Cautious optimism Central Europe CFO Survey 2015Cautious optimism Central Europe CFO Survey 2015...

Cautious optimismCentral Europe CFO Survey 2015

2015 results | 3rd editionSerbia

When you take into consideration the predictions of a challenging economic outlook for 2015, it looks as though steering a business, according to CFO perceptions, will not get any easier – especially for those companies that are trying to stay ahead. Most surveyed companies are aiming to run their business ‘as usual’, without a strong focus on business remodelling.

© 2015 Deloitte Central Europe3

I am very pleased to present this third Deloitte CFO report based on a regional survey that both compares the sentiments of Serbian CFOs with those of their peers from 13 other countries across Central Europe and tracks shifting trends over time.

This survey was conducted in an environment that is still not very optimistic. The main concern for CFOs today, as it has been for the last several years, is the state of the economy. It seems that we are to face another difficult year, for which there are many reasons such as the ongoing economic crisis worldwide, discontinued subsidies for loss-making state firms and the new law on privatisation which is likely to increase the unemployment rate.

The fear of unemployment and reduced wages will reduce consumer and business confidence in the year to come. On top of this, the consequences of flood damage will be felt for some time, particularly its impact on agriculture, manufacturing and exports.

Going forward, among other things, we need stimulating measures and initiatives from the Serbian government that will make the economic environment more optimistic, favourable and attractive to businesses.

I would very much like to thank those CFOs who participated in our survey – I am grateful for their generosity in giving us their time and their insight in the views they express.

I also hope that you find this material interesting and useful. I would like to take this opportunity to invite you to participate in our next CFO Survey in October/November 2015.

Introduction

Introduction

1 Key findings

2 Economic outlook

3 Growth

4 Risk

5 Debt

6 Financing

7 Talent

Contents

Nada SudjicPartner, Deloitte Serbia


Key Findings


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• Optimismisalsoevidentamongthe 40% of CFOs who told us their companies’ ability to service debt will improve over the next three years.

• Newcreditisdifficulttoobtainfor38%of companies (much the same as a year ago – 39%). Bank borrowing as a source of funding, meanwhile, is attractive to 17% of interviewed companies (compared to only 7% in the previous survey); this reflects the belief among 63% that financing costs will decrease or remain the same.

Key findings

• Forthe next12-monthperiod,mostparticipating companies will focus on growing revenues from the current markets and reducing direct costs. When it comes to GDP growth, 35% expect recession, which is much higher than the previous survey (7%).

• CFOsdo notlackoptimism;61%rankedtheir financial prospects as optimistic or very optimistic, compared to 57% in the previous survey.

• Oneintworespondents(51%)expecta talent shortage in the financial area in forthcoming years, primarily among the most senior positions (41%).


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We will see further revisions of government spending (to cut public sector employment further, to raise more revenue from privatisation and to fight the grey economy, which is believed to be at least 30% of GDP). It is expected that government spending will also shrink in 2015, by 3.5%.

The dinar will most likely slide to an average 122 to the euro during 2015. The central bank will actively continue to manage the exchange rate through interventions and will seek to prevent further rapid depreciation.

Economic outlook

The economic outlook for Serbia is not very optimistic. The government will be in austerity mode for at least three years, and this could actually increase public debt as it pushes spending and tax revenues down. Public debt will rise to 72-75% of GDP by the first half of 2015 and most likely will hit75-78%ofGDPbyearly2016.Itshouldthen stabilise as of 2017.

On the plus side, some infrastructure investments will contribute to growth in 2015, and some projects will be financed by bilateral loans, including those from the UAE and China. Export growth, particularly to Russia, is expected to continue in 2015.

Overall, these deep structural reforms should over the long term create a fundamentally healthier economy.

Growth



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Growth

Despite the start of the process to negotiate EU membership, a challenging economic environment will remain in 2015. For the next 12 months, most participating companies intend to focus on growing revenues from their current markets and reducing direct costs. The area in which they have the least interest is new investments – a situation which has not changed during the last 12 months. While only one in 10 CFOs opposed this idea in the last survey, now four in 10 think that new investments should not be among their companies’ priorities.

Graph 1What is your company‘s business focus for the next 12 months?

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0% 20% 40% 60% 80% 100%

Revenue Growth (current markets)

Revenue Growth (new markets)

Cost reduction - direct costs

Cost reduction - indirect costs

Improved liquidity

New investments


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When it comes to GDP growth, 35% expect recession – much higher than the 7% in the previous survey. 57% of CFOs expect Serbian GDP to stagnate – that is grow by less than 1.5%. Official estimates for 2014 are that GDP will show negative growth of 0.5% due to the May floods and the crisis in Ukraine, where energy, mining, manufacturing and agricultural production sharply declined from the previous year. Official projections for 2015 are for negative GDP growth of 0.4%. When it comes to GDP, CFOs and statistical data are therefore united in thinking that there will not be much growth.

Graph 2CFO expectations for Serbian economic growth in 2015

Moderate Growth (1,5-3%)

8%

Growth (>3%)0%

57%Stagnation (0 -1,5%)

35%Recession

Risk



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Risk

On the other hand, CFOs do not lack optimism; 61% classified their financial prospects as optimistic or very optimistic (compared to 57% in the previous year). This sentiment might be the reason that led 16% of them to the conclusion that now is a good time to take greater risk on to company balance sheets, while only 7% could agree to this in the last survey.

Only 12% of CFOs think that the general level of external financial and economic uncertainty faced by their business is normal,downfrom18%inthe previoussurvey. The good news is that even though uncertainty is growing, optimism is not declining.

Graph 3Outlook on financial prosepects for their company compared with 6 months ago

Graph 4How would you rate the general level of external financial and economic uncertainty facing your business?

12 % Normal

33 % Above normal

41% High

14 % Very high

8%Very optimistic

53%Somewhatoptimistic

29%Unchanged

10%Lessoptimistic

12 % Normal

33 % Above normal

41% High

14 % Very high

8%Very optimistic

53%Somewhatoptimistic

29%Unchanged

10%Lessoptimistic

Debt



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Debt

Half of the interviewed CFOs would not change their current gearing ratios, while 43% plan to decrease it (compared to 29% in the previous survey). This indicates the stronger current performance of those companies that are focused on maintaining their market position.

Graph 5What is your aim for the level of gearing?

Reduce

43%

Raise

No change

51%

6%

Graph 5 - What is your aim for your level of gearing over the next 12 months?

2%Increase significantly

38%Increase somewhat

58%Remain the same

2%Decrease somewhat

0%Decrease significantly


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Debt

Optimism is evident among the 40% of CFOs who told us their companies’ ability to service debt will improve over the next three years. Nochangewasanticipatedby58%,leavingonly 2% who expect this ability to decrease.

Graph 6Over the next three years, you expect your ability to service your debt to...?

Reduce

43%

Raise

No change

51%

6%

Graph 5 - What is your aim for your level of gearing over the next 12 months?

2%Increase significantly

38%Increase somewhat

58%Remain the same

2%Decrease somewhat

0%Decrease significantly

Financing



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Financing

Newcreditisdifficulttoobtainfor38%ofrespondent companies. At the same time, bank borrowing as a source of funding is attractive to 17% of the interviewed companies (compared to just 7% in the previous survey), which reflects the belief of 63% of interviewed CFOs that financing costs will decrease or remain the same.

Graph 7How would you rate the overall availability of new credit for companies nowadays?

Graph8Currently, bank borowing as a source of funding is?

Normallyavailable

Easilyavailable

Difficult to obtain

656 38

100

Graph 7: Currently bank borrowing as a source of funding is

17%Attractive

56%Neither attractivenor unattractive

27%Unattractive

100 100

100 100

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100

Graph 9: Overall ability of new credit for companies nowadays

Graph 8: Currently equity raising, as a source of funding is

39%Attractive


16%Unattractive Decrease somewhat

Decrease a significantly

Remain the same

Increase somewhat

Increase significantly

24%

39%37%

Normallyavailable

Easilyavailable

Difficult to obtain

656 38

100


17%Attractive


27%Unattractive

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39%Attractive




Remain the same

Increase somewhat


24%

39%37%


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Graph 10Currently, raising equity as a source of funding is...?

Nonetheless, raising equity seems to be a much more attractive financing tool (attractive to 39% of CFOs) than bank borrowing. This is logical, since, according to the Ministry of Finance review of last November, 2014 (in quarters one, two and three) was characterised by the decline of corporate loans and the growth in retail credits in comparison to the previous year (-4.5% and 5.6% respectively).

The review also showed that the ratio of non-performing loans to total loans reached 23% in the second quarter.

Graph 9How are financing costs for companies in Serbia likely to change over the next 12 months?

Normallyavailable

Easilyavailable

Difficult to obtain

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100


17%Attractive


27%Unattractive

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39%Attractive




Remain the same

Increase somewhat


24%

39%37%

Normallyavailable

Easilyavailable

Difficult to obtain

656 38

100


17%Attractive


27%Unattractive

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39%Attractive




Remain the same

Increase somewhat


24%

39%37%

Talent



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Talent

One in two respondents to this survey (55%) thinks the unemployment level is set to increase somewhat. A year ago, 61% of CFOs shared this view. This change can be connected with the amendments to the Labour Law, adopted in July 2014, which were justified as a way to improve labour market flexibility and thus enable employment. Official statistical data for the third quarter show a decrease in the unemployment rate among the total working population of 2.2 million people, from21.1%inthe secondquarterto18.4%in quarter three.

Graph 11Over the next 12 months, how do you expect the level of unemployment to change in Serbia?

55%Increasesomewhat

33%Neutral

8%Decreasesomewhat

4%Increasesignificantly

Top level 41%

Senior level 32%

Middle level 24%

Junior level 3%

Yes51%

No49%


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At the same time, opinions on likely talent shortages remain the same. One in two respondents (51% of interviewed CFOs), expects that there will be a talent shortage in the financial area in years to come, primarily among the most senior positions (41%).

Graph 12Do you expect talent shortages in the finance area over the next year?

Graph 13Where do you expect significant talent shortages in the finance over the next year?

55%Increasesomewhat

33%Neutral

8%Decreasesomewhat


Top level 41%

Senior level 32%

Middle level 24%

Junior level 3%

Yes51%

No49%

55%Increasesomewhat

33%Neutral

8%Decreasesomewhat


Top level 41%

Senior level 32%

Middle level 24%

Junior level 3%

Yes51%

No49%


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Graph 14To what extent is business remodelling or restructuring likely to be a priority for your business over the next 12 months?

Graph 15Over the next 12 months, how do you expect the level of M&A to change?

Conclusion

When one takes into consideration the predictions of a challenging economic outlook for 2015, it looks as though steering a business, according to CFO perceptions, will not get any easier – especially for those companies that are trying to stay ahead. Most surveyed companies (39% of interviewed CFOs, compared to 29% in the previous survey) are aiming to run their business “as usual”, without a strong focus on business remodelling. On the other hand, a smaller number of companies, mainly those seeking a market-leadership position, would prefer to expand their businesses through M&A - 31% of interviewed CFOs anticipate an increase in M&A activities over the next 12 months.

Graph 5: CFOs’ attitudes towards restructuring andremodelling over the next 12 months

41%Strongly

20%Somewhatpriority

39%Not a priority

Graph 6: CFOs’ expectations about the levels of M&A in their country


29%Increasesomewhat

65%Neutral

4%Decreasesomewhat

Graph 5: CFOs’ attitudes towards restructuring andremodelling over the next 12 months

41%Strongly

20%Somewhatpriority

39%Not a priority

Graph 6: CFOs’ expectations about the levels of M&A in their country


29%Increasesomewhat

65%Neutral

4%Decreasesomewhat


For more information on the Deloitte CFO Survey please contact:

Nada SudjicPartnerDeloitte [email protected]:+38111 3812 110

Jelena GalicDirectorDeloitte [email protected]:+38111 3812 123

Aleksandra GregovicMarketing managerDeloitte [email protected]:+38111 3812 180

About the survey

The 6th CE CFO survey took place in October & November 2014. A total of 550 CFOs across 13 countries completed our survey. The Deloitte CFO Survey is the only survey that seeks to establish the views of CFOs in relation to the financial markets, economic outlook and business trends on a quarterly basis.

Deloitte CE CFO survey is a “pulse survey” that provides CFOs with information regarding their peers’ thinking across a variety of topics. It is not, nor is it intended to be, scientific in its number of respondents, selection of respondents, or response rate —especially within individual industries.

We would like to thank all participating CFOs for their efforts in completing our survey. We hope the report makes an interesting read, clearly highlighting the challenges facing CFOs, and providing an important benchmark to understand how your organization rates among peers.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax, consulting, financial advisory and legal services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.

Deloitte Central Europe is a regional organization of entities organized under the umbrella of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu Limited. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities.

The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through more than 3,900 people in 34 offices in 17 countries.

© 2015 Deloitte Central Europe

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