2022 was a year of profound disruption. Corporate risk managers, who had hoped that macroeconomic conditions in 2023 would stabilise and make their jobs easier than last year, have already been disappointed.
Whilst supply chain bottlenecks have eased, new geopolitical ruptures are emerging, financial market volatility remains high and the economic outlook for large companies is deeply uncertain. The combination of persistently high input costs and waning demand as tighter financial conditions slow the world’s major economies, is set to put corporate margins under pressure.
In this new era of heightened business risk, effective management of financial risk is essential. It will not only protect a company, but also enable it to remain competitive and seize growth opportunities. It is no surprise, therefore, that risk management has become a corporate board topic over the past 12 months.
In the latest whitepaper, titled ‘2023 Corporate Risk Management Outlook: navigating global business uncertainty’, BNP Paribas aims to provide leaders of large companies the insights to make informed decisions and build financial resilience for an uncertain future. The whitepaper covers the global outlook from a corporate perspective, along with three high-level themes.
Global macroeconomic outlook
Whilst the current inflation shock was originally supply-driven, services and core goods have now become key drivers of global price growth, delaying the disinflationary process and affecting consumer and business behaviours. It is also increasingly apparent that the impact of monetary policy tightening over the last year has been dampened by consumer and corporate saving buffers, supportive fiscal policy and tight labour markets. BNP Paribas’ Markets 360 expects these factors to persist to a large extent in 2023, leading to a prolonged period of high inflation with significant impacts for corporates.
Managing new risks in the cost base
An immediate challenge for corporate leaders is to manage a higher cost base following the extreme commodity and raw material price volatility. Many commodity users are implementing new hedging programmes and those who already had strategies in place are reinforcing them. Inflation, which has been benign for the last two decades, is a pressing issue in many sectors as companies struggle to pass the impact through to customers. It has become a new, measurable financial risk parameter for companies, alongside FX, rates and commodities.
Planning for prolonged volatility
The combination of geopolitics, new monetary policy approaches and looming recessions will entrench volatility. Companies are reacting to this new volatility regime by adapting their approach to risk management. Options and geopolitical tail‑risk hedges not only add flexibility to hedging strategies, but they can also improve resilience and agility.
Dealing with a new debt management paradigm
After years of low interest rates, central banks’ attempts to control inflation have triggered a sharp rise in corporate borrowing costs and increased volatility of capital markets. Corporates may need to diversify their financing sources (including to explore private debt markets) and use hedging instruments to access new funding sources, reduce interest rate volatility and lower borrowing costs.
Given the above-mentioned themes, BNP Paribas believes that the volatility regime change is here to stay and that innovative approaches to risk management will be key to shield corporate business models from financial risk in 2023 and beyond.
If you have questions on the whitepaper or to access the full report, please contact your local BNP Paribas representative.