After a year in business like no other, do treasurers need to change their thinking on risk? This is a crisis we’ve never experienced before; and while its impacts have varied in their severity depending on industry sector or level of restrictions country to country, it is unique in its global reach.
Lesson one of the past year has been that – after an intense but short period of adjustment – a great deal of treasury work has remained the same in operational terms.
So, in terms of whether treasury risk management is due a radical shift in approach, the answer has to be: no. The fundamentals remain the same. Core treasury risks – FX, interest rate, liquidity and refinancing risk – have not actually changed a huge amount over the past 12 months.
Of course, at any crisis point, there will be a focus on liquidity, but corporates have benefitted from government interventions and a strengthened financial sector, courtesy of the post-global financial crisis regulatory reforms. Clearly there is a need to understand the impacts of the pandemic on your individual business and industry sector – we’ve seen huge variation in the experiences of hospitality and tourism compared to pharmaceuticals and food retailers, for instance – and how those impacts vary across the geographies in which you operate.
In addition, over the course of the past year, we overcame operational resistance to connecting into work systems from home and banks shifted their policies around digital signatures. Personal impacts are ongoing. Interestingly, Citibank has just declared Fridays a videoconferencing-free day (at least for internal meetings) in recognition of the need to combat a sense of overwhelm.
Surviving the next year and the medium term will require still more recalibration as treasurers manage the current cocktail of risk and scan the horizons for future ones. I’d suggest there are five key areas that require our focus:
Inflation risk has been absent from our economic reality for some 12 years. Many younger treasury professionals won’t ever have faced this particular risk before. But answering definitively on whether we are heading into an inflationary period is not straightforward. The Bank of England and many commentators caution that inflationary headwinds are more prevalent now than at any point in the past decade. We know that the pandemic has made fundamental impacts on the global economy. Supply has been hampered and pent-up demand is all around. Meanwhile, governments and central banks appear willing to maintain their support measures at least in the short term – an alignment of monetary and fiscal policy that wasn’t the case after the global financial crisis (GFC). Personal savings are at high level. Some inflation, at least in the short term, has to be a strong possibility. You can read more about inflation here.
Interest rate risk used to correlate closely with inflation before the GFC – is this correlation set to return? There are natural hedges available, of course, in the form of floating rates. Just the same, this is an area likely to require more active management than in the previous relatively benign period.
Geopolitical risk appears largely to have receded – at least on the surface. The choppy waters of the past four years have calmed with Donald Trump’s departure from the White House and the arrival of a quieter, less invective-ridden approach to international relations in the form of President Joe Biden, and Brexit has passed its acute phase with the signing of the Trade and Cooperation Agreement. Those events seem to have calmed volatility, at least for now. What we are seeing, at least in the short term, is geopolitical risk in the form of vaccine nationalism.
Operational risk within the treasury function is not an easy area to call when it comes to making predictions around when travel restrictions might lift and what the future of work will look like. Looking further ahead, there are interesting questions to address as to which aspects of our working from home experience we’ll retain. Surveys tell us that people want to spend two or more days working from the home office, so this is very much an emerging issue. However, it raises not insignificant HR and benefits questions such as ensuring you integrate and develop members of staff, providing access to project work or interaction with senior people from wherever they work.
Supply chain and customer risk is a significant area of concern. There remains a great deal of uncertainty. The antiglobalisation trend prior to the onset of COVID-19 served to shorten supply lines, a trend that the pandemic accelerated. Supply chain risk will remain subject to many headwinds – geopolitical impacts on market access and international cash flows among them. Customer risk, too, will require careful risk management. Treasurers need to make sure that they stay connected with these changes in their businesses and understand the impacts on FX and cash flow management.
Looking ahead, the focus for the rest of 2021 will be recovery. Operational risk (including moving towards a steady state on hybrid working as, hopefully, travel restrictions start to ease) and holding a steady focus on liquidity are obvious priorities. Keeping risk in its broadest sense very much on the radar won’t go out of fashion any time soon.
Ian Chisholm is currently group treasurer at the Grosvenor Group, the international property company. He has previously held treasury and corporate finance roles at Shell and BHP Billiton. He is a fellow and former president of the Association of Corporate Treasurers