We won't be able to fully assess the impact of the financial crisis in Europe for some time. Yet all the warning signs are flashing. Costs and prices are spiking. Consumer prices are up more than 10 percent on average across Europe. Energy and gas prices have jumped by more than 23 percent ESB Statistics , placing massive pressure on energy-intensive industries and households alike.
Central banks have responded with higher interest rates, which have sent lending rates through the roof - Poland's went from 3.2 percent in 3Q 21, to 8 percent in Q3 22 EIU. After years of moribund inflation, the cost of goods and the cost of capital is rising rapidly across the EMA region.
The good news is that energy prices have cooled somewhat since the highs of early 2022 when concerns about global growth and the impact of Russia's invasion of Ukraine pushed prices to historic levels. But they aren't anticipated to decline significantly until late 2023 or 2024, according to the World Bank, particularly in Europe.
In order to protect consumers from higher energy prices, many European governments have been pouring public money into consumer and commercial supports. Germany has allocated more than EUR260 billion in funding, with an additional EUR68 billion earmarked for bailing out utilities. European government debt spiked to nearly 100 percent of GDP in March 2021. Most will be hard pressed to come up with additional support in the face of a deep recession.
Turbulence in a storm
There is never a good time for a financial crisis. But this crisis has come at a particularly hard time for European and African companies, less so for the Middle East, where oil prices have to a degree provided an offset. Markets and consumer demand had already taken a turbulent ride through the pandemic; forecasting supply and demand had become increasingly difficult. At the same time, consumer and employee expectations shifted. Many companies are in the midst of a digital transformation.
Then there is the regulation - ESG regulation in particular. As Europe takes the lead in driving the ESG agenda, European companies and their suppliers are stiving to meet their NetZero ambitions and evolving regulatory requirements. It's not just regulators; sovereign and institutional investors and debt providers are also now closely examining the ESG requirements and the credentials of their clients and investment targets. Those without an ESG strategy (or those not actually following through on their articulated strategy) are seeing their cost of capital rise.
National nuances make for regional challenges
Across Europe and Africa, a crisis is looming. Executives know they need to invest into transformation if they want their companies to remain viable over the long term. But investment capital is scarce, borrowing costs are increasing rapidly and continuing government support is unlikely. At the same time, there are a complex range of issues playing out at the market level, creating additional challenges for decision-makers, particularly at regional and global organizations.
In the German market, for example, the big concern amongst OEMs is of supply chain failures, which is catalyzing a fundamental reorganization of the value chain across Europe. That is creating both disruption and opportunity in Europe's lower-cost manufacturing markets like Poland, Romania and the Czech Republic. Germany's financial situation will continue to have a big impact on these markets; when Europe's industrial heartland sneezes, it is often Poland, Romania and the Czech Republic that are the first to catch the cold.
The big multinational centers like Ireland and The Netherlands are grappling with the growing retreat of globalization and evolving trade issues. Head office layoffs and supply chain challenges are taking a toll on local and national businesses, with knock on effects down into their economies. The UK is suffering from some of the region's highest inflationary pressures, particularly around the cost of energy. France is experiencing the lowest rates of inflation but is starting to see clear signs of stress in key industries.
In Portugal, Spain, Italy and Greece, governments have little fiscal room to maneuver. The four markets top the government debt list (Greece's government debt was nearly 200 percent of GDP at the end of 2022). Spain and Italy have already committed tens of billions of Euros towards helping combat the energy crisis. The silver lining in these markets is that household debt-to-income ratios are lower than most other European markets, suggesting consumer demand may be more resilient.
Interestingly, energy rich markets - including Norway, the UAE and Angola - are a mixed bag. Norway's rules on resource revenues make it hard for the government to easily convert high energy prices into public spending. Angola is struggling with structural challenges in their energy sector, as well as recent corruption scandals. The Middle East has been more resilient and the good liquidity, strong ROIs and ease of doing business continues to generate inward and outward investment capital flows. The UAE is continuing to invest heavily into the modernization and diversification of the economy and in digitalization and clean energy solutions.
Transform for tomorrow
The key takeaway from our regional discussions is that every market across Europe, the Middle East and Africa is experiencing massive disruption on a fundamental scale of one type or another. Companies are facing significant stress in the short-to-medium term, particularly in certain markets and industry sectors. Borrowing rates and capital costs are high and rising. And governments' ability to support distressed businesses and sectors is weak, at best.
We believe the winners of tomorrow will be those companies that see the disruption of today as an opportunity to transform for tomorrow. In this environment, financial restructuring will likely only delay the inevitable. This market requires companies to thoroughly rethink their business models and strategies to create more flexible and resilient businesses moving forward.
Sustainability - in all its forms - will be particularly key. ESG isn't just about enhancing your brand and building customer loyalty. It's also about improving your access to capital, reducing the cost of borrowing and winning new business. A focus on ESG puts you in a better position to face future regulatory requirements. And it provides the extra agility in governance, culture and operating models that will be key in a fast-changing environment.
Navigating through these opportunities and challenges will require organizations to have three things: great data to understand what to change, great sector insight to know how to change, and great execution capabilities to drive the change. The next two years will show which organizations brought these three things into alignment and which didn't.
The reality is that there is a real risk of distress and insolvency at companies across Europe, the Middle East and Africa if companies don't move quickly to restructure their organizations strategically, financially and operationally. It's a risk that could be avoided.