The world of corporate finance is inextricably linked to national and international events. Unsurprisingly, global economic policies can have a tremendous impact on corporate finance and how your business manages its money.
Learn about how shifts in areas like trade agreements, interest rate fluctuations, and market dynamics can influence your corporate financial strategy.
Trade Agreements
Trade agreements play a crucial role in shaping the investment landscape for international organizations.
Often, when two or more nations strike a new trade agreement, they typically reduce tariffs and other barriers to trade. These changes can create new opportunities for your business to expand into foreign markets, leading to increased investments in regions with favorable tax rates.
For example, the United States-Mexico-Canada Agreement (USMCA) has provided more stability and predictability for businesses operating in North America, encouraging investments and cross-border collaborations. Your company can seize this opportunity to source materials from these border nations or launch new business initiatives, all while enjoying the savings benefits provided by the USMCA.
Trade agreements also have a direct impact on your supply chain strategies. Any time trade barriers are removed or reduced, you can source raw materials and components more efficiently and at a lower cost. However, the trade agreement sword cuts both ways.
A negotiation or dissolution of a trade agreement can lead to increased tariffs and logistical challenges. If your company has established strong roots in a foreign nation or sources critical materials from a single country, unexpected trade disputes can have far-reaching repercussions on your supply chain.
Changes in trade policies can also affect currency values, which in turn impact the cost of importing and exporting goods. Therefore, you must implement robust currency risk management strategies, such as hedging, to protect yourself from these changes.
Interest Rate Volatility
Over the last few years, businesses and consumers around the globe have experienced severe interest rate volatility. Many of these fluctuations have been in response to high inflation rates. Regardless of the cause, rising interest rates increase your company’s cost of borrowing, which can drastically impact its capital structure and investment decisions.
Interest rate fluctuations, especially severe ones, can impact profit margins. Higher interest rates increase the cost of servicing existing debt, thereby reducing net profits. If your organization has significant debt exposure, it must carefully manage interest rate risk. For instance, you could use interest rate swaps to stabilize the cost of borrowing funds.
Over time, volatile interest rates will drive up the cost of capital and inhibit long-term growth. Your company may need to become more conservative to protect its cash reserves while focusing on optimizing existing operations and improving efficiency. Making significant internal improvements can keep the growth going to a degree, but it’s no replacement for ambitious investments.
Emerging Market Dynamics
Global economic policies can drastically shift market dynamics and create new opportunities. However, investing in emerging markets comes with its own set of challenges. Political instability, regulatory changes, and economic volatility can pose huge risks to corporate finance. Therefore, your organization must conduct risk assessments and develop contingencies to mitigate these concerns.
If company leadership is committed to investing in emerging markets, it is wise to diversify. Becoming active in multiple emerging markets can reduce exposure to any single nation’s instability.
Another major concern is the risk of inflation. Emerging markets are often characterized by higher currency volatility and inflation rates. These factors can erode profit margins and affect the overall financial health of your organization.
How Should Your Company Respond to Changing Global Economic Policies?
There aren’t any one-size-fits-all solutions to handling shifting global economic policies. Some organizations prefer a “wait and see” approach. This tactic can result in some missed opportunities, but it will also give company leadership a better chance to gauge the risk of emerging markets and determine how policy changes will impact their day-to-day.
Other businesses tend to be more proactive and willing to take risks. If your business falls into this category, due diligence is critical. You must carefully vet the impacts that a risky investment might have on corporate finance and ensure that the opportunity falls within reasonable risk tolerances.
Remember that data holds the key to informed, confident decision-making. With the right insights at your fingertips, you’ll be able to stay within the organization’s risk tolerance thresholds.
Adapting to the New Normal
Over the last few years, change has seemed like the only constant in the global economic landscape. Therefore, your organization must embrace a proactive and analytics-driven approach to decision-making.
Whether your business tends to be more risk-averse or prefers an opportunistic approach, tapping into the power of predictive analytics will help you better understand the implications of each decision on corporate finance. Adopting scenario planning and committing to diversification will enable your organization to optimize financial performance and achieve long-term success, despite ongoing economic volatility.
