Treasury Outlook for 2017

 

by Ritu Singh, Market Development Manager, Corporate Treasury and Alex Goraieb, Head of FX & Corporate Treasury Market Development Europe, Thomson Reuters 

How have the unprecedented macroeconomic and political events of 2016 affected treasurers?

Geopolitical events have had a bigger impact in 2016 than in recent years. Brexit was the most prominent example of populist politics with the electorate exercising its dissatisfaction with the status quo and fuelling a growing trend of reverse globalisation. 

FX volatility is now less driven by macroeconomic trends but more by political risk. The recent dramatic movements in sterling can be directly correlated to speeches by politicians or government officials- recently witnessed with the extreme volatility in GBP following the rollercoaster speculation surrounding the hard vs soft Brexit decision. There has been some speculation around the GBP flash crash being sparked by comments originally attributed to the French president François Hollande regarding the European response to a hard Brexit being recycled in the media. This however is yet to be proved.

Political instability in the Middle East and Africa has led to the largest involuntary migration since the Second World War. This has unwittingly fuelled the populist politics within developed Europe, further exacerbating the protectionist attitude and popularity of extreme politics. This is not confined to Europe, but indeed contributed to an anti-globalisation, anti-free trade business environment in which most MNCs thrive.

On the other hand, MNCs whose treasury operations are centralised are also looking to keep regional and even subregional presence in place. This is particularly relevant for China where language and government bureaurocacy may create significant challenges. The drastic fall of oil prices in recent years has meant that cash may become trapped in economies that are dependent on oil production and impose hard currency controls... as recently voiced by the head of treasury operations at one of the leading global oil firms. 

Political events will also have a bearing on counterparty/country risk mangement. Treasurers are increasingly integrating market-based and political data such as GDP per capita, stability of reserves, unemployment rates as new inputs into their risk models. 

Global growth can be seen in four quadrants. The US is improving albeit at a slow pace, Europe is at a standstill, China is slowing and the rest of the emerging world has shown resilience to a great extent in the wake of a strong dollar. Treasurers will be considering this when planning new projects. We at Thomson Reuters believe we can only provide the right level of sub-regional insight to our corporate customers by being on the ground in over 100+ countries, gathering key data points, as well as the latest news scoops on the macroeconomic, geopolitical and central bank events. This information is the life blood of our corporate customers’ decision-making and strategic planning processes on a day-to-day basis.

What other challenges have been particularly significant this year?

Historically financial regulation did not have significant impact on a treasurer’s agenda. This, coupled with tax and accounting directives and rules, is now very much at the forefront. Treasury now has an added compliance function. Basel III and Basel IV mean that the attractiveness of placing short-term deposits for corporates is diminished. MiFID II extends the stricter collateralisation and clearing requirements of OTC instruments, such as commodities derivatives, that many corporates use to hedge price risk. 

Treasurers are responding to the BEPS regulations by working more closely with their tax, finance and boardroom executive colleagues to ensure that the processes that they put in place are coherent with the strategic goals of the company and more importantly that they are compliant from a tax reporting perspective. 

IFRS (while not effective until January 2018) requires all financial instruments to be recognised at fair value. Observable market rates are required by auditors as key inputs into achieving this objective. Intercompany loans that are not made at arm’s length will be given a difference in accounting treatment and so it is incumbent to show ‘arm’s length’ rates through independent market data rather than relying on bank rates or the parent’s credit rating. 

 

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KYC demands on corporates continue to provoke a communal groan. Industry utilities facilitate the provision of uploading documents once and take away manual processes. Wider adoption from corporates will put more pressure on the financial institutions to standardise requirements. 

In a recent cash management conference organised by the ACT in London, there was an informal poll to determine how many of the corporate audience felt they had a firm grasp on their required action to comply with the current regulatory environment and challenges. Only two hands were raised from among more than 200 delegates. 

Thomson Reuters continues to work closely with our corporate community to provide a wide range of solutions to address many challenges such as providing:

• regulatory insight and guidance which help our customers better navigate increasing reporting requirements
• comprehensive data to help mitigate risks posed by third party relationships, and avoid financial penalty and reputational damage
• benchmark loan and pricing databases to help demonstrate the ‘arm’s length’ principles

What do you see as the most significant technological developments?

Advancements in technology have always been disruptive. At the recent EuroFinance conference in Vienna, Ramez Naam of the Singularity University identified five key ‘D’s’ which underpin industrial evolution:

1. Disruptive technology: e.g., driverless cars
   
   
2. Digitise – the process by which processes and functions are digitally automated via software e.g., automatically adding a new feature or providing remote support diagnostics without the need for physical intervention
   
   
3. Dematerialisation (not owning assets e.g., Uber or Airbnb) - a key component of platforms
   
   
4. Demonitise (arguably destroying value…or changing how it is created e.g., broadsheet newspapers’ value destroyed in a decade… but some have done well in the digital world finding a wider readership base, and new means of being consumed e.g., in-car or elevator news).
   
   
5. Democratise (i.e., making it available en masse) - e.g., putting a smartphone in the hands of every citizen globally. This is the biggest opportunity in Africa, and the key component of growth in many social media platforms that rely on community to drive growth. 

Key lesson for the professional treasury of today is that manual processes should be eliminated and automation is necessary to manage the identification and management of all activites from which a financial exposure could arise. This includes compliance, cybersecurity, supply chain, as well as traditional FX and interest rate risk. Underpinning this there needs to be good quality data, whether that is internal or external.

A key driver of automation is big data: having data analysts to best leverage not only the data available from insight producers such as Thomson Reuters, but also a lot of the valuable internal data held in silos within companies. The power of both these data sets, organised properly together with the application of quants to automate decision making and key processes, is the next step in evolution. We at Thomson Reuters regularly ask our clients when we explore how we can help them, whether they have any data scientists. The answer is usually no. We expect this to change.

What will treasurers focus on in 2017? 

Political uncertainty and the future of Europe is definitely front and centre stage with the upcoming French and German elections. The new US president will determine the future role of the US in both global economic and political terms. 

The interest rate environment will continue to be of benefit to high rated corporates accessing the capital markets and even high yield bonds have appetite with investors. 

As long as there is political uncertainty there will be volatile FX markets.

With several significant global accounting and fiscal initiatives currently in vogue it seems treasuries will be concerned with topics like BEPS, IFRS9 and Section 385 (for US corporates).

On the technology side, there is awareness of major disruptors such as fintech and blockchain and appetite to learn more, but resource and funding are limited. We expect corporates to embrace big data in a much more comprehensive manner, by tagging and organising internal data, sourcing data externally to complete the picture, and by recruiting data scientists that can help take the corporate to the next stage of their digital evolution (Industrial 4.0).

 

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Despite the presence of peer-to-peer lending, the vast majority of corporates still look to their banks for transactional banking and capital market access. The value of that relationship does need more transparency and the shift of power is in favour of corporates (better rated and having more choice). Multibank platforms and transparency of capital market fees mean more leverage for the corporate.

We have also seen that treasurers are widening their remit outside of treasury, being responsible in some cases for investor relations, corporate finance, pension and investments and increasingly bringing commodity price risk and hedging into treasury. This will continue and accelerate. 

We at Thomson Reuters recognise the constantly evolving role of the treasurer and rely on the voice of the treasurer to shape our propositions, geographical presence and overall direction. As a technology firm, we harness and incubate innovation. Out of this will come exciting solutions for our treasury clients.

 

Ritu Singh Market Development Manager, Corporate Treasury, Thomson Reuters  Ritu joined Reuters in 2001 after having spent eight years as a USD prop trader at Banque Indosuez (now part of Credit Agricole) in New York. She began her Thomson Reuters career as a client trainer, moving into the FX business division. Her previous roles have included a specialist sales position for Fixed Income and FX/MM where she focused on selling to the corporate treasury community as well as an account management position. Her current role as Market Development Manager, Corporate Treasury includes developing relationships with our industry associations and third party partners building closer ties between our organisations. She is also responsible for setting the direction for our growth plan in key FX buy-side client segments.  Ritu’s academic career includes a BA in French and German from the University of Bradford followed by an MBA in Finance from Fordham University NY.

 

Alex Goraieb Head of FX & Corporate Treasury Market Development Europe, Thomson Reuters  Alex Goraieb joined Thomson Reuters in September 1998. He currently holds the position of Head of FX & Corporate Treasury Market Development for Europe. The main focus for the group is to develop growth and retention strategies in these key markets for Thomson Reuters products and solutions across Europe. Before joining Thomson Reuters he worked as an Emerging Markets Repo Broker at Prebon Yamane (1994-1995), then at Knight-Ridder Financial (1995-1998) as a Market Specialist (FX, Rates & Technical Analysis), Banco Popular Espanol (1990-1993) in Treasury Sales.  Alex has an MBA from Imperial College London and a Business Management Degree from Manchester University.