Central Europe and Ukraine CFO Survey: Does 2019 look optimistic?

14/ 03/ 2019

Chief Financial Officers from nearly 700 major Central European organizations representing a wide range of industries and sectors are positive about the economic outlook and expectations for their own businesses. Although the surge in expectations observed back in 2018 has slightly declined, this year’s forecast still remains optimistic. Below are the results of the 2019 CFO Survey conducted by Deloitte. This is the tenth consecutive year the CFO Survey is conducted and used as an important indicator of changes in sentiments of the leading financial experts from Central Europe. Ukraine CFO Survey findings. Ukrainian CFOs are the most optimistic among all of the analysed countries regarding the increase of company revenues – 95% of respondents believe in higher revenues compared to 66% in CE region. Recent reforms and developments have a favorable impact on Ukraine’s business environment; in particular, Ukraine is steadily improving its positions in the ease of doing business ranking. In addition, Ukraine is in the process of implementing reforms supported by international institutions (such as WB, EBRD, and USAID). During 2018, the volume of trade with EU has increased. In particular, during three quarters of 2018 export of goods and services to EU increased by US$ 2.5 billion compared to similar period of 2017, reaching US$ 17.5 billion. During the mentioned period, import from EU to Ukraine has also increased by US$ 2.4 billion amounting to US$ 19.0 billion. The only less optimistic expectations, compared to CE region, are the uncertainties facing businesses. In Ukraine, 42% of CFOs estimate the overall level of economic uncertainty as high compared to 35% in CE region. The expectations regarding the level of uncertainty, among other factors, might be driven by presidential and parliament elections forthcoming in 2019. Moreover, 65% of Ukrainian CFOs do not think that 2019 will be a good time for taking greater risk. These anticipations are similar to those of CFOs in CE region (73%), and might indicate global trends. Expectations of Ukrainian CFOs about the GDP growth correlate to average in CE Region. In particular, 42% of Ukrainian CFOs are optimistic about the GDP growth in 2019. Positive outlooks are also supported by the fact that Ukrainian GDP has been steadily growing during 2016–2018, with the growth rate reaching between 2.4%-2.9%. Ukrainian CFOs anticipate that inflationary pressure will remain strong in 2019, with 72% of respondents expecting the inflation rate to increase over the next 12 months. In recent years, inflationary pressure was comparatively high in Ukraine. However, the inflation rate has decreased down to 9.8% in 2018 compared to 13.7% in 2017, reaching a five-year low rate. In addition to greater hopes for higher company revenues over the next 12 months, Ukrainian CFOs predict the decline in unemployment levels (58% compared to 38% in CE region). Ukraine is experiencing migration of economically active population to Central Europe, due to which the Ukrainian business might expect further wage growth and a local shortage of workers. According to statistics, the number of vacant positions has increased. Ukraine continues to be an attractive market for different industries, particularly as a production site for international companies as well as an outsourcing destination for IT and business process. In 2018, a number of international companies have set up new production sites in Ukraine, namely Sumitomo Electric Bordnetze (SEBN), Bayer and others. Furthermore, a number of global retail companies, such as IKEA and H&M have entered the Ukrainian market. In addition, a low-cost carrier Ryanair entered the Ukrainian market in 2018. Findings of SFO Survey in other Central European countries. The 2019 edition has just been published, and slight negative changes in several key areas suggest that concerns are slowly growing about the uncertainties faced by businesses in financial and economic spheres. The most significant outcomes are: An anticipated average growth in GDP of 2.3%, 0.1% lower than we recorded in 2018 A fall in the proportion of CFOs predicting a decline in unemployment during the year ahead, down from 48% last year to 38% in 2019 A rise in the share of respondents who believe there is a high level of uncertainty in the business environment, up from 31% in 2018 to 35% now Economic outlook. Company financial outlook remains positive but down from previous surveys Most often, CFOs see their companies’ financial prospects either as better or unchanged (both 39%) when compared to six months ago. However, there has been a small but regular tendency towards decreasing optimism since 2016. Most CFOs believe that revenues will be higher in 2019 (66%), but the share that holds this positive view has decreased since last year by 7p.p. Business environment outlook. More CFOs are risk-averse than in 2018 Same as last year, most of the surveyed CFOs think that this is not a good time to take on greater risks when making financial decisions. The overall proportion of CFOs sharing this opinion has risen to nearly three-quarters (73%), although there is a spread of opinions depending on country. For example, while CFOs in Hungary and Bulgaria are optimistic about the risk environment, those from Slovakia, Lithuania, Poland and Romania are more pessimistic than they were last year. Operating margins are expected to stay the same or grow Most CFOs expect operating margins to increase or stay the same (both 38%), but there was a slight decrease in optimistic expectations (from 42% in 2018 down to 38% in 2019). Rising costs identified as the biggest risk factor When identifying the major risk factors facing business, more than half (57%) of CFOs consider increasing costs as a major threat to their business, highlighting costs related to workforce (selected by 90%), transportation (82%) and production (83%) as key areas of concern. The number of respondents predicting an increase in borrowing costs has increased significantly (up by 9 p.p., from 55% in 2018 to 64% in 2019). Employment rate. Employment levels are expected to stay the same or to increase. Most CFOs expect the number of employees in their companies to remain unchanged (45%) or to increase (37%). However, considering expectations for decrease in other performance indicators, there is a tendency for CFOs to be less willing to hire new employees. And when it comes to finding the right people, technical knowledge and work experience are the two hardest skills for companies to find. Improved remuneration and staff training are the main actions being taken to address skilled labor shortage. Deployment of artificial intelligence When conducting this year’s survey, we focused on the attitude of CFOs to artificial intelligence (AI) and their experience in applying AI-based solutions and other cognitive technologies. Despite remarkable progress achieved by AI in recent years, the results suggest that the companies across Central Europe are not grasping the potential benefits of AI with great speed. Key findings include: 64% of CFOs admit that the finance function in their organization is only a little or not at all prepared for implementing AI solutions; 77% of the region’s companies do not use any form of cognitive tools; there is no broad agreement among CFOs about whether it is relevant for the finance function to adopt AI solutions; performing routine tasks is the most popular application of AI, and very few CFOs currently use it to support managerial processes; accounting is a key area for AI solutions. When it comes to AI and other cognitive tools replacing humans, the long-term outlook for employment opportunities is not positive. While CFOs believe that such technologies will have little impact over the next three years, and that in three years AI/cognitive technologies and workers are likely to augment each other’s abilities, in 10 years’ time a significant number of jobs in financial sector will be replaced by technology. Source: https://www2.deloitte.com/ua/en/pages/press-room/press-release/2019/ce-cfo-release.html

Ukraine CFO Survey findings

Ukrainian CFOs are the most optimistic among all of the analysed countries regarding the increase of company revenues – 95% of respondents believe in higher revenues compared to 66% in CE region. Recent reforms and developments have a favorable impact on Ukraine’s business environment; in particular, Ukraine is steadily improving its positions in the ease of doing business ranking. In addition, Ukraine is in the process of implementing reforms supported by international institutions (such as WB, EBRD, and USAID).

During 2018, the volume of trade with EU has increased. In particular, during three quarters of 2018 export of goods and services to EU increased by US$ 2.5 billion compared to similar period of 2017, reaching US$ 17.5 billion. During the mentioned period, import from EU to Ukraine has also increased by US$ 2.4 billion amounting to US$ 19.0 billion.

The only less optimistic expectations, compared to CE region, are the uncertainties facing businesses. In Ukraine, 42% of CFOs estimate the overall level of economic uncertainty as high compared to 35% in CE region. The expectations regarding the level of uncertainty, among other factors, might be driven by presidential and parliament elections forthcoming in 2019.

Moreover, 65% of Ukrainian CFOs do not think that 2019 will be a good time for taking greater risk. These anticipations are similar to those of CFOs in CE region (73%), and might indicate global trends.

Expectations of Ukrainian CFOs about the GDP growth correlate to average in CE Region. In particular, 42% of Ukrainian CFOs are optimistic about the GDP growth in 2019. Positive outlooks are also supported by the fact that Ukrainian GDP has been steadily growing during 2016–2018, with the growth rate reaching between 2.4%-2.9%.

Ukrainian CFOs anticipate that inflationary pressure will remain strong in 2019, with 72% of respondents expecting the inflation rate to increase over the next 12 months. In recent years, inflationary pressure was comparatively high in Ukraine. However, the inflation rate has decreased down to 9.8% in 2018 compared to 13.7% in 2017, reaching a five-year low rate.

In addition to greater hopes for higher company revenues over the next 12 months, Ukrainian CFOs predict the decline in unemployment levels (58% compared to 38% in CE region).

Ukraine is experiencing migration of economically active population to Central Europe, due to which the Ukrainian business might expect further wage growth and a local shortage of workers.

According to statistics, the number of vacant positions has increased. Ukraine continues to be an attractive market for different industries, particularly as a production site for international companies as well as an outsourcing destination for IT and business process.

In 2018, a number of international companies have set up new production sites in Ukraine, namely Sumitomo Electric Bordnetze (SEBN), Bayer and others. Furthermore, a number of global retail companies, such as IKEA and H&M have entered the Ukrainian market. In addition, a low-cost carrier Ryanair entered the Ukrainian market in 2018.

Findings of SFO Survey in other Central European countries

The 2019 edition has just been published, and slight negative changes in several key areas suggest that concerns are slowly growing about the uncertainties faced by businesses in financial and economic spheres.

The most significant outcomes are:

An anticipated average growth in GDP of 2.3%, 0.1% lower than we recorded in 2018
A fall in the proportion of CFOs predicting a decline in unemployment during the year ahead, down from 48% last year to 38% in 2019
A rise in the share of respondents who believe there is a high level of uncertainty in the business environment, up from 31% in 2018 to 35% now

Economic outlook

Company financial outlook remains positive but down from previous surveys

Most often, CFOs see their companies’ financial prospects either as better or unchanged (both 39%) when compared to six months ago. However, there has been a small but regular tendency towards decreasing optimism since 2016. Most CFOs believe that revenues will be higher in 2019 (66%), but the share that holds this positive view has decreased since last year by 7p.p.

Business environment outlook

More CFOs are risk-averse than in 2018

Same as last year, most of the surveyed CFOs think that this is not a good time to take on greater risks when making financial decisions. The overall proportion of CFOs sharing this opinion has risen to nearly three-quarters (73%), although there is a spread of opinions depending on country. For example, while CFOs in Hungary and Bulgaria are optimistic about the risk environment, those from Slovakia, Lithuania, Poland and Romania are more pessimistic than they were last year.

Operating margins are expected to stay the same or grow

Most CFOs expect operating margins to increase or stay the same (both 38%), but there was a slight decrease in optimistic expectations (from 42% in 2018 down to 38% in 2019).

Rising costs identified as the biggest risk factor

When identifying the major risk factors facing business, more than half (57%) of CFOs consider increasing costs as a major threat to their business, highlighting costs related to workforce (selected by 90%), transportation (82%) and production (83%) as key areas of concern. The number of respondents predicting an increase in borrowing costs has increased significantly (up by 9 p.p., from 55% in 2018 to 64% in 2019).

Employment rate

Employment levels are expected to stay the same or to increase

Most CFOs expect the number of employees in their companies to remain unchanged (45%) or to increase (37%). However, considering expectations for decrease in other performance indicators, there is a tendency for CFOs to be less willing to hire new employees. And when it comes to finding the right people, technical knowledge and work experience are the two hardest skills for companies to find. Improved remuneration and staff training are the main actions being taken to address skilled labor shortage.

Deployment of artificial intelligence

When conducting this year’s survey, we focused on the attitude of CFOs to artificial intelligence (AI) and their experience in applying AI-based solutions and other cognitive technologies. Despite remarkable progress achieved by AI in recent years, the results suggest that the companies across Central Europe are not grasping the potential benefits of AI with great speed. Key findings include:

64% of CFOs admit that the finance function in their organization is only a little or not at all prepared for implementing AI solutions;
77% of the region’s companies do not use any form of cognitive tools;
there is no broad agreement among CFOs about whether it is relevant for the finance function to adopt AI solutions;
performing routine tasks is the most popular application of AI, and very few CFOs currently use it to support managerial processes;
accounting is a key area for AI solutions.

When it comes to AI and other cognitive tools replacing humans, the long-term outlook for employment opportunities is not positive. While CFOs believe that such technologies will have little impact over the next three years, and that in three years AI/cognitive technologies and workers are likely to augment each other’s abilities, in 10 years’ time a significant number of jobs in financial sector will be replaced by technology.

Source: https://www2.deloitte.com/ua/en/pages/press-room/press-release/2019/ce-cfo-release.html