The near-term macroeconomic outlook might be uncertain, but for mid-sized companies there are enormous opportunities as a result of once-in-a-generation structural shifts. Working with a global bank can help firms to weather today’s storms and set course for a promising future, writes Bill Stanton, UK Head of Citi Commercial Bank.
Mid-sized businesses headquartered in the UK, or international firms with UK subsidiaries, face a paradox. Many economic indicators make grim reading – Citi expects global growth to slow to 2.2%; inflation remains above target at 6%-9%; and interest rates are at levels not seen for 15 years. All the talk is of a further slowdown, although Citi puts the probability of a synchronized global recession at just 30%. Meanwhile, FX volatility has increased as geopolitical tensions impact sentiment, while energy and labor costs are sharply higher.
Yet at the same time as mid-sized companies contend with these headwinds, the outlook is exciting. Many firms envisage expansion, not contraction, in the medium- and long-term – a fact that has helped to drive the outperformance of mid-cap indices this year.
The need to address structural shifts, such as the elevation of environmental, social and governance (ESG) issues, creates challenges. But it also generates potential opportunities to cut costs, win new customers and differentiate your business.
Likewise, the rapid digitization of every industry segment requires investment. But harnessing the power of data and technologies such as artificial intelligence and automation can deliver dramatic process efficiency improvements across the business, from treasury and finance to operations and marketing. Many businesses see digitization as laying the groundwork for new business models and accelerated global expansion.
Even the global economic uncertainty that has defined recent years, which has prompted a reshaping of supply chains to reduce perceived risks, has a potential silver lining. While the stakes are high – trade accounts for 52% of global GDP – moving production may cut costs, while reduced political risk in substitute countries should bolster stability. Similarly, nearshoring may have potential reputational and ESG benefits and improve companies’ flexibility to adapt to future disruptions or respond faster to changing customer demands.
Smart tactics and strategic vision
To thrive in this period of paradox, mid-sized organizations need to be both agile and responsive to market changes, while remaining focused on their operational ambitions. One way to tackle today’s environment is to separate the challenges and opportunities into tactical and strategic imperatives.
Tactics is about addressing the need for cost cutting and resilience in a challenging financial environment. At present Citi’s economists see global growth running at a sustained below-trend pace, as central banks deploy tight policies to fight inflation, and many countries face recessionary conditions. Many companies find that they are unable to pass on higher supply chain costs in full to customers: as a result, margins are under pressure. To lessen the pressure, companies need to pare costs wherever possible, which will also provide a buffer should a recession materialize in the coming months.
Strategy is about taking advantage of the key structural shifts– such as ESG and digitization as well as socio-economic shifts. The opportunities that these present could drive organic growth as well as M&A and capital raising. While both dealmaking and capital markets have come under pressure in recent months, there is still capital available for investment and M&A activity, provided a company’s story is compelling. In the first quarter of 2023, despite the marsh macroeconomic backdrop, total deal value globally was just shy of $1 trillion.
Focusing on day-to-day efficiency
For mid-sized companies with global ambitions, working with domestic banks could limit their horizons. In today’s environment, the need to work with a global bank that meets your day-to-day requirements for efficiency and transparency has never been greater. The right capabilities and solutions – from FX and interest rate hedging to trade tools and cash management – can have a material impact on mid-sized companies’ resilience.
For instance, as more companies are seeking longer and more flexible payment terms, some of our clients have benefited from structured accounts receivable portfolio financing, which can be an efficient working capital optimization tool to reduce Days Sales Outstanding, while allowing longer payment terms for their strategic customers.
Another example is the use of Application Program Interfaces (APIs) in payment processing, a growing trend that we see among our corporate clients in EMEA, enabling real-time reporting and visibility, which in turn drives more efficient reconciliation. Banks that have global capabilities and a market-leading position – Citi offers the capability to make payments in over 140 different currencies, for example – are better placed to offer competitive FX rates than rivals with a domestic focus.
International banks can also advise on and facilitate appropriate hedging strategies to minimize FX volatility, which has wrought havoc on some companies’ P&L over the past year. While some banks are focused only on G7 currencies, Citi’s capabilities mean it can help firms implement hedging strategies for a much wider spectrum of currency exposures.
The recent market changes that have particularly affected emerging companies in the digital space, have highlighted the importance to fine tune the use of cash. By implementing pooling and netting structures, firms can optimize their cash, reducing the need to run costly overdrafts in some countries. Alternatively, cash generative companies may be able to benefit by concentrating surplus cash so that it earns the best possible yield.
Looking to the long term
At a practical level, international banks have the infrastructure in place to help clients grow without needing to rely on multiple bank relationships. Efficient payment and collection processes is only part of the challenge, with access to capital and expertise being another. Digital disruptors and other companies going global require consistency, visibility and control wherever they operate, while gaining access to solutions and local market instruments that lower transaction costs.
In an environment where counterparty risk is more prevalent, Citi has proven resilient, reliably providing access to a wide range of alternative sources of funding, including private and public equity markets, and private, high-yield bond or syndicated debt markets. Citi can ensure clients receive guidance on the merits of various choices, and appropriate timing for, capital raising. This could help achieve lower financing costs and a sustainable debt and equity profile that benefits your company’s long-term growth.
Citi Commercial Bank combines market knowledge with industry sector expertise, and understands the competitive dynamics impacting its clients and how peer companies fund themselves or are evolving their M&A strategies, providing these valuable insights that can help gain a competitive advantage.
* All figures referenced in this article refer to global metrics from the Global Economic Outlook & Strategy - The Path to Global Recovery—Assessing the “Acute” and “Chronic” Risks