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7 trends that will affect the business environment in 2022

Hybrid working as a new normal, increase in energy prices, Saeima elections and the Green Deal are just few of the trends that will affect the business environment in Latvia in 2022, outlines Artūrs Veics, INDUSTRA CFO and Member of the Board.

  1. Paradigm shift in the pandemic. This change is so fundamental and has such a huge impact that it deserves to be ranked number one. People's habits and perceptions of what is normal have changed in many ways. Choosing where to live, shop, work and how to work. Much of the work is done remotely because of the pandemic. While we initially thought it would only be for a short while, until the big virus was over, it is now clear that what has happened has fundamentally changed people's habits and beliefs about what is normal. Many people have come to appreciate the benefits of remote working, or more commonly, hybrid working. This has an impact on trends in the real estate market, as such employees can now work from anywhere with an internet connection. It has changed the way we think in general, and our understanding of an acceptable work-life balance. "Working holidays" are becoming increasingly popular - people who can work remotely go to live in another country for a month or two while continuing to work at their place of work and enjoying the culture and nature of another country in their spare time. This change of habits and beliefs is here to stay.
  2. As much as we would like to avoid the negative, we cannot ignore this factor. Its impact is felt by everyone - in business and private life. Namely, the huge increase in energy prices, which we already saw in the past year and which is still continuing. There are expectations that price dynamics could change in the spring, but I believe that the decisions taken by Europe under the Green Deal will have lasting consequences for the price of energy. Similarly, the increase in energy prices has pushed up the prices of other goods and services. The Bank of Latvia believes that price inflation should slow down in the second half of the year, with Latvia's annual average inflation rate coming to halt at 6.1%. But this price chaos also has other consequences. The consequences of excessive inflation could be an increase in benchmark interest rates by the US Federal Reserve and the ECB. This usually leads to falling stock markets, which in turn reduces consumption and puts pressure on global economic growth rates. There may come a time when it is not possible not to raise rates because otherwise inflation cannot be suppressed, but you might not want to raise them because the stock market, heated by the money printers, would be slayed risking triggering the next economic crisis. A true Sophie's choice!
  3. Printing money will not solve all problems. Another unfortunate situation relates to the monetary tools at the disposal of central banks to stimulate the economy. Specifically, liquidity injections into the market (government and corporate bond buybacks, support programmes for companies). The bad news is that if these activities do not help the economy to recover, there is no other better or more powerful tool in the central banks' arsenal, and they cannot be used forever because they gradually devalue money. Whatever the case, fingers crossed that market incentives work and that businesses emerge from this crisis smarter, more efficient and stronger - with the muscle to cope with the various challenges. 
  4. Promises of never-ending fortunes? Now that we are borrowing at negative rates, governments no longer have much incentive to work efficiently and economically. We are paid a premium for this borrowed money. The Ministry of Finance's statement on the 2022 budget plans says: "Latvia can afford it both legally, as the deficit rules are lifted in 2021 and 2022, and financially, as it is profitable to borrow now." It also reports that Latvia's general government deficit in 2021 (9.3% of gross domestic product (GDP)) is the fourth highest in the euro area, behind only Greece, Malta and Italy. Yes, there is a premium for borrowed money now, but what happens when central banks stop their current "easing" policies and switch to restrictive policies, raising rates and limiting the money supply in the market to curb inflation? This moment could have dramatic consequences for the economy - governments and companies that are disproportionately leveraged will no longer be able to meet their obligations. 
  5. Parliament elections. Given the public's sometimes justified, sometimes unjustified, but always enduring dissatisfaction with the current government and the large number of small parties in Latvia, the next Parliament promises to be fragmented. Public opinion estimates suggest that up to eleven parties could be elected into Parliament under certain circumstances. Many parties in the Parliament are likely to bring a complex process of government formation, including instability. The next Parliament will have to continue to work in a society that is fed up and tired of COVID, and even more depressed on a daily basis due to inflation. For businesses, this will mean worrying that the new government may come with more tax changes.
  6. ESG - Environmental, Social and Corporate Governance - Green Deal, Climate Neutrality. This topic is having an increasing impact on the business environment, already increasing the direct costs of manufacturing products, but in the near future ESG criteria will also be one of the parameters for setting the price of bank financing. I would like to say, however, that the Green Deal is not so green across the board and its impact on people's well-being can be harsh. As it happens, Europe wants to show others how to follow this ESG path by example, essentially putting another tax on the shoulders of companies and people. Being a pioneer is rarely easy or profitable. But there is no change of the green deal expected, so sceptics will have to adapt and see the opportunities, not just the difficulties. ESG has many facets that are valuable for a long and prosperous life for humanity - an inclusive working environment and society as a whole, fair pay and other values. So a lot depends on using common sense to set standards so that the long-term benefits outweigh the price we pay. 
  7. Entrepreneurship is an optimistic thing, so I would like to end on a good note. This is the digitization, which has accelerated exponentially recently. As a result, we have made many cumbersome processes more efficient - this applies to customer service in state and local authorities as well as in private business. For example, whereas before you had to go to an office or notary to sign a contract, now we approve electronic signatures (which was also possible before, but we were very reluctant to use this option). Remote working has also led to more effective collaboration through the introduction of various project management and collaboration programmes and platforms. This means that we now have much more time to do something worthwhile. We improve productivity by doing things that add value.

What to do with all this?

And finally, what can we do to protect ourselves from the tiger's jaws of rising energy prices and inflation? One option to hedge against rising energy prices is to buy the respective index products - wood, grain, electricity, carbon offsets, etc. If their price rises, the direct production costs for the customer will increase, but this loss will be partly offset by the increase in the index. The other option is to invest wisely in stock markets in segments of companies that benefit from rising rates. These are not the tech start-ups that have overheated in the last year, whose value is based on expectations of rapid growth and assumptions about future profitability, but the many perhaps boring but profitable "real economy" companies. Finally, rather than simply spending "cheap money", it should be invested in equipment, technology and skills to improve productivity. 

Make this a year filled with wise financial decisions!

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