CFO survey Q1 2010: executive summary

The first quarter of 2010 has seen another series of developments that will impact on Ireland’s economic recovery. On a positive note: 

• There were high profile investments and job announcements by IBM, LinkedIn and eBay 
• Dublin Port reported the third successive monthly increase in trade through the State’s principal port. Exports increased 10.7% in February when compared with the same month last year
• Annual industrial production rose 13.7% in February according to the Central Statistics Office 
• The Central Bank, and a number of other economic commentators, have predicted a return to growth in GDP and GNP by the end of 2010, but still an overall decline in annual terms. For 2011 both GDP and GNP are predicted to increase
• A 0.1% rise in consumer prices in March has eased fears of a deflationary trend 
• There were growing signs of economic recovery internationally, especially in the United States 

However, unemployment is projected to continue to rise through 2010 and increasing prices, coupled with the recently announced rise in mortgage interest rates by several lenders, will create challenges for consumers and businesses. 

In February, the European Commission granted approval of the National Asset Management Agency (NAMA) and the first tranche of loans subsequently transferred to it. Interestingly, the valuations were lower than expected, and the certainty created seems to have been well received by the international bond markets, rating agencies and the international financial press. 

In terms of the public sector and the political arena, continued industrial action and work to rule by public service unions reached a head when the Passport Office became the main focus of a public backlash to reduced services. At the time of writing, it looks as if many public sector unions are about to reject the National Public Sector Pay and Reform Agreement. The Government took a further knock with the resignation of three senior Ministers which led to a cabinet reshuffle. The announcement of a general election in the UK for 6 May is an interesting development with potential implications for Ireland. In the Deloitte UK CFO Survey for Q1 2010, 56% of CFOs think a hung parliament would be negative for their business and 93% think it would be negative for the UK economy. 

The appointment of provisional joint administrators to Quinn Insurance clearly sets out the intentions of the new Financial Regulator. While this event happened after our survey was completed it demonstrates the volatility that still exists in the market, and is a topic that we look forward to exploring later in the year. 

Optimism amidst the challenges
CFOs are positive regarding their own company’s revenue and profits over the next 6 months with the expectation that turnover (69%) and profits (69%) will either increase, or at least stay the same. Compared to our previous survey, CFOs are slightly more optimistic about the overall financial outlook for their companies, with an increase to 32% predicting a return to growth in 2010. A positive but cautious outlook again points to a steady return to growth in the medium term. 

Credit availability
Irish bank funding is now the least preferred method of external funding for our CFOs. The cost and lack of availability of credit from these banks is the most likely cause for this. The top two preferred methods of funding for CFOs are now corporate bonds and overseas bank funding. Overseas bank funding has emerged as the most available source of finance compared to 6 months ago. CFOs do not see the supply of credit loosening in 2010 but there is optimism among a majority that 2011 and beyond will see an improvement. 

Banking sector and NAMA 
There was a general welcome for NAMA - 60% of CFOs believe that it will ultimately have some positive impact on the availability of credit, and 52% indicated that it will have a positive impact in restoring the credibility of the banking sector. It will be interesting to see how this plays out over the rest of this year once more loans have been transferred and the economic effects start to trickle through. 

Exchange rate a key risk 
Exchange rate risk emerged as a major concern over the last 12 months. Uncertainty in the international market and a slow EU response, coupled with a public backlash in Germany and France to the Greek financial crisis have resulted in exchange rate fluctuations. Many CFOs now expect to see further strengthening of the dollar against the euro. Uncertainty is further fuelled by the May elections in the UK, where there is speculation that a new government will devalue sterling to drive UK competitiveness.

National Pensions Framework 
When asked for reaction on changes to the National Pensions Framework, 35% of CFOs stated that they are in the process of closing an existing defined benefit pension scheme in light of the pension funding problems. Some CFOs’ comments indicated they were closing their defined benefit scheme to new entrants with consideration being given to future benefit changes and switching to defined contribution schemes. This indicates a very rapid acceleration in the demise of pension benefit accruals under the defined benefit model. 

What to expect from next quarter 
The first quarter of 2010 has seen a series of mixed signals in relation to economic recovery. There were some high quality inward investments announced by the IDA; industrial production and international trade statistics are showing upward trends; and most economic predictions set the end of the year as the timeframe for a return to growth in GDP and GNP. 

On the other hand, unemployment, increasing prices, a rise in mortgage interest rates and the potential for further public sector industry unrest will continue to be causes for concern. 

The strength of the euro has been called into question with the slow and uncertain response by the EU to the Greek financial crisis. The full impact and resolution of this will hopefully become clearer over the next quarter. 

A key question for next quarter’s survey will be whether these positive developments can continue and so outweigh the threats to economic recovery.

Shane Mohan
Partner, Deloitte