Managing the impact of volatile inflation

EVEN as the effects of the Covid-19 pandemic fade into the background, companies in Singapore and around the world are grappling with prices of essential materials, products and services spiking at a pace not seen in over a decade. Unfortunately, experts believe the current inflationary trend is here to stay for the foreseeable future, coming on the back of pandemic-led disruptions and supply chain challenges in the last 2 years.

US consumer prices rose again in August, raising the likelihood of another historically large interest-rate hike by the Federal Reserve. Meanwhile, Singapore’s core inflation rose to a 13-year high of 4.8 per cent in July, beating expectations. Selena Ling, chief economist at OCBC, predicts that inflation will stay high into 2023. 

“A lot of central bankers have pivoted. Last year, they talked about inflation being transitory. Now, they are talking about inflation being persistent. So I think if we are hoping for inflation to come down very sharply, that’s probably not going to happen,” she said.

Against this grim backdrop, companies will have to assess their business plans and budgets over the next few years, as they learn how to operate in an inflationary environment characterised by slower growth. 

“While companies have limited control over the macro environment, what they can do is to ensure that their balance sheet remains rock solid to face this volatility. For instance, they should secure fixed rates as much as possible, term out the maturity of their debt, as well as make sure that their balance sheet continues to be liquid, and they have the ability to recycle capital,” advised Arthur Lang, group chief financial officer (CFO), Singtel. 

“Not only is balance sheet strength important, companies need to ensure they have sufficient resources, including talent, to seize any interesting opportunities that should arise amidst the economic malaise.” 

Lang said that Singtel is keeping a close watch on macroeconomic developments and adjusting its own planning parameters to ensure an optimal allocation of capital and resources. This includes proactive measures such as automation and digitalisation to  mitigate the impact of inflation on operating costs. 

Meanwhile, entertainment services provider Cityneon Holdings plans to hunt for growth opportunities even in the face of an impending downturn. “It’s all about moderate growth, because there are definitely pockets of opportunities. If I look at our own organisation, we are very much focused on preparing proper risk overviews from a long and a shorter-term  perspective,” said Mark Kemper, group chief corporate & financial officer, Cityneon Holdings, at the CFO Connect Symposium event in July organised by CPA Australia. 

Recession fears

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While inflation is a concern, it may not necessarily result in an economic slowdown as central banks try to battle rising prices by hiking interest rates. 

“I wouldn’t say that a technical recession is even on the cards for Singapore yet. Mainly because we still have manufacturing, electronics and trade that are very resilient. And if you look across the region, with the reopening of economies, the domestic consumption story is relatively strong,” explained Ling. 

Indeed, she believes that commodity exporter countries or those in the food agribusiness, will benefit from inflation as they are able to pass on some of the costs to their clients. “I think inflation really depends on whether it is demand pull or cost push. Demand pull inflation is actually not that bad a thing because it means that the global economy is recovering and demand is actually picking up.” 

One such agribusiness is Japfa, a Singapore-based company specialising in producing protein staples such as poultry, beef, swine and aquaculture, as well as dairy and packaged foods. “We produce staple foods such as chicken or pork across emerging Asia. So because my product is a staple, it is less affected by inflation because people have to eat, and there is a stronger future in the growth of staple proteins in that particular region,” said Kevin Monteiro, executive director and CFO at Japfa, who also spoke at the CFO Connect Symposium event.

Top of mind issues

In the context of stubbornly high inflation and possibly slower economic expansion, CFOs are reassessing their plans for future growth. Lang said that companies should continue to focus on attracting and retaining talent despite the challenging environment. This can be a source of differentiation at a time when it has become harder to retain people, and employment costs continue to rise. 

“Besides paying competitively, we need to ensure our people get to do meaningful, fulfilling work and in turn are recognised for their contributions. It is also just as important to create a sense of belonging for them through a positive and inclusive work culture and caring for their well-being,” he said. 

Meanwhile, Cityneon is preparing for the bumpy road ahead by focusing on its balance sheet and funding plans. “We have to ensure that we make sound decisions in the context of investment programmes, how we train our people, where we deploy our capital, and the timing of it,” said Kemper. 

“So we hear all the discussions about a potential recession, but as a company we’re saying ‘Let’s have moderate growth, let’s focus on a strong balance sheet, let’s prepare ourselves for proper funding for the coming years. And let’s make sure we deploy that in an appropriate manner.’” 

Above all, Ling advised businesses not to panic as interest rates will likely return to some semblance of normality in 2023. She said: “If you are a CFO or you have your own business, don’t panic. We are probably near the end of this high interest rate cycle. And if they are successful in pushing demand down, then probably we will see some stabilisation in 2023.”