Two treasury experts from Asia and the US tell The Treasurer what they believe will be the big issues for 2023.
As Hong Kong finally opens its doors after three years of tight quarantine and pandemic-related measures, one can ask what awaits regional corporate treasurers as the pandemic slowly recedes. While the shift from the ‘3+4’ to ‘0+3’ quarantine rules has been greeted with very audible sighs of relief by the Hong Kong business community and population alike, and as planes take off once again from our beleaguered airport, we cannot ignore the enormous challenges that await.
A perfect storm of accelerated climate change, inflation and conflicts has increased risks to a level unseen for decades in a world increasingly polarised by geopolitical tensions. From a financial markets perspective, the dominant role of the US dollar coupled with the relentless rise in interest rates in the US has considerably increased debt management challenges for other countries and creates headaches for treasuries in FX management and hedging.
In a bifurcated world where Western central banks are entering a vortex of interest rate increases while in China the government and central bank are contending with the twin consequences of a property crisis and a technology winter, and the central bank of Japan is the last major central bank to maintain a negative interest rate policy, international corporate treasuries are exposed to significant volatility in terms of interest rate management. Commodity prices volatility has been amplified both by various conflicts, notably the war in Ukraine, but also the impact of accelerated climate change.
We are also witnessing a significant increase in labour and population unrest, with strikes and unionisation multiplying in Western countries, while human rights abuses are met with resistance in the Middle East and elsewhere. Less dramatically perhaps, younger generations are questioning the old model of work both physically and in intensity, with the phenomena of ‘quiet quitting’ (or is it just simply doing one’s job?) raising issues of human capital management.
Extreme weather events threaten business interruption and impact supply chains that have already been significantly impacted by the pandemic. Even more worrying, material risks arising out of water availability and management are now surfacing, which also raise significant geopolitical issues.
Little help can be expected from governments that appear ill-equipped to deal with challenges on all fronts, and as fiscal interventions expand budget deficits. Nevertheless, in risks lie opportunities. For example, while climate change creates enormous material risks, it also offers the opportunity to rethink and rebase business models to properly account for externalities and adopt more science-based metrics relevant to the firm’s own business.
Taking the opportunity to accurately map supply chains will help identify opportunities to improve resiliency. Re-examining risk management policies to account for second- or third-order impacts of changes in climate will also open the door to a better materiality assessment as more regulators increase materiality-based reporting requirements.
Corporate treasurers are ideally placed to guide the analysis and play a critical role in building resiliency for their companies.
As US treasurers look back at 2022 and the year ahead, they recognise with some satisfaction the many challenges they and their departments have successfully overcome. The worldwide challenges of COVID-19 certainly represented the biggest obstacle for their companies as well as their departments, and although to a diminishing extent, continues to the present.
For treasurers, in particular, assuming responsibility for receiving, disbursing and safeguarding the cash flows of their companies with everyone from team members to bankers working from home has transitioned in many cases to a hybrid working environment in which some disruptions persist.
Face-to-face meetings with key bankers who commit the necessary funding for their companies obviously stopped during the pandemic. However, most treasurers have resisted restoring these visits fully. Especially for lower-tier syndicate members, treasurers and bankers accept the obvious efficiency of virtual meetings.
Bankers needing to update their understanding of companies’ upcoming funding and transaction requirements can get everything they need through virtual contact. For managing their departments, treasurers have learned to spend one-on-one time with each team member to keep up with their personal situations and to keep them connected to other members of the treasury team.
A significant looming challenge most treasurers have overcome is the replacement of LIBOR with new interest rate indexes. In the US, the focus is on the government-endorsed secured overnight funding rate. The National Association of Corporate Treasurers has been the voice of the borrowers’ community as a full voting member of the Alternative Reference Rates Committee, the group sponsored by the Federal Reserve to manage this transition in the US.
The transition has required agreeing with bankers on the substitute pricing for all outstanding and new loans against a deadline of 30 June 2023, when LIBOR will cease to be quoted as a representative interest rate. As these conversions have proceeded, the market has settled on the necessary pricing adjustments.
More difficulties have arisen from amending bond indentures and other documents for publicly traded instruments, which typically did not have any amendment mechanism incorporated in their original documentation. An advantage of the US bond market of having longer maturities, often out to 30 years, is that certainly no one thought at the time of issuance of replacing an interest rate index in such broad use as LIBOR. However, bond trustees and other market participants along with the long-term investors have worked with treasurers to overcome this potentially significant problem.
Another issue both in the debt markets and from companies’ customers and managements has been the desire to promote the principles of diversity, equity and inclusion (DEI) in workforces and operations. The debt markets have initiated indexes keyed to include bonds whose issuers have instituted DEI practices, and many corporate treasurers and their boards have met the criteria required to be included in these DEI indexes.
Treasurers are the corporate officers positioned to be aware of the debt markets’ requirements for DEI and assuring their companies meet those criteria and sustain the practices required to remain qualified.
Corporate treasurers in the US have had a challenging time managing these important tasks and acting as their companies’ link between the financial markets and good practices, with well-qualified and motivated staff to sustain their access to those key sources funding their operations, but they have met those challenges.
This article was taken from Issue 4, 2022 of The Treasurer magazine. For more great insights, members can log in to view the full issue. If you're not an ACT member, you can sign up for eAffiliate membership.