (WMO).
El Niño is characterised by warmer global temperatures that amplifies the potential for extreme weather and climate events such as heatwaves, drought, wildfires, heavy rain and floods in many regions, as per WMO.
“El Niño occurs on average every two to seven years, and typically last nine to 12 months. It is a naturally occurring climate pattern associated with warming of the ocean surface in the central and eastern tropical Pacific Ocean. But it takes place in the context of a climate being changed by human activities”, observes WMO.
Crop yields have already been negatively impacted by severe droughts and heatwaves, and the recurrence of El Niño may worsen weather events, resulting in “Record-high global temperatures in 2024. These disruptions, combined with geopolitical factors such as the collapse of a grain export deal between Russia and Ukraine, could put higher than expected operational stress on commodity-dependent industries, including agriculture, mining and manufacturing. If extreme weather events have a significant impact on production, this could lead to shortages, straining global supply chains and once again adding to upward inflationary pressures”, warns EIU.
Among the different types of risks that corporate treasurers had to navigate in 2023, geopolitical cybersecurity, market, credit and liquidity were among the top risk concerns. Given that climate risk is likely to heighten in 2024 and can affect corporate balance sheets, it is not only imperative for their treasurers to engage in conversations about climate hazards, but also take climate vulnerabilities remarkably seriously. Incorporating climate-related risks into existing risk management systems will go a long way in making progress in this direction.
To conclude, the last few years have brought about several challenges for treasurers and finance chiefs. With geopolitical conflicts back in focus and uncertainty shrouding the global economy, it is equally important for treasury executives to be attentive to global interest rate movements, climate-related risks and extreme events, and key regulatory considerations encompassing AI, data, privacy, and competition,
Keeping tabs on these three aspects will help corporate treasury mitigate the potential threats and losses that can adversely impact their organization’s capital, earnings, value, and reputation in 2024 and beyond.
The only certainty in business is uncertainty, and approaching uncertainty with knowledge, curiosity, and information-driven actions will help organizations prepare for different outcomes. Companies and their treasury teams that invest more time and effort in monitoring and understanding the three key factors described in this article and follow it up with a preparedness plan are more likely to grow and thrive in the foreseeable future.
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