Challenges as economy recovers

Cor­po­rate trea­sur­ers are known for hav­ing a cau­tious mind­set. Tasked with respon­si­bil­i­ties, includ­ing cash man­age­ment, invest­ments, fund­ing and man­ag­ing risk, many respond­ed to the finan­cial cri­sis by build­ing large war chests of cash, devel­op­ing ever­more sophis­ti­cat­ed process­es to mon­i­tor and man­age risk, and pri­ori­tis­ing secu­ri­ty over yield when invest­ing.

Now the world has moved on from the cri­sis and the lat­est eco­nom­ic growth fig­ures tell a pos­i­tive sto­ry. In April, the Office for Nation­al Sta­tis­tics announced that the UK econ­o­my had grown by 0.8 per cent in the first quar­ter of 2014. With five con­sec­u­tive quar­ters of growth, GDP has risen 3.1 per cent in the last year.

While the UK’s trea­sur­ers nat­u­ral­ly wel­come the more pos­i­tive macro­eco­nom­ic envi­ron­ment, the cau­tious approach that has been fine­ly honed over the last few years is unlike­ly to be scaled back any­time soon.

David Fel­ton, UK-based vice pres­i­dent of inter­na­tion­al trea­sury at Dis­cov­ery Cor­po­rate Ser­vices, explains: “There is the begin­ning of a feel-good effect with­in banks and cor­po­rates now, but since the reces­sion has been so deep and so long, many cor­po­rates are still hes­i­tant about the longevi­ty of the improve­ment.”

Ali­son Wil­son, trea­sur­er of smooth­ie and juice com­pa­ny inno­cent, says: “Signs of improve­ment in eco­nom­ic and trad­ing fun­da­men­tals in Europe are act­ing as a more pleas­ant tail­wind for us and our Euro­pean cus­tomers.” How­ev­er, she also notes: “The UK eco­nom­ic cli­mate con­tin­ues to present some chal­leng­ing trad­ing con­di­tions for some of our cus­tomers.”

In the evolv­ing cli­mate, the close focus that trea­sur­ers have held on risk for a num­ber of years is show­ing no signs of dimin­ish­ing, although the types of risk they are look­ing at con­tin­ue to shift. On the world stage, con­cerns about the break-up of the euro­zone are giv­ing way to more recent devel­op­ments.

Yuri Polyakov, head of finan­cial risk advi­so­ry at Lloyds Bank­ing Group, says recent events in Ukraine have intro­duced sig­nif­i­cant uncer­tain­ty regard­ing the future direc­tion of oil prices, which will impact on any major indus­tri­al com­pa­ny. As such, he rec­om­mends that com­pa­nies should now be eval­u­at­ing their busi­ness­es to under­stand the impact of any polit­i­cal esca­la­tion that may occur.

Since the reces­sion has been so deep and so long, many cor­po­rates are still hes­i­tant about the longevi­ty of the improve­ment

Mean­while, as com­pa­nies begin to focus more whole­heart­ed­ly on growth, anoth­er key chal­lenge is man­ag­ing risks in new mar­kets. “Com­pa­nies need to make sure that their risk man­age­ment strate­gies are adapt­ed to growth mode rather than val­ue-preser­va­tion mode,” says Mr Polyakov.

Inter­na­tion­al expan­sion has been a theme for UK com­pa­nies for the last few years, which presents addi­tion­al chal­lenges from a trea­sury point of view. As well as addi­tion­al risks, new mar­kets bring with them addi­tion­al cur­ren­cies, pay­ment sys­tems, reg­u­la­to­ry struc­tures and tax regimes, which may be par­tic­u­lar­ly com­plex when the com­pa­ny is focus­ing its atten­tion on emerg­ing mar­kets.

While Chi­na con­tin­ues to be a focus for com­pa­nies expand­ing over­seas, oth­er mar­kets are begin­ning to attract more atten­tion. David Blair, man­ag­ing direc­tor of Acarate Con­sult­ing, says Africa is being tout­ed as the new fron­tier, but risks and inef­fi­cien­cies mean cor­po­ra­tions need to adapt their busi­ness mod­els to African ways of work­ing.

Michael Mueller, head of cash man­age­ment at Bar­clays, says Africa is still “a bit of a white space on the map of many cor­po­rate trea­suries”. How­ev­er, he adds that multi­na­tion­al com­pa­nies are now begin­ning to look at Africa in a more con­sol­i­dat­ed way, with grow­ing num­bers of requests for pro­pos­al (RFPs) being issued for region­al cash man­age­ment solu­tions.

What­ev­er the des­ti­na­tion, expand­ing over­seas presents addi­tion­al chal­lenges for trea­sury. “Buy­ing and sell­ing inter­na­tion­al­ly brings with it the need to hedge our cur­ren­cy require­ments and at inno­cent we have a US dol­lar and euro hedge pro­gramme,” says Ms Wil­son. “With ster­ling strength­en­ing against both these cur­ren­cies recent­ly, there has been an oppor­tu­ni­ty for us to lock in some price cer­tain­ty.”

While eco­nom­ic growth and over­seas expan­sion present trea­sur­ers with a range of chal­lenges and oppor­tu­ni­ties, there is anoth­er fac­tor sim­mer­ing in the back­ground. Large­ly devised in response to the finan­cial cri­sis, a wave of reg­u­la­to­ry change is begin­ning to take effect, impact­ing cor­po­ra­tions as well as finan­cial insti­tu­tions.

Keep­ing up with all the ongo­ing changes is arguably a full-time job, adding to the chal­lenges faced by the many trea­sury depart­ments which are already under-resourced. As such, opti­mism regard­ing new oppor­tu­ni­ties is like­ly to be tem­pered by the oner­ous task of under­stand­ing and address­ing the chang­ing reg­u­la­to­ry land­scape.

Trea­sur­ers have had to evolve a great deal in the last six or sev­en years. Once seen as occu­py­ing an ivory tow­er with­in the com­pa­ny, the treasurer’s role has become more vis­i­ble across the organ­i­sa­tion. Eco­nom­ic con­di­tions may be improv­ing, but rather than scal­ing back their vig­i­lance and dis­ci­plined approach, trea­sur­ers will be using the same skills they honed dur­ing the cri­sis to sup­port their com­pa­nies in a more pos­i­tive eco­nom­ic cli­mate.