What’s next for business post-Covid-19? Forecasts for the future

Trends already being felt across business sectors from banking and energy to industry, tech and telecoms are being accelerated by Covid-19 argue a group of corporate leaders in a webinar organised by AmCham – The American Chamber of Commerce in Portugal – with António Costa Martins, EDP board member and AmCham president, Leslie Rubio, CEO of Citi Portugal and AmCham board member, and Pedro Penalva, CEO of AON Portugal and AmCham first vice-president.

By Chris Graeme

What’s on the horizon for the banking and financial sector?

The world versus the virus?

This current crisis is different from all other crises because it is a health one with a global humanitarian challenge in which governments and industries have to come together to fight a common cause.
Leslie Rubio, CEO of Citi Portugal says that the 2008-2009 crisis was speared by the US housing bubble with a big impact on the financial sector but which primarily affected the US and Europe.
“The good part – if any of this situation can be good – is that now, because of the reconstruction that the banks went through since the previous crisis, the financial system is today in a more robust condition from a liquidity, capital and resource perspective,” she says.
Today, says Rubio, the banks want to support their clients and communities, which is very much in line with Corporate Responsibility. However, she points out that with the current crisis there has been “a disconnect between the market response and the economic impact”.
“The market response has been very volatile, uneven, with market movements that have seen the sharpest and most rapid declines since 1987. We have seen phases that have gone from panic to capital protection to a calmer situation now, with markets recovering in an unprecedented way. We are seeing the impact of the crisis in company valuations, but all very uneven,” explains the Citi Portugal top executive.
The banker believes there will be a big differentiation between industries that are very badly hit, with capacity and demand constrained structurally, while telecoms, health and high-tech sectors will be in a better position to react and survive because they have already been able to counter some of the impacts of the crisis.
Rubio emphasises that in these circumstances there is “flight to quality” with assets that are less leveraged and more sustainable for the investor community.
But while markets have been rising and correcting over the past couple of weeks, the economic impact is more worrying.
“This crisis has had an unprecedented shock in demand levels and in turn resulted in a contraction of growth, with growth revised to -6.3%. Companies and governments have to wrestle with falling growth, rising unemployment, rising pension costs, and therefore unprecedented but repayable support packages from governments and institutions,” says Rubio.

There are limits

Rubio warns that there are limits to the amount of government packages to support business which could cause “unsustainable deficits and debt”.
“Capital markets and banks are playing an important role in being able to provide liquidity, but on a note of caution there needs to be some prudence as reserves are not limitless with a change in cycle unfolding,” the Citi boss warned.
A very important factor that has surfaced with the crisis is how companies will have to think through supply chains, and what this means in terms of globalisation and near shoring or the practice of transferring a business operation to a nearby country, especially in preference to a more distant one.

Expect the unexpected

Companies, corporates and governments are all faced with conducting financial management in a world of uncertainty and uneven impacts and reactions. “No one really know what shape this crisis will take,” she says.
Rubio says it will depend on the success of contagion containment programmes, assessing and repairing the interim damage, and how quickly the economy can rebound in terms of growth.
“If the pandemic is with us for the next eighteen months to two years, how do we prepare and adapt? This is at the forefront of every board and management team. Expecting the unexpected is the way to think about this, with scenario planning, focusing on the importance of liquidity, and buffers with operational resilience and digital operations all very important factors when it comes to survival,” concludes Lesley Rubio.

What’s next for company risk management?

Reflect, reimagine and reset

“The pandemic represents a rare but narrow window of opportunity to reflect, reimagine, and reset our world,” said Klaus Schwab – Founder and Executive Chairman of the World Economic Forum.
According to Pedro Penalva, CEO of AON these words sum up and reflect the reality of what should happen in the immediate aftermath of the Covid-19 crisis.
“We will need to have responses to what may be in future increasing numbers of events that could disrupt the world’s economies. These include extreme climatic events, global cybernetic attacks, other pandemics, or even geo-political crises will become part of our reality,” he explains.
Penalva says that these new realities are important for establishing levels of risk management that companies and corporations have to take. “When we are in a time of huge uncertainty, it is vital to have a high level of maturity in strategy and risk”.
Risks have to be identified that can attack an organisation and how these risks can be quantified in terms of financial and operational impact and how these can be mitigated while setting up contingency plans to meet them. “What are the transparency mechanisms in terms of matching capital to meet these risks?”
“Dealing with all of these and in what manner will prove a big advantage for organisations while hoping for the best but planning for the worst,” Penalva says.
With Covid-19 we are experiencing the worst production disruption in recent decades, global GDP will fall by over 3% while in Portugal it could be around 10%. This will be a very deep and long-lasting crisis where the uncertainty variable with impact the speed or recovery.
The other impact, he says, affects liquidity and the need to have the available capital funds to meet commitments of the organisation.
Questions arise as to how an organisation can translate sales into cash when supply chains are impacted and suppliers cannot deliver supplies, products and raw materials?
Penalva gives the example of a company that was able to rapidly convert its production line to produce disinfectant gel, but then had supply chain problems with the containers to hold it.
“What we have today is a mixture of a shock to demand with financial and consumer impacts, allied to uncertainty with what will happen in the medium to long-term and a shock on the supply side with companies being unable to put their products on the market,” says the AON CEO.
“When you have shocks to both supply and demand you historically speaking get the perfect storm with very complicated and difficult impacts,” Penalva added.
As to the future, there are already trends which can be seen in the markets reflecting digitalisation and sustainability, with a huge acceleration in these trends with companies rapidly adjusting to this new reality.
“These trends already existed, but the pandemic has acted as an accelerant, while at the same time – and for the very first time in history – we are seeing a number of measures being taken by policy makers which are putting people’s health and wellbeing at the centre of priorities such as quarantining to safeguard lives and financial packages to protect companies and jobs. This has never been done at a global level in the history of mankind,” Pedro Penalva concluded.

What’s next for the energy sector?

Sustainability and Digitalisation

Digitalisation didn’t stop because of the Covid-19 pandemic, quite the contrary it has proceeded at a galloping pace over the past three months as more and more people have become familiar with using digital tools and platforms for teleworking in all its myriad forms.
António Costa Martins, EDP board member, highlighted the acceleration of the 4Ds – Decarbonisation (gradual phasing out of fossil fuel dependence), Decentralisation of energy production, with a continuing paradigm shift towards alternative energy sources, Digitalisation that helps enhance and speed up the transformation of the previous two, and Disclosure which means greater due diligence, auditing, scrutiny, editing and making information public.
Then there is the Task Force for Financial Disclosure, which many entities have signed up to, with a commitment from companies to publish their dealings, transactions and results in a transparent manner regarding business and financial sustainability, as well as energy consumption, emissions and use of environmentally friendly materials.
“This environmental movement is unstoppable, with Portuguese companies being members of the World Council for Sustainable Development with around 200 signatory companies worldwide in various sectors — automotive, financial and technology. These decisions cannot solely be in the hands of politicians”.
“The world of enterprise must take a leading role in this revolution otherwise they run the risk of policy makers taking decisions on this which are not adequate for company realities,” he says.
Costa Martins says this movement is underway and will continue to progress, and Governments need to provide the right incentives so that this energy transformation moves forward on a suitable scale for the companies in question, and in a fair and sustainable manner taking into account jobs and avoiding creating social problems,” said the EDP board member.
The recovery, he says, in terms of energy and oil prices, will probably happen more quickly than in the last crisis of 2008-2009, but the market will need incentives so that this new cleaner technologies are smoothly adopted.
Corporate Social Responsibility will also be an increasingly important topic and one which will attract more interest from investors, meeting social and cooperative responsibilities including ensuring that supply chains follow these policies which must embrace the entire ecosystem of these sectors.
“Investors have to give clear signs that those who do not follow these commitments and principles will not get the same treatment as those who do,” said Costa Martins.
Good corporate governance will also increasingly be a topic on the table, involving company risk management, lobbies, compliance. A company that fails to show that it has these policies operating in a well-structured way will not be held in such high appreciation by the investors.
“I think there will increasingly more scrutiny on conflicts of interest involving the company and its shareholders,” said the AmCham president.
“Regarding the financial ratings agencies and private equity companies, aspects such as Green Bonds will be more appreciated by the markets, with discounts being given for keeping to emission targets for those companies that are issuing green bonds that are audited and certified in line with market expectations and best industry practises.”
Green bonds are a fast-growing form of sustainable investing, offering the potential for an effective pairing of investment and environmental objectives. Green bond proceeds are ring-fenced on the issuer’s balance sheet, set aside for the exclusive purpose of financing projects deemed environmentally beneficial. A green bond’s return, however, is backed by the credit of the issuer as a whole. With their large fixed income portfolios and underwriting businesses that make them keenly aware of climate-change risk, insurers are among the leading investors in green bonds.