In 2022 and 2023, adaptability has become the key factor in business. It has been an important aspect in the past, but in recent years we have found ourselves in a situation where we have to juggle several variables and unknowns at the same time. Added to the Covid crisis last year was the geopolitical risk from the war instigated by Russia, followed by unprecedented price increases and the end of the era of the so-called cheap money.
It is a new environment where speed of adaptation and thinking ahead are fundamental to survival and success. We see an impressive, admirable ability of Latvian and Baltic companies to adapt to any circumstances and find development opportunities for themselves even in the face of challenges.
Top challenges in business: geopolitics, inflation, energy
These are the main risks mentioned by entrepreneurs not only in the surveys conducted by SEB in the Baltic States, but also worldwide. For example, according to the McKinsey survey carried out in December 2022, 61% of CEOs are concerned about the impact of the geopolitical situation (this risk is far ahead of inflation (35%) and energy price fluctuations (26%)).
The rise in the price of energy and other resources is having, and will continue to have, an impact on companies' financial performance. For example, 86% of CFOs of Latvian companies in a survey conducted by SEB Bank admitted that the company's profitability, i.e., EBIDTA indicator will decrease this year (18% of them believe that the decrease will be more than 20%). Consequently, the ability to adapt to new circumstances in the energy market will be another important competitive factor alongside efficient processes, either through the launching of new technologies or through the digitalisation of processes. This is especially true for manufacturers, where energy consumption has a relatively greater impact on product prices.
The rise in inflation has been one of the most discussed topics of 2022. Last year, we observed how the increase in raw material costs was passed on to the end consumer. So far, this has generally been successful, but this process is subject to market constraints, as continued price increases will eventually reduce consumption. In 2023, we can expect cost reduction measures to maintain the market position and improve competitiveness in the long term.
Although the uncertainty about the further development of the global economy is quite high, which has also affected investment decisions, interest in investments, e.g., in renewable energy projects, still remains high. The flow of investment has not stopped. It should be emphasised that Latvian and Baltic companies are sufficiently capitalised, and their liquidity has a good margin. At the same time, the intensity of the use of allocated overdrafts gradually increased in the second half of the year, indicating both the impact of inflation and a decrease in the velocity of money circulation. In the second half of the year, the amount of corporate loans granted, and deposits continued to increase, although their growth rate declined.
Finding new opportunities is key
Uncertainty and instability in the economy have been and are commonplace phenomena, but 2022 and even a few years earlier were particularly unorthodox. It seems that the era of new upheavals and resulting changes is far from being over. The year 2023 will be characterized by high uncertainty, and positive outcomes will be more dependent on the non-materialisation of negative risks. Inflation, energy supply risks, and the risks of new geopolitical shocks will remain. Global economic growth will reach its lowest level in recent years in 2023 – slightly above 2%. The aggressive raising of key interest rates by central banks will pose downside risks to the economy. The Baltic economies are also moving towards recession, although GDP growth rates for the whole of 2023 are expected to be slightly above zero.
Consequently, one of the most important conditions will be the export capacity of our entrepreneurs, i.e., if consumption in Europe shrinks, our producers will also be affected, for whom it is crucial to maintain the ability to invest in efficiency and productivity. To a large extent, it is a matter of being able to attract investors to invest in development. The second important process - in 2022 we saw companies from various sectors successfully and quickly reorienting themselves to new markets, and it is likely that this trend will continue this year as the scope for sanctions against aggressive neighbouring regimes is far from having been exhausted. And the third, but by no means least important point: business development will continue to depend on the “key” people who are able to identify future trends and successfully integrate them into the company’s work.
Therefore, this year I would like to maintain my team of “key people” and recruit new professionals to be able to timely identify upcoming changes and stay ahead of events with timely and bold decisions.
