These risks are all an unknown quantity. So if we can't measure them, how can treasurers react and prepare? An 11-person panel at EuroFinance's International Treasury conference discussed how.
“Amazingly interesting times, which could be a curse or an opportunity” is how Chris Stibbs, CEO at the Economist Group, described the current political and economic environment in his opening speech at EuroFinance's International Treasury & Cash Management conference in Vienna. The theme for the conference is 'treasury at a tipping point', referring to the various developing and evolving factors and risks facing today's corporate treasury. These risks include the rise of populist politics in the Western world, the struggling global economy as it recovers from the 2008 financial crisis, China's emergence as an economic and political force, as well as the ongoing war in Middle East. Corporates are affected by all these factors and many more.
Treasury's super risks
An innovative session in the main hall saw no less than nine experts take to the stage to give an account of why various risks are changing and becoming more prominent for businesses. The session was moderated by PwC's Sebastian di Paola, who, together with Shell's Frances Hinden, VP treasury operations, commented on each of the risk factors and reacted by discussing how treasury is reacting to the risks. These 'super risks', including some comments from the speakers, were as follows:
1. Political risk
Speakers thought it should be more integrated into treasurers' thinking because it has the most effect on their environment – one topical example is Brexit affecting the pound. The Economist's Daniel Franklin also pointed out the long-term existential problems facing Europe: not just Brexit but also the euro crisis that rumbles on one shape or another – from Greece to Italy's banks, to German banks. Then there's Europe's migration crisis, which raised serious questions about the EU's borders and laws, and security throughout Europe in light of tensions in Ukraine, Russia and the Baltics. Treasurers need to prepare and think about these risks – perhaps with scenario planning.
2. Interest rates, socio-economic stagnation and inequality
The Economist Intelligence Unit's Alasdair Ross pointed out that these trends are a response to the financial crisis but also could be the result of demographic changes, with more onus on individuals to save more at the same time that quantitative easing is keeping rates at historic lows. Ross asked if these factors could be reversed in the near future but the only certainty seemed to be that they are driving political dissatisfaction and unrest across the developed nations, fuelling the rise of populist politicians.
First China's economic development simply grew exceptionally quickly. Now the growth has slowed considerably but the change is still rapid. The country's regulatory and banking environment are shifting, which poses a possible risk to treasurers with cash invested or held there. Shell's Frances Hinden acknowledged the need to pay close attention to China and said Shell has approached this issue by establishing a treasury hub in Singapore, which takes care of cash concentration for the region. She notes “this is something that treasurers need to keep an eye on to avoid trapped cash – they need to see where regulatory tightening will happen and it might be China or another country, such as Venezuela or Egypt.”
It's well-known that oil prices are low but if treasurers think they just have to hedge commodity risk, then that is not the full picture. Tensions in oil-producing nations don't just mean commodity risk, but also tensions in the economies of those countries, which could mean currency restrictions. Shell's Frances Hinden asked: “How is that going to impact restrictions on hard currency, FX, capital repatriation... will it lead to unstable fiscal regimes?”
5. Credit markets
A presentation from Mark Lewis, head of product management, corporate treasury, at Bloomberg, pointed out the weaknesses in credit spreads and deteriorating credit quality. Frances Hinden replied that, at Shell, this is having a significant effect on treasury, since changing regulations have altered the way they can assess and evaluate their banks as a financial counterparty. Different regulations in different countries have meant they now have to think carefully about how a bank in one country, such as Germany, could compare to, for example, a Swiss bank. She said: “We now have a much more nuanced financial counterparty credit risk management policy.”
6. Changes in banking
Oliver Bussman, a fintech innovation advisor, gave a presentation on how banks are on the brink of huge change, driven by fintech, disruption and blockchain. He said that distributed ledger technology could dramatically reshape finance products and processes for banks, pushing them to completely rethink what they are and what they do. He said that the universal banking model is being disrupted and that banks will have to find a new role for themselves in future.
7. The new financial crisis
We don't know where the next crisis will come from but Treasury Alliance's Daniel Blumen said that one weakness identified in the global financial system is in the payments industry. Huge advances have been made in payments in recent years, from mobile and e-payments, mobile wallets, as well as the expansion of payment systems. However, there hasn't been a corresponding increase in settlement systems and Blumen believes this is a weakness that could cause problems. He said the treasurers need to identify the weak links in payments and “model for failure”.
8. Technology: Cloud and blockchain
Cloud-based services and processes will change treasury and in particular, 'Cloud-based platforms as a service' will allow fintechs to develop a wider choice of Cloud-based apps. Blockchain will also completely change and redefine how the financial community shares data and manages risk. Ripple's Marcus Treacher noted that blockchain is comparable to the change that occurred in the early 19th century when the shipping container was invented, completely revolutionising how we transported goods and traded. Such steps forward in transferring goods – or data – could bring disruption but ultimately a lot of opportunity.
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