Higher borrowing costs call for financial prudence 

The case against share buybacks 

Another offspring of the cheap money era has been the habit of many companies – often under pressure from activist investors – to leverage their balance sheets and take up debt to repurchase their own shares. 

With the stock market still near past highs, companies risk overpaying for their own shares. The other risk is that buybacks reduce real investment and even lead to financial fragility, because as interest rates rise, companies could struggle to meet their higher borrowing and refinancing costs. Many will also want to raise money on the bond market and lock in low borrowing costs now, before rates start to climb any higher. 

Value chains need supplier support 

More immediate, though, are the risks to supply chains. The combination of higher demand fueled by cheap money and the dislocation caused by COVID-19 has played havoc with many companies and caused certain product shortages. 

But just imagine a scenario where key suppliers of, say, leading manufacturers of planes, trains or automobiles, found themselves in financial difficulties. Examples already abound of companies such as Airbus and Boeing having to financially support a crucial supplier. Some future degree of greater vertical integration across the value chain may be inevitable. 

Make sure you are sufficiently aware of, and adequately understand, the financial situations of your key suppliers. If you have any cause for concern, reach out and, if necessary, make a proposal to ease the strains. The risks of serious disruption caused by failing to act will far outweigh any short-term costs. 

The price is right 

Much more worrying still are the potential macroeconomic repercussions of higher rates of interest. Consumer confidence has fallen because of rising living costs, inflation and higher borrowing costs, which is slowing down the pace of the economic recovery. 

People do not think now is the right time to make major purchases, which hits sellers and poses a particular challenge for firms that built up inventories to cope with supply chain bottlenecks. The supply squeeze has enabled corporates to pass on rising costs to consumers, but a slowdown in consumer confidence undermines price rises. So discounting may be inevitable. 

Against this treacherous background, I have great sympathy for central bankers facing the challenge of bringing inflation under control while avoiding the risks of over-tightening: disrupting growth and markets. 

For CEOs, that could make 2022 the hardest year of the pandemic yet to navigate. But while they may be increasing the probability of worst-case outcomes in their scenario-planning, they can put in place measures now to control higher costs and put their organization on a sound financial footing.