Employment growth is also foreseen, with just over half of financial services firms expecting expansion, with a third of real economy firms equally optimistic. Eighty-two CEOs from local large and medium sized firms were interviewed in Luxembourg as part of this survey of more than 5,000 top-bosses globally. In Luxembourg, 70% of these chief executives were in the financial sector, compared to a quarter in the entire sample.
Differential impact
“This outlook partly reflects how most financial sector businesses in Lux were insulated from the pandemic,” said John Parkhouse, CEO of PWC in Luxembourg, speaking as part of an exclusive presentation of these results to Delano and Paperjam. “These growth plans are generally focused on organic growth, with the development of new products and services,” he added. Seeking operational efficiencies is also high up the agenda. Over 60% of CEOs said they were targeting these three activities as routes to growth. Less popular strategies were moving into a new market (favoured by a third), with just a quarter considering a takeover or a strategic alliance or joint venture.
Obviously the pandemic affected businesses differently and this continues to influence their outlook. While asset servicing and wealth management businesses were able to move to remote working and barely missed a beat, other businesses have reason to be more nervous.
There is a risk that the number of non-financial firms declared insolvent will increase in the coming months, Olivier Carré, partner and financial services market leader at PWC in Luxembourg, said during an interview with Delano and Paperjam, 12 April 2021. Library picture: Olivier Carré is seen speaking during a Paperjam Club event, 27 May 2020. Photo: Patricia Pitsch
“There is potentially a wave of bankruptcies in the non-financial sector that won’t survive the crisis,” noted Oliver Carré, partner and financial services market leader at the consulting firm. “Only a handful of banks in Luxembourg are exposed to these risks,” he added. Some insurance businesses have also not escaped negative effects of lockdown.
“The sectors that have been really hard hit are going to struggle for optimism, but for others, the improved European and global situation is key, given how much Luxembourg real-economy businesses rely on global markets,” noted François Mousel, partner, clients and markets leader.
Over regulation the biggest risk
“Over-regulation” is seen as the biggest threat to growth by the grand duchy’s CEOs, even more than the pandemic. While chief executives and their business might struggle with the cost and complexity, “Luxembourg has largely been a beneficiary of regulation, such as financial services passporting,” noted Carré.
Also not to forget that the likes of KYC/AML and GDPR rules are the result of policies of democratic governments backed by popular desires to keep checks on some business activity. A similar dynamic is playing out again with new green investing regulation, the SFDR and the coming taxonomy. “It is super complicated, but there is certainly also an upside to this regarding the products that can be offered,” Carré noted.
François Mousel, partner and clients & markets leader at PWC in Luxembourg, was broadly positive about global corporate taxation proposals coming out of Washington at a briefing on the consulting firm’s annual CEO survey. Pictured: François Mousel is seen during an interview with Delano and Paperjam at PWC’s Cloche d’Or HQ, 12 April 2021. Photo: Romain Gamba
Tax concerns
The survey also looked at post-pandemic tax policy, and how CEOs might respond to efforts to finance new debt. Over half expect their total tax bills to rise, with just 13% disagreeing. Just under a quarter said this would “lead my organization to reconsider its geographical footprint,” but with half disagreeing, even if a similar share said this would make them consider their cost structures.
After the survey was published, both the EU and then the Biden administration announced plans for, respectively, greater transparency on multinational corporate tax bills and a minimum global tax rate for large companies. The details and the politics need to be worked out, but the move from Washington is “very much aligned to the policy that Luxembourg has followed over the last few years, such as with the implementation of the Beps agenda,” noted Parkhouse. “This move can only be a positive for Luxembourg,” he added. Mousel agreed: “If you’re talking about the flat tax rate of 20%, that’s exactly where we are,” he said.
ESG & digitalisation outlook
The study also confirms the interest of companies in ESG challenges, and that this is stronger in Luxembourg than elsewhere. According to the survey, 75% of CEOs in the country intend to increase their investments in sustainability, compared to an average of 60% worldwide.
Is this situation linked to the weight of the financial sector? “Yes, in this sector the weight of positive responses is 80%, compared to an average of just over 50% elsewhere,” pointed out Parkhouse. This sustained interest is explained by the influence of regulations and also by investors’ appetite for ESG products, with both factors forcing the entire value chain to be increasingly active in this area.
Unsurprisingly, digitalisation also remains high on the agenda of decision-makers. This was already the case before the pandemic, but this trend has only served to accelerate the movement. “Indications are that there are very high levels of investment in this area in Luxembourg,” Parkhouse added.
Cyber risk concerns rising
“In the financial sector, senior managers are leading their firms towards opening the digital infrastructure to remote working,” stated Carré. Similar moves had already been made with client facing activities, but now investment is need to secure remote access to back offices.
It is therefore not surprising that cybersecurity is now perceived as the second most important issue in terms of risk, after the pandemic. “We have found that companies in the financial sector are much more aware of this risk than those in the real economy,” observed Parkhouse. “We therefore tried to send a message to these players that cybersecurity should also be seen as a major issue for non-financial players.”
State needs to help on skills
The survey also shows an awareness on the part of top management (42%) for the need to invest continuously in the development of staff skills. A particularity in Luxembourg is that here 72% believe that it is a duty of the state to take charge of this upskilling of employees, compared to only 52% at the global level.
“There is undoubtedly a culture that goes in this direction in Luxembourg,” agreed Carré. “But the interest is rather about developing public-private partnerships to ensure this training need is met, and this is different for each company and sector.” The challenge is considerable and too financially onerous to be met solely by the companies themselves.