November’s US Presidential election is right around the corner, and, as the race between candidates intensifies, corporate treasurers are reviewing risk and liquidity planning to adapt to the unpredictable economic landscape.
As with any major political or macroeconomic event, companies should consider all scenarios and ensure that they have sufficient liquidity to mitigate potential economic shocks, while still maintaining long-term investment strategies. What steps can treasurers take to ensure they are adequately prepared, and what strategies can treasurers deploy to ensure sufficient access to liquidity?
Understanding the implications for the dollar, inflation and subsequent interest rate decisions will be crucial for effective liquidity and risk management
Although the Federal Reserve is ultimately responsible for US monetary policy, the outcome of the election can also impact treasury activity.
For treasurers, a Republican victory for former President Donald Trump could mean preparing for a shift in trade relationships and adapting to changing tariffs on global supply chains, while possibly navigating a lower corporation tax environment. In contrast, a win for Democrat nominee and current Vice President Kamala Harris might require adjusting to a more extensive regulatory landscape and new tax environment. In either scenario, understanding the implications for the dollar, inflation and subsequent interest rate decisions will be key for effective liquidity and risk management.
With the election just a month away, geopolitical risks, volatility in interest rates and FX rates may well continue through 2024 and into 2025. A longer-term liquidity plan to identify when, where, and how much additional capital may be needed is therefore essential for nearly every finance department. Combining the uses with the sources of cash into a liquidity plan facilitates policy enforcement and drives decisions that optimise cost of capital and liquidity levels,
For example, when looking at large outflows such as debt maturities, if a debt policy limits total maturities within a certain time period, the liquidity forecast then shows the net impact of that maturity on the overall forecast available cash. The same dynamic exists for other large cash outflows – including capital expenditures, M&A, dividend targets – and the impact on cash repatriation strategies. Understanding this dynamic will help treasury time the size and tenor of new capital raises.
Liquidity plans can provide a static view of known information. With the proper technology, organisations are also able to run scenarios on liquidity plans – for example, stress testing for a scenario in which interest rates drop by one percentage point to assess the knock-on effect on available cash. Artificial intelligence and machine learning tools can also be used to create cash forecasts more frequently, often with a higher degree of accuracy.
Underpinning cash forecasts and liquidity plans with a large volume of accurate and up-to-the minute data, treasurers can prepare for a range of scenarios, no matter the outcome of the election or the Fed’s interest rate decisions.
With a liquidity plan in place and scenarios run, treasurers may need a combination of tools to protect against a liquidity shortfall and react quickly if liquidity positions tighten. These tools range from risk management strategies to accessing new sources of financing. The goal is to have visibility of the liquidity plan and finding the right balance that includes surplus cash and working capital solutions. From there, treasurers can ensure there are sufficient options to manage through volatility and disruption.
Ultimately, as markets await the outcome of the November US elections, treasurers must navigate the uncertainty. By taking steps to improve their visibility and understanding of liquidity positions, treasury teams can buffer any shocks in the road and adapt or react to shifts in the macroeconomic environment.
Michael Kolman is chief product officer for ION Treasury. The views expressed in this article are those of the author and not do not necessarily represent those of the Association of Corporate Treasurers.
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