Money Maze Mappers: The Track to Good Treasury
by Helen Castell, Senior Reporter, TXF
As uncertainty over the future of US trade policy, regulation and taxation, and the UK’s Brexit negotiations inject volatility into foreign exchange (FX) markets, corporate treasurers are under more pressure than ever to make fast and accurate risk management decisions.
But according to findings from last month’s Citi Treasury Diagnostics report, while most corporate treasuries have mature risk management programmes in place, many are not nuanced or nimble enough in how they manage risk on the currencies that have most power to upset their earnings.
So, at a time when the expanding role of treasurers means they are already being pulled in various directions, which risks should top their priorities, how important is automation, and why is now the right moment to ask for additional tech spend?
The damage that currency moves following the UK’s Brexit vote and Trump’s election inflicted on corporate earnings proved a wake-up call for many corporate treasurers. “Surprisingly, people didn’t hedge very well for Brexit,” says Mark O’Toole, vice president of commodities and treasury solutions at treasury and risk management software vendor OpenLink. “They just wanted to trust the polls and nobody was trying to come up with a strategy to the downside.”
Similarly, too few corporates were prepared for the roughly 15% slide in the Mexican peso against the dollar following Trump’s victory. Then, as corporates started rolling out their quarterly or full-year earnings, they blamed losses on currency moves that they didn’t hedge for, he notes. “Clearly, companies weren’t stress-testing, which is what we encourage all our clients to do,” adds O'Toole.
In the last 12 months, however, treasurers are becoming more strategic in that regard. Geopolitical risk has a major impact on markets - as exemplified by Brexit, Trump’s election and tensions between China and the US - and is a key focus in ABB Singapore’s corporate risk management, according to country treasurer Christopher Emslie. It also changes fast, so ABB Singapore assesses its risk management strategy each month to ensure it remains robust.
Taxation and regulatory risk
US border taxes or changes to the corporate tax code could have particular consequences for both domestic treasury teams as well as offshore corporate treasurers, says Erik Johnson, director of risk management solutions at Citi.
Corporates are now studying the possible consequences to existing balance sheets, to capital investments or potential capital investments, and to existing lending profiles.
They are also questioning how changes to natural offsets to the debt markets for foreign currency earnings – ie dollar debt against dollar earnings – could affect how they manage US dollar earnings streams back into, for example, the eurozone, he adds.
Taxation changes will be a key risk priority for treasury in 2017, according to Declan McGivern, EMEA head of the treasury advisory group, Treasury and Trade Solutions, at Citi.
The OECD’s base erosion and profit shifting (BEPS) proposals, likely to be in force by June, will change all double-taxation agreements that treasury rely on for the inter-company pricing of instruments like loans, deposits and foreign exchange. This comes on top of the EU Anti-Tax Avoidance Directive, adopted last June.
At the same time, individual countries have unilaterally introduced rules on transfer pricing and interest deductibility that will impact portfolios of loans, and the foreign exchange hedging on them. The possibility of tax cuts in the US could meanwhile create a long-term need for companies to collapse currently separated cash pools into a single pool.
Combine the above and some companies may need to change their entire underlying supply chain, including the location of the treasury centre and principal companies, how they distribute and ultimately where they pay tax, McGivern says.
“Given that inter-company lending changes on a daily basis, how do you create the capacity in treasury to ensure that on a local, regional and global basis you’re not suffering from any tax leakage or breaking any local legislation?” he asks.
Companies need to ensure therefore that they build enough “bandwidth” in treasury to be nimble as the tax landscape solidifies.
Growing uncertainty about US tax policy means lots of money is being kept on the sidelines rather than invested as capital expenditure, and this can present a risk to corporates throughout supply chains, says Alejandro Fernandez, finance manager at Bunge Latin America.
The possibility of US interest rate hikes is another subject of concern for Bunge. Higher US rates could trigger capital flight from markets to which Bunge sells its commodities and affect the competitiveness of markets it sources from. “That’s one of the things we need to continue to monitor very closely,” he says.
The scrapping or renegotiating of existing trade agreements such as NAFTA – and even the imposition of tariffs – creates further uncertainty that treasurers need to stress-test for, says O’Toole.
Corporates should monitor such developments closely, analyse how decisions could impact them and explore how they might be able to hedge the downside, he advises.