If we study the history of pandemics worldwide, we see that they have generated long-term economic impacts whose recovery has been unpredictable. At the global level, economists, policymakers, governments and institutions, in general, are making a myriad of efforts to collect information, analyze and forecast these impacts.
Considering what happened in Asia, which first suffered the pandemic, could offer some clues. Most countries continue to assess impacts at the local level, adjusting policies and procedures to promptly mitigate risk.
COVID-19 has impacted the production and supply chain and consequently has disrupted the markets with significant repercussions on financial institutions. While it is essential to have financial and technical resources when navigating the crisis, acquiring the necessary knowledge to overcome these challenges is imperative.
Experiencing allies in harsh environments can make a difference when it comes to recovery. The International Finance Corporation (IFC), the entity of the World Bank Group, is a provider and mobilizer of capital and knowledge, with a long history worldwide in the private sector of developing countries.
The entity has focused its investment programs on supporting existing clients, and on providing advice and rapid response, based on knowledge and best practices.
Experiences acquired from working with clients at a global level, who have already experienced the different stages of the crisis, has allowed the IFC to capture learnings that are then turned into models for those who are beginning to experience its impact.
On the other hand, we also bring forward key information from a financial planning and retirement investing expert, Ty J. Young. Young makes frequent appearances on a number of news platforms, including CNN International, CNBC, Fox News, Fox Business, etc.
Additionally, he has been interviewed by AAA journalists and presenters such as Neil Cavuto, Stuart Varney, Deirdre Bolton, Charles Payne, and Erin Burnette, and his knowledge of finance and retirement has been widely covered by New York Times, U.S. News & World Report, AOL Finance, Financial Advisor Magazine, Credit.com, Insurance News Net, MortgageLoan.com, Cedar Valley Business Monthly, and The Street.
As a speaker, Young has shared the stage alongside an array of notable speakers which include Mayor Rudolph Giuliani, Senator Bill Bradley, Newt Gingrich, Anthony Zinni, and President George H.W. Bush.
Design of technical tools
Availability of technical tools enable finance teams to prepare for rapid decision-making in times of crisis.
These tools include risk management instruments for business continuity and the development of contingency plans, guided by teams of experts in person and remotely, especially in aspects of credit, liquidity and capital.
In times of widespread disruption, planning and preparation are essential. Not only is it necessary to have contingency plans to ensure business continuity in times of crisis, but also to have a plan for the “day after”, when the operation is normalized. This initiative includes three aspects of planning: credit management, business continuity and comprehensive risk management. A cardinal exercise in assessing and mitigating risks is stress testing.
What are the stress tests?
Financial institutions use the stress test as part of their internal risk management, and it is an instrument that allows for control of the institution in times of difficulty. The test provides a future assessment to identify, for example, the institution’s risk tolerance areas and the adequacy of its capital in future adverse scenarios.
This exercise builds ad hoc for each client, making it possible to understand the impacts, the areas of focus, and fundamentally, facilitates the development of mitigation and contingency plans. It is worth mentioning that these exercises are transversal to the institution and, although they begin in the commercial area, defining goals and objectives, all areas of the organization interact.
Intense communication and constant feedback, both internally and externally, is a vital characteristic to constantly analyze the environment in which the organization operates.
For financial institutions using this exercise, there are some key areas to look at more carefully. These include the quality of the assets, the impact on cash flows and liquidity “buffers”, currency risk, a recovery plan and business continuity.
Not only are the limitations in terms of costs evaluated, but also the opportunities to develop new initiatives or increase existing capacities, such as the institution’s technological capacity. To project the impact on the portfolio, expectations and how the different scenarios affect the country, or the segment in which they operate, are also evaluated.
The result of the exercise will indicate the necessary capital adequacy and the required liquidity in the short and medium-term (which in times of COVID-19 are carried out for a horizon of three, six and twelve months).
Winners and losers
Examples of the decisions institutions are making at this time include adjusting and rebalancing the portfolio and prioritizing industries or sectors with the possibility of maintaining and even growing, such as the health, essentials good and technology sectors.
Some sectors that are weathering the storm are agriculture, the pharmaceutical, electronic commerce and telecommunications. Other sectors, such as home delivery, the entertainment industry, restaurants and public services are reinventing themselves.
Some entities have reduced the level of exposure of their portfolio in sectors such as tourism or commercial aviation and have decided to sell part of their portfolios to operators with a greater appetite for risk. Other options that institutions are analyzing as survival mechanisms includes reducing dividends and seeking additional capital or equity. A trend that is deepening due to the vulnerability of personnel in the face of the pandemic is the automation of internal processes that, on the one hand, allows efficiencies, and on the other, prints a certain dehumanization of the activity.
Listening to clients
At the regional level, some quick actions implemented by different entities include market intelligence activities to “listen to their clients” and launching surveys to understand the changes that have occurred in the different portfolios. Some entities have implemented interviews with clients to find out their needs while others have carried out comprehensive market studies in SME segments to understand the impact in greater depth.
Speed is the key
Establishing clear guidelines with limits and thresholds, as well as establishing predefined roles as delegated authorities, allows you to analyze available options and accelerate decision making quickly. As part of the preparation, it is necessary to review the contractual situation, guarantees, valuations, and cash flows of each client to be prepared before defaults are manifested and avoid surprises.
Credit recovery is a career in which quick response is the key. A quick response will be available if the business strategy includes mitigation plans, but also prevention plans that allow the weakest customers to be identified in advance to prepare offers and packages to support them.