Which economic trends will dominate treasury in 2019?

As the New Year looms, treasurers are facing hurdles old and new. We ask a panel of experts to set out their key preoccupations, threats and challenges

Currencies move, commodity prices shift and political figures precipitate ripples and sometimes waves in international relations and markets.

Factor in the unevenness of technological advances and adoption, and the impact on those technologies and innovations on the world of work and treasury, and you end up with an unenviable cocktail of variables.

To grapple with these challenges is the lot of the corporate treasurer.

As we head towards 2019, here’s what our panel of treasury professionals had to say about the issues and events that are keeping them up at night.

The geopolitical challenge

Christos Baltoumas

Treasury senior manager at LAMDA Development

In our highly interconnected world, the efficiency of information in markets has increased hand in hand with such speed that the geopolitical events and their risks are being felt.

I am expecting a lot of anxiety and volatility in the markets in view of the challenges that lie ahead of us.

In Europe, we have the new government in Italy and the country’s place in the eurozone; the result of Brexit negotiations; the migration saga and its effects on the political spectrum, especially in Germany; the never-ending story of Greece’s problems; not to mention that, in May 2019, citizens in all 27 EU member states will elect 705 MEPs for the new House.

 The efficiency of information in markets has increased hand in hand with such speed that the geopolitical events and their risks are being felt 

In the rest of the world, the Trump administration and its relations with its allies; potential trade wars between the leading economies of our planet; the tensions between east Mediterranean countries for the exploration of the oil and gas reserves of the region; along with the effects of climate change and the gradual building of political consensus, are only a few of the issues that will shape the world in years to come.

Treasurers will have to react quickly and accurately to protect against all these risks. More crucially, we must be ready to make strategic decisions that will lead our organisations in the years to come.

Leveraging growth through technology

Joanne Bates

International treasurer, Worldpay

As Worldpay nears its first anniversary since the Vantiv takeover, our thoughts are turning to how we continue to leverage the business, and this includes treasury.

The company continues to grow in double digits and treasury has to keep pace. For that reason, we have been examining our processes to make them as efficient as possible, challenging the status quo.

Our task for the next year is to harness technology wherever possible to further drive operational leverage.

We are taking a two-pronged approach. We are examining our treasury management system (TMS) to ensure we are using every module to automate, monitor and control treasury operations, aiming for an end-to-end process that has as little human intervention as possible.

 Why use a person to move data… when a robot can do it? 

We are also working to implement robotics to automate simple manual processes. Why use a person to move data from system A to system B when a robot can do it?

We are looking at all processes to assess where robots will work – this might include collection of bank statements; collecting in forecast data from various systems; and executing FX trades, and that’s just the beginning.

This will save time, improve controls and will allow the team to focus on value-add. As the company continues to grow, we have no desire to grow the team, and that means working smarter and harnessing technology.

Regulatory impacts

Joanna Bonnett

Group treasurer, PageGroup

It would be difficult for anyone to argue the intent behind government regulation is not positive. In a post-financial crisis world, regulation is a critical part of the financial landscape and is very much here to stay.

On the front line of financial regulation, however, the treasury profession has found itself caught in a tsunami of red tape imposed by banks and businesses alike.

Banking regulation is no longer a cottage industry or side show to the financial services industry, but rather it now mirrors the scale of the 18th-century Industrial Revolution.

Not so long ago, we were adapting TMS reporting to comply with European Market Infrastructure Regulation (EMIR) and changing liquidity structures for Basel III.

More recently, we migrated bank accounts for UK ring-fencing and now have to consider the implications of the Payment Services Directive (PSD2), Libor and Brexit.

To feel the true pain of regulation, or perhaps simply the banks’ interpretation, one only has to open a bank account and review the required KYC checklist. The requests for KYC cause endless frustration due to the inconsistent interpretation, not only by different banks, but from within the same bank.

Increasingly, the sanctions compliance function is brought under treasury due to our ability to manage enterprise-wide risk.

In order to do so, we are forced to lean on legal counsel and delve ever deeper into the organisation only to discover another topic called General Data Protection Regulation (GDPR).

Our mind flicks back to the bank’s personal KYC request, convinced we have provided it several times before.

As a profession, we need to stand together, champion change and one day we will see harmonisation of compliance across banks and jurisdictions.

Unwinding quantitative easing

Anthony J Carfang

Managing director, Treasury Strategies, a division of Novantas Inc

The post-crisis quantitative easing (QE) by major central banks has ended. Now, the return to normal central bank balance sheets could have serious consequences for corporate treasurers.

To effect QE, central bankers inflated their balance sheets with longer-term debt instruments. This pushed up bond prices, lowering rates, resulting in years of zero or negative interest rates on the short end of the yield curve – and historically low rates at the long end.

Now that is reversing, and the common questions are: When? How far? At what pace will rates rise? There is a hope that the unwind won’t set off any financial calamities.

Corporate treasurers are just beginning to grapple with the implications.

Years of zero interest rates essentially meant there was no opportunity cost to poor treasury management. So we see many treasuries with outdated or obsolete technology. Cash-forecasting systems have atrophied and either must be recalibrated or rebuilt entirely.

Investment policies must be updated to reflect the effects of financial crisis regulation. Money funds, rating systems and bank offerings have all been impacted.

We even see corporate ‘investment’ departments staff with professionals who have never operated in a positive interest rate era.

In 2019, treasurers must get this right or risk destroying shareholder value.

Positive real interest rates and an upwards sloping yield curve can be a treasurer’s best friend. But that requires the right treasury system, sound cash forecasting, updated investment policies and a seasoned team.

Technology impact and future-proofing treasury

Royston Da Costa

Assistant group treasurer, Ferguson

Technology has had a major impact on treasury functions, and I believe it is vital in future-proofing treasury processes. Here are four areas I would highlight:

Automation has provided us with: full visibility of all our treasury transactions, including all our bank accounts across the group; full connectivity to 13 cloud-based systems (SaaS) we use; improved security using SaaS-based solutions, including authorising treasury payments from our mobile phones; and improved efficiencies resulting in time and costs saving.

Compliance achieved in the following areas: regulatory – ISO 27001, Type 2 SOC 1 certification for cloud-based solutions, EMIR, GDPR, foreign bank account report; external audit – reconciliation of bank account data using our TMS; and internal audit – compliance achieved for seven different key areas using our TMS.

I see huge potential for further automation and improved efficiencies in some of our treasury processes using artificial intelligence, for example, for reporting. I believe in automation replacing processes, so we have more time to analyse and understand the data.

Blockchain technology is already being used in up to 50 different industries today. The potential for this technology in treasury will be significant, especially if it is used to solve the KYC issue.

Emerging-market currency risk

Frances Hinden

VP treasury operations, Shell

For the past year, we’ve had so much news about Brexit, Russia and Donald Trump’s views on international trade that we may not have been thinking so hard about emerging-market currencies.

The Argentine’s peso abrupt slide (50% depreciation just in August and September), Turkey’s recent troubles and a lot of volatility in Brazil have reminded us that things can change very quickly. There are also changes in currency regulation in China and Malaysia, among others.

We need to have our networks in place to find out fast if a subsidiary is about to get into cash-flow trouble and why.

The solutions will depend on the cause and the chance of it getting resolved in days, months or years. We also need to remember basic economics: it may sound painful to borrow in peso at a 60% interest rate rather than USD at a 6% rate, but that could be cheaper in the long run.

Finally, recent volatility is a reminder to maintain all our bank relationships and keep them aware of what’s happening in our businesses. If we need local funding at short notice, it will be much simpler if the relationship manager isn’t taken by surprise and already knows the company.

Cash repatriation — the treasurer’s role

Winny Li

Group treasurer, PPD

In today’s global economy, multinational corporations will often need to consider prompt repatriation of their cash back from international investments or subsidiaries.

This may be motivated by reasons such as corporate M&A transactions, debt repayment and further investments.

Treasurers have a key role in facilitating successful cash repatriation and must stay on top of the continually changing landscape in order to provide technical expertise to navigate their company through complex laws, taxation issues and regulations, and provide strategic direction.

For US companies, an example of a recent change to incentivise cash repatriation back to the US is the enactment of the Tax Cuts and Jobs Act of 2017, which, for a limited transition period, has cut corporate repatriation tax from 35% to as low as 8%.

Consequently, it was noted that more earnings have been repatriated in the first six months of 2018 than in the three previous years combined.

Treasurers can evaluate these opportunities and build a solid team with other leaders to analyse challenges and requirements.

Considerations are wide-ranging: company liquidity projections, working capital demands, FX risk measures, hedging requirements, country-specific banking restrictions, and credit and debt limitations may be relevant.

Other typical cash-repatriation factors include countries’ dividend policies and regulations, central bank approvals, timing for finalising local statutory legal reserve positions, audit approvals, and tax obligations at individual entities and group level.

A cash-repatriation project plan should be drafted with sufficient lead time to accommodate all key requirements and achieve the project goals and timelines.

Be mindful that frequent changes mean potential pitfalls. But there will also be many opportunities and, by working with others, treasurers can make a positive difference.

Standardisation of payments

Yann Umbricht

PwC partner, treasury and commodity trading group – together with his colleague…

Thomas Knudsen

PwC senior manager

Corporates continue to pursue standardisation of payments to make processes more efficient and reduce costs.

Clearing systems are moving to faster payments and more standardised payment and reporting formats (for example, ISO 20022), along with better remittance data and the ability to trace important payments using SWIFT gpi.

This allows organisations to aim for higher matching rates in cash allocations and more efficient processing of priority payments.

Growth in e-commerce means card payments are also being reviewed in more detail by many organisations. This is due to the ever-increasing proportion of sales margins that card and associated FX costs take up.

It is also prompted by recent outages in the card systems exposing the risk of over-reliance on cards.

Alternatives to cards are becoming more common, and open banking driven by PSD2 will continue to bring new solutions to market that corporates should consider.

Treasurers should lead the organisation to reap benefits of a changing payments landscape by helping to reduce fees, choosing the right services, and maintaining correct cash reporting and controls as new services are implemented.

A must-do is to understand how faster payment clearing and new payment types will impact working capital, and how treasury teams manage day-to-day liquidity.

Thanks to all our participants

This article was taken from the December 2018/January 2019 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership

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