Ongoing inflation, refinancing and insolvency pressures, geopolitical issues, and electoral uncertainty are just some of the headwinds D&Os need to be prepared for in 2024, according to Allianz Commercial financial lines and D&O experts.
Since the world eased out of lockdown a new normal has not made daily challenges for companies any easier. Inflationary pressures remain across the globe. In the UK, for example, while inflation rates have slowed, they remain considerably higher than Bank of England targets.
Refinancing of existing debt is proving a shock to the system for some firms. After years of low interest rates, firms refinancing debt are feeling the effects on their profit and loss statements (P&L). While the ability to provide a positive earnings before interest, taxes, depreciation, and amortization (EBITDA) message remains, the impact is clearly being felt for many firms within their cash flow. Directors and Officers are seeing fresh pressure on cash generation. Decisions around how the company finances capital expenditure (Capex) and manages its debt profiles are under more scrutiny from stakeholders. Directors and Officers must choose between new debt at higher rates, discussions with shareholders on equity raisings and, in some cases, easing of Capex in the business.
Economic growth across the globe remains disappointing. Across Europe, the UK and US the most optimistic suggestions are for modest growth in Europe, although sluggish is a more common theme. The likelihood of a recession in the US and UK in 2024 continues to rise.
Considering current interest rate challenges and a bleak outlook on UK and US recessions in 2024, it is unsurprising to learn that insolvencies in the UK are above pandemic levels. However, we are also seeing higher than pre-pandemic insolvencies. A report by the Centre of Economics and Business Research notes that in the UK there were over 6,700 business insolvencies in Q2 2023 [1]. To put this into perspective, the average in the quarters leading up to the pandemic was around 4,100. We are now seeing insolvency activity in line with peaks after the global financial crisis in 2009. It is worthwhile noting that insolvency is not only an SME concern. We have seen high profile insolvency in the UK, most notably in the retail sector.
Meanwhile, globally, business insolvencies are expected to rise by +10% in 2024, according to Allianz Trade [2], a third consecutive annual rise.
Geopolitical risks and other uncertainties
There remain considerable geopolitical issues across the world. At the time of writing, it is approaching two years since the start of the Ukraine war. Heavy sanctions against Russia and Belarus remain. While a significant number of businesses have exited trading in these territories, Directors and Officers should be prepared for the aftermath of the conflict if or when it ends. Is there a strategy in place to return to these territories and with the increasing focus on environmental, social, and governance issues how will stakeholders respond to the ’social’ decisions taken by the board? The Israel-Hamas war brings further uncertainty across the region and the globe. From a board of directors’ perspective, this is a further reminder following the Ukraine war of the responsibility to ensure the safety of employees. Are suitable kidnap and ransom (K&R) processes in place and have the directors prepared the company to withstand business interruption in higher risk territories?
Finally, to add to the challenges of rising costs and insolvency, 2024 will bring uncertainty with key elections in the UK and the US. With polling possibly taking place against a negative economic backdrop, Directors and Officers must be prepared for how any new government will impact their business. As previously noted, higher interest rates will have an impact on Capex, which typically eases in the build-up to elections due to uncertainty.
The challenge for Directors and Officers for 2024 is to be prepared for the headwinds. To be nimble is not only to cut headcount, but to have a strategy that can adapt when presented with a block to the business. Diversity in the boardroom continues to allow companies to have varied approaches when presented with problems. To assist with the challenges ahead, the C-Suite should push beyond the norm in their industry and allow themselves a better chance to be on the front foot for the future.
1] Centre of Economics and Business Research, Britain likely to witness 7,000 business insolvencies per quarter in 2024, as high interest rates cause financial strain, September 4, 2023
[2] Allianz Trade, Global Insolvency Outlook 2023-25: From maul to ruck?, October 18, 2023