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The Multidimensional Impact of the COVID-19 Crisis on the Modern Economy – 8 Key Areas Organizations Should be Assessing

March 19, 2020

As the Coronavirus pandemic has matured, so have the complexities and implications on businesses compounded. There has been a tightening of financial conditions, a collapse of inflation expectations, drastically reduced oil prices and the lowest ever bond yields. Furthermore, the reduced Gross Domestic Product (GDP) growth forecast and the severe impact on public health, supply, and demand, manufacturing and services, funding and liquidity, have created demand shocks, supply dislocations, financial risk, health care gaps, wealth reduction and many more such complications.

This coupled with quarantines, travel restrictions and social distancing has led to a significant drop in spending, as also a state of recession. The resulting loss of business revenue could trigger laying off employees and lead to a sharp increase in unemployment levels. Corporate bankruptcies could soar, putting significant pressure on the banking and financial system, thereby developing a lower risk appetite.

While such a slowdown would impact Small and Medium Enterprises (SMEs) more severely, not all sectors are equally affected.  Service sectors, including Aviation, Travel, Tourism, Hospitality, and Retail are likely to witness the largest impact.

Given that is it unclear as to where this will lead to in the future, organizations should not underestimate the potential economic and market impact ahead. This is an evolving situation and brings with it, several implications, which is why this is the time companies should be assessing their business operations, funding, hedging and risk management strategies, and adopt mechanisms to prepare themselves to get back on track at the earliest and put in place, robust precautionary measure for the times ahead.

In lieu of the above facts, these are the 8 areas that businesses should be assessing:

  • It is recommended that companies undertake a scenario analysis to assess how long existing sources of liquidity would be able to hold up, in an elongated stressed environment impacted by supply chain pressure, customer demands, cash flow instability and lack of funding, to name a few.
    • The liquidity position would have to be reviewed as well, to determine if there are hidden pockets, including the availability of undrawn bank lines. Such reserves can be optimized for usage in other regions and countries, and the potential for setting up additional banking facilities to support overall business should also be evaluated.
    • A contingency plan can also be developed, for the funding of upcoming large pending transactions in the near months.
    • Companies will have to be prepared to make quick decisions during the intermittent stable period, to opportunistically raise debt capital at historically low rates.
    • Reviewing existing capital allocation plans like Capital Expenditure (CAPEX), Share Repurchases, debt pay down, etc., would also be beneficial, in this new environment of higher economic uncertainty.
    • Counterparty risk and/or policies like Insurance, AR Sales, etc., need to be reviewed to potentially adjust risk mitigation measures, especially around larger clients.
    • Supply Chain financial exposures and the potential disruptions for key suppliers would have to be evaluated, and their financing needs examined.
    • The effect of reduced foreign sales would have to be analyzed for regions that have been highly impacted, as that may impact the quantum of dividends received by the Head Office.
    • The back-up procedures and related indemnities with banking partners need to be discussed, to facilitate alternative payment instructions in case of system or access issues.
    • The impact of the negative rates on currency exposure, cash management, companies’ investment portfolio, and liquidity management would have to be examined.
    • The existing hedging policy should also be reassessed, and the hedging positions be adjusted in anticipation of lower international revenue and cash flows.
    • Companies should take advantage of dislocations in the Foreign Exchange market like, for instance, Commodity Currency Pressure, as also lock-in rates at historically low levels.

    Ecommerce has gained major traction due to the restricted mobility of people, and while consumer demand is down, it has not completely disappeared. Customers’ changing preferences are not likely to go back to pre-outbreak norms, which is why companies should invest more on online channels.

    • There has been a dramatic shift toward online shopping for all types of goods, including the delivery of food and produce. Companies should invest in online channels as part of their push for Omnichannel distribution. This move will require getting cybersecurity infrastructure in place for data protection, since hackers are taking undue advantage of the crisis and spreading malware to gain access to sensitive data.
    • The ‘Work from Home’ provision for employees, as well as the limited availability of staff has most definitely impacted operational and management activities like accounts payable and receivable, documentation, signatory, and settlement processes. It is prudent to undertake an analysis as to which processes can be automated, wherein a digital workforce can be deputed to manage daily standard and repetitive tasks, thereby reducing the dependency on human beings.
    • An adoption of digital payment systems and emerging technologies including blockchain, cryptocurrency, Fintech should be seriously considered and assessed, due to the high risk of the virus being transmitted through physical currency usage.
    • Uncertainty can lead to several opportunities for potential cash acquisitions of distressed businesses at lower target valuations. Organizations should thus examine whether their supply chain provides a competitive advantage for potential mergers and acquisitions or whether it is a weakness that could be to the benefit of competitors. On the other hand, the strengths and weaknesses of competitors’ supply chains should be evaluated, and potential M&A targets identified.
    • Companies should also prepare for opportunistic share repurchase scenarios, in order to take advantage of lower equity valuations.
    • The COVID-19 pandemic has been an emotionally challenging situation for many people. Which is why organizations need to ensure that they have a crisis response team in place. Health Insurance policies of staff and their families should be adequately taken care of. Organizations should draw up and execute an employee support plan that is consistent and triggers policy change to manage the crisis and provide the right level of support.
    • Teams should be aligned to ensure that they do not operate in silos, but instead, have a more coordinated approach to decision making.
    • Supply chain challenges can be navigated effectively as companies with strong, centralized procurement teams and good relationships with suppliers would be more confident in addressing their current risks.
    • Strategic, long-term changes would have to be made by companies to stabilize their supply chain, including the rationing of critical parts, pre-booking freight capacities, using after-sales stock as a bridge until production restarts and gaining higher priority from their suppliers.
    • Businesses should also begin planning on how to manage supply for products that may, as supply comes back on line, see unusual spikes in demand due to hoarding.
    • Updates to demand planning, further network optimization, and searching for and accelerating the process of qualification of new suppliers is also advisable, to ensure resilience in the supply chain.

    Companies that navigate disruptions better often succeed, as they are able to better anticipate customer behavior and needs, and thereby better invest in their core customer segments.

    • At times such as these, it is recommended that organizations stay close to their customers and offer assistance and support in whatever manner possible. Lesser face to face meetings and working from home provides sufficient time at hand to connect with customers over a phone call or via video conferencing. These measures can in turn, help further strengthen the existing relationship.
    • Companies can also elect to run knowledge exchange sessions through webinars, in order to keep the communication channels open with customers and update them about the latest offers and provisions available to them.
    Dr. Anuraag Guglaani

    Designation: Ph.D.

    About Author:

    Dr. Anuraag Guglaani, Ph.D., is a Partner for Strategy, Transformation, Expansion, Technology, Cyber Security- Governance, Risk and Compliance at MBG Corporate Services

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