The Resilient Treasury: Optimising Strategy in the Face of Covid-19

No sooner had treasury departments signed off on their 2020 strategy plans than Covid-19 transformed priorities and shifted the conversation around treasury. With treasurers having had six months to readjust, TMI speaks to Ole Matthiessen, Global Head of Cash Management, Deutsche Bank, about the results of the latest EIU annual corporate treasury survey, which this year covers macro risks, regulatory changes and emerging technologies.

TMI: The results of the sixth Economist Intelligence Unit (EIU) annual corporate treasury survey, supported by Deutsche Bank, have just been released. Can you tell us more?

Ole Matthiessen (OM): Absolutely. I am incredibly excited to discuss the latest survey – it comes at a critical point for treasury, where a number of different factors are driving strategic change in the treasury function. This year’s survey covers a lot of ground. It looks at the macro and financial risks that impact strategy, the effect of negative interest rates on investment plans and the regulatory initiatives that are currently top of mind for treasurers. Additionally, it analyses the technologies that treasurers are using today, the skills that treasury functions require and the approaches they are taking towards cybersecurity. Critically, it also identifies the key priorities that treasurers will pursue up to 2025.

As you mentioned, this is the sixth edition of the survey. As we embark on a new decade we have tried, where possible, to factor in findings from previous EIU corporate treasury surveys in this series (conducted between 2015 and 2019) to highlight how the industry has developed over the past few years.

Bringing together responses from more than 300 corporate treasurers across the globe, the report is structured in three sections:

TMI: When we spoke back in March, you mentioned that the pandemic would emphasise “the importance of corporate treasurers in helping their businesses operate in uncertain times”. Reflecting on the past six months, would you agree that Covid-19 is now not only emphasising the importance of treasury, but driving the conversations around it?

OM: Undoubtably so. You only have to look at the title of this year’s report, The Resilient Treasury: Optimising strategy in the face of Covid-19, to see how the conversation around treasury has been driven by the pandemic. Its implications have been huge. No sooner had treasurers begun to implement their 2020 strategies than the economic landscape completely shifted.

One day we were all in the office, the next we were working remotely. And as we transitioned to this new way of working, the focus of many treasuries was shifting massively too. For example, long-term cash forecasts have been pushed to one side in favour of short-term, more regularly interrogated, forecasts – enabling treasury departments to access a more accurate ongoing picture of cash and liquidity. We have also seen that treasurers are taking a closer look at their liquidity buffers in the short term.

TMI: So, do Covid-related risks represent the main concern for today’s treasurer? Or are there other risk management challenges on the horizon too?

OM: It is clear that the ‘new normal’ for corporate finance will be shaped by Covid-19 – and this is reflected in the results of the survey. In fact, they reveal that the top three risks to a firm’s finances in 2020 all have ties to the disease: pandemic risk (43%), global economic growth (31%) and inflation/deflation risk (23%). When taken together, it is clear that these concerns will necessitate robust forms of risk management from the treasury function.

We are also seeing that the pandemic is exacerbating existing concerns, including the state of the world economy. When the dust settles, and we are able to take stock of the economic fallout of Covid-19, what will be the lasting impact? And, as central banks battle this uncertainty and look to avoid a long-lasting recession after Covid-19, negative interest rates appear closer than ever in markets such as the UK and the US. This could yet have huge implications for cash management and funding.

TMI: How are treasury departments reacting to this prevailing uncertainty?

OM: The current climate of uncertainty surrounding interest rates and inflationary trends is being met head on – with treasurers increasingly looking to diversify their investment portfolios. This has brought a variety of risk management techniques to the fore. Liquidity risk, foreign exchange risk and mitigation of interest rate risk have each become vital to navigate increasingly volatile markets, while a focus on counterparty risk has become critical for supply chain management. The survey also revealed that, over the next 12 to 24 months, treasurers plan to increase investments in long-term instruments (55%), bank deposits (48%), local investment products (48%) and money market funds (47%).

TMI: You mentioned that Chapter 2 of the report addresses regulatory challenges. Can you give us a flavour of what’s happening there?

OM: Competing regulations, and the challenges and burdens that surround them, are always going to factor into a treasurer’s list of priorities and concerns for the year ahead. This year is no exception. While the 2019 survey found that the International Financial Reporting Standards (IFRS) 9 were the biggest regulatory concern (30%), this time around the replacement of the London Interbank Offered Rate (LIBOR) and other Interbank Offered Rates (IBORs) is the primary focus for treasurers (38%).

The clock is certainly ticking for treasurers as they prepare for life after LIBOR. Regulators in both the US and UK expect firms to have completed the transition to alternative risk-free rates (RFRs) by end-2021. But Covid-19, and the necessary shift in priorities it has precipitated, means that the transition could be delayed even further.

TMI: Last year’s report focused on the importance of building a data-driven treasury. How have views on the importance of data and, more broadly, technologies evolved since the previous survey?

OM: Implementing and developing new technologies and data has long been a preoccupation for treasury departments – both within and outside their business. Covid-19 and the ensuing move to the ’home office’ was the first significant test of these efforts. Has it been a success? I think that broadly it has. If we think back to 2010, it is highly unlikely that treasury departments would have had access to the necessary tools to continue performing their day-to-day roles from home – at least not with anywhere near the levels of business continuity that we have seen in the past six months.

And, of course, the pandemic has accelerated this desire for wholesale digital transformation, with treasurers relying on technology more than ever. For example, 37% of respondents cited real-time e-commerce is as one of treasury’s most impactful business model disruptions – a trend that has likely been accelerated by pandemic-related lockdowns and social distancing. We also see that cloud-based applications remain popular – enabling remote access to business systems and data, which has allowed many organisations to continue ‘business as usual’. So, it is good to see that this digital focus is bearing fruit.

TMI: What are the key concerns or priorities for treasuries in this respect?

OM: Data quality remains high on the list, with 78% of participants citing it as a key concern this year, as opposed to 69% in 2019. Acquiring the necessary skill sets to realise the full benefits of this data and technology is also a continuing priority – with 30% of respondents claiming that they have all the skills they need to manage technological change, up from 22% in 2018.

TMI: What is the key message you want a treasurer reading the survey to take away?

OM: Since we first started releasing these EIU reports, it is clear that treasury departments have grown and evolved. What remains constant, however, is that there will always be a sea of challenges to navigate. This year’s survey suggests that treasury priorities for the future will be shaped by three core themes: macro risks, regulatory changes and emerging technologies.  In the wake of Covid-19, we also see that pandemic risk will remain on the treasury checklist for years to come.

All of this plays into the top priorities for the 2020 treasury agenda – with 32% of respondents citing the management of relationships with banks and suppliers, and 32% citing collaboration with other functions in the business. Together, these trends should help the treasury function to become an even more supportive and proactive partner to the rest of the business.