Deloitte CFO Sentiment

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Confidence, but in a sea of domestic, global uncertainty

Deloitte CFO Sentiment

14 July 2016: Uncertainty may be holding back business investment according to Deloitte’s latest CFO Sentiment survey but, in spite of local and global events in the first half of 2016, confidence among Australia’s leading finance executives was on the rise again.

Key points from the H1 2016 survey, conducted in May, include:

  • 80% of respondent CFOs believe uncertainty is holding back business investment
  • But net 33% feel more confident, a significant jump on the net 5% figure recorded in H2 2015
  • Nearly 40% support fiscal stimulus to boost non-mining business investment
  • And a further 30% agree, but feel budget repair is more important
  • Tax reform was a top pre-election issue for CFOs, but only 20% said the tax debate of the last 12 months is negatively affecting business investment.

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CFO business confidence

Confidence amidst a sea of uncertainty

Deloitte Executive Program leader Tom Imbesi said: “This positive shift in Australian CFO confidence is both meaningful and encouraging. Its improvement is greater relative to confidence levels among their UK and US counterparts, based on Deloitte surveys in those countries, and its something that business and governments needs to embrace in order to capitalise on future opportunities.

“The current environment of record low interest rates, a lower exchange rate and weak wages growth have combined to improve Australian business competitiveness in a way that would be the envy of many advanced economies. And better news from China, in the short term at least, and the associated stabilisation of key commodity prices appears to be supporting greater confidence.

“Our economy is performing well against many indicators, yet CFOs are also right to be wary about the longer term, as there are significant downside risks on the horizon.

“Perhaps not surprisingly therefore, CFO feelings of uncertainty are at record highs, even before the recent Brexit vote that has raised so many new questions, as well as the outcome knife-edge result of our recent federal election.

“Britain’s EU future, the election outcome and even threats around AAA credit ratings are certainly dominating the headlines. Each is a potential contributor to increased uncertainty, but China is the more pressing concern, where debt is producing less growth than it used to and is postponing the transition from investment to consumer-led growth, increasing the risk of a hard landing further down the track.

“Our CFOs believe that uncertainty is holding back business investment. This is based on short term influences such as the recent federal election, but of greater concern are longer term global influences and domestic risks such as an effervescent housing market and persistently low price growth across the economy.”

Impacts on optimism – domestic factors

Tax reform

Tax reform, policy certainty and government stability were the top pre-election issues for CFOs. Business and personal taxes were identified as areas most in need of reform. And despite being taken off the table, some still feel that GST reform should be a priority.

“Interestingly, and despite strong feelings around tax reform, almost 80% of CFOs report that the tax debate has not negatively affected business investment. Instead, pervasive uncertainty is the main culprit,” Imbesi said.

“Nearly 40% support fiscal stimulus to boost non-mining business investment, while a further 30% agree, but feel the state of the budget doesn’t allow for such measures.

“Ongoing government stability remains a source of frustration. Having said that, while the back and forth nature of the tax debate might be expected to have discouraged investment, it appears that the impact has not been significant. Perhaps CFOs never placed any great weight on the credibility of the debate.”

Risk and gearing appetite

Consistent with the improved confidence levels, the risk appetite among CFOs has also improved.

“Nearly 45% believe now is a good time to be taking risk onto the balance sheet,” Imbesi said. “While this may seem at odds with elevated levels of uncertainty, it also reflects record low interest rates and increased company tax cuts.

“That said, this increase still fails to bring about a net positive result, with the majority of CFOs indicating that now is not a good time to be increasing leverage.

“A net 7% of CFOs also believe that Australian corporates are now over-geared, the first such reading since we began surveying CFOs in 2009. This is perhaps the result of increasing concerns regarding the destabilising impacts of ‘cheap money’, and an increasing preference for alternative sources of funding.”

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