As a result of dramatic macro-economic and geo-political developments, volatility is likely to become the new normal in financial markets. At the same time, there is the recognition that there are those in the treasury community - both in corporates and in financial institutions - who have not experienced such turbulence before, having only known an environment of low interest rates and slow-moving exchange rates.
“Every conversation we have had [with treasurers] has been about the speed of change,” said Naresh Aggarwal, associate director of policy and technical at the Association of Corporate Treasurers (ACT). “But it is not always bad news. For example, sometimes sterling depreciation is positive if you are selling products overseas or if you have got overseas assets denominated in non-sterling currencies.”
Aggarwal’s comments were made during a Talking Treasury meeting with the ACT Policy & Technical team, reporting on how treasurers are dealing with the current market volatility.
Looking specifically at the UK, James Winterton, also an associate director of policy and technical at the ACT, said: “I think politically, the UK is likely to have a couple of turbulent years ahead, until the next general election. It is a little bit extreme for market commentators to refer to sterling as being like an emerging market currency, but there will be continued unusual levels of volatility. So, this is where it benefits those treasurers who are comfortable using FX derivatives such as collars, as well as those who were already checking that their reporting currency is aligned with the economics of their business.”
However, looking more widely, Winterton commented that the strength of the US dollar could be affected by results in the mid-term elections, as well as the impact of the recent OPEC announcement on reducing oil production.
“This could really weaken the US’s ability to drive its economy, which could potentially have some impact on the dollar,” he said. “Likewise, with the euro, Germany used to be able to pick up the strain, but now if there is a bad winter, we are hearing that German factories may cut back production, which could have an impact on the value of the euro.
“So, there are some scenarios here for which treasurers need to be stress testing.”
Sarah Boyce, associate director of policy and technical at ACT, added that the recent bout of FX volatility happened over quarter-end reporting periods. “For a lot of corporates, their accounting is going to be difficult,” she said.
Aggarwal agreed, adding that there was a risk to covenants. “It is worth looking at thresholds to understand where your trigger points are, and it is definitely worth speaking with your accounting teams and external auditors before they come and talk to you.”
Boyce also predicted that corporates would need to communicate clearly with stakeholders in the coming weeks so that they have an understanding about the variances to forecasts in reported figures. “Stakeholders are generally more amenable if you are able to explain why the numbers are the way they are,” she said.
The current volatility could affect customers and suppliers, Aggarwal warned. “We know that going into autumn there was a lot of concern about credit risk across the supply chain,” he said.
“Treasury teams in many well-capitalised corporates are engaging directly with their financial counterparties at critical customers and suppliers to understand their financial resilience, as any further slowdown in economic activity will have a knock-on effect for many companies. Even if your own company is in a good position, we know that you are only as good as your key suppliers and customers, and many companies have already started to exhaust their sources of funding.”
Aggarwal suggested that corporate treasurers could their risk management capabilities across those key relationships that might not have such capabilities.
Boyce added that the CBI had recently said that if there was one thing that corporates could do to help their suppliers, it would be to pay them on time. “Prompt payment is going to be absolutely key for small businesses during the next 12 to 18 months.”
On fund raising, Aggarwal commented that the only corporates that were issuing bonds were the ones that needed to. “Many corporates got their funding arranged earlier this year… I can imagine that many will now want to pause, wondering if there is worse to come,” he said.
Winterton agreed, adding that there was a realisation among treasurers that pricing was becoming more unpredictable and more investors were backing out of commitments at later stages of funding. To exacerbate matters, there are staff in treasury teams that are relatively inexperienced, and did not go through the financial crisis in 2008, so they will need to upskill themselves by attending technical updates and conferences, and using their treasury networks to help them prepare for the period of excessive uncertainty that lies ahead.”
The full recording can be accessed here (ACT members only).
Philip Smith is editor of The Treasurer