The Brazilian market began 2022 with its eyes on geopolitical events, largely due to the growing tension between Russia and Ukraine. This concern is not unfounded, given that international events, such as wars, have a major impact on economies worldwide, affecting even the budgetary planning of companies.
Generally speaking, large-scale events that create tension in the markets cause commodity prices to skyrocket, leading to higher inflation and reduced consumption.
Therefore, companies need to revise their revenue and cost projections.
Next, you can learn more about how geopolitical events impact the economy and business budget planning. Check it out!
What is geopolitical risk?
Geopolitical risk can refer to a wide range of issues, such as military conflicts, climate change, and political-economic decisions, such as Brexit. In other words, it occurs when there is a threat to normal relations between countries or regions.
Events such as those mentioned above create uncertainty, and this weighs on economies and financial markets, as decision-makers avoid making major commitments.
Companies delay investment decisions or new hires. Consumers postpone spending on expensive items like cars or homes. Financial investors delay their decisions while trying to assess the economic or political impact.
The effects of geopolitical events on the global economy.
In today's highly globalized world, even events that seem local affect the global economy, as they influence imports, exports, investments, etc.
However, the consequences may be directly related to the agents involved in a specific event.
The recent conflict between Russia and Ukraine, for example, has had a major impact on the global economy. This is mainly due to the fact that Russia is a major producer and exporter of oil and natural gas.
Thus, since the war began, the price of a barrel of oil has fluctuated greatly, reaching a level not seen since 2014, when another geopolitical event involving Russia occurred (the annexation of Crimea).
In early April 2022, a few days after the start of the Russian invasion, The price of a barrel of oil closed at US$110 on the British market..
This increase in the price of oil on the international market causes each country to adopt internal measures in the same vein, generating high inflation in the world economy.
In Brazil, for example, the rise in prices of this commodity led Petrobras to raise the prices of gasoline (18,8%), cooking gas (16,1%) and diesel (24,9%).
The price increases of some commodities are just one of the effects of geopolitical events.
Faced with uncertainty, investors are turning to more stable economies that are not directly involved in geopolitical events, or those that may be less affected.
This creates instability in the financial market, unexpected currency fluctuations, and a concentration of investments in safer options, such as gold, for example.
How do geopolitical events impact companies' budget planning?
As already mentioned, geopolitical events create instability in financial markets, reduce investments, and raise prices.
Given this, there is a tendency for inflation to increase and, consequently, for the basic interest rate to rise, one of the main remedies used to control price increases.
The sum of these factors directly impacts consumption, which generally affects companies' budget planning, as it brings new financial challenges.
In general terms, when preparing a budget plan, companies take into account macroeconomic factors such as inflation, interest rates, expected economic growth, employment, income, etc. This allows them to create estimates of both revenue and costs.
However, unexpected geopolitical events completely change the game, and companies need to be alert to review their budget planning and make the necessary adjustments.
Higher interest rates, for example, make credit more expensive, which reduces sales projections for sectors that are highly dependent on financing, such as real estate and the automotive industry.
Companies that consider raising loans in their budget planning should reassess their viability due to the new financial costs.
The rise in oil prices in Brazil, for example, drives inflation in basic goods, which means that the population will have less money available to buy non-essential items.
Inflation can also affect business costs. Therefore, it is essential to revisit the budget to assess whether revenue and expense projections remain consistent with the current scenario.
How can budget planning be effectively reassessed?
Budgetary planning is an essential document that serves as a guide for the company's strategic decisions.
Therefore, it needs to be carefully prepared and frequently revisited to assess whether what is being done is in line with what was planned.
When unexpected geopolitical events occur, it is crucial to assess what has changed in the economic landscape since the budget planning was drawn up, in order to make necessary adjustments.
These evaluation and correction activities are best performed when companies use an effective enterprise resource planning (ERP) system to support budget planning.
This allows for a quick comparison between planned and actual results, as well as providing a comprehensive and detailed overview of your entire plan.
In this way, you can quickly identify which aspects of your planning are being or will be affected by geopolitical events, and you can act quickly to "recalculate the route" according to updated projections.
Did you enjoy learning how geopolitical events impact the economy and business budget planning? Then, take the opportunity to also learn about... The reasons for having an ERP in the cloud.!
