Published: February 16, 2023
Before the 2020s got underway, corporate treasurers and CFOs doubtless felt they had already faced a formidable set of tasks at the start of each year. But a turbulent decade is adding more challenges to their agenda, from resurgent inflation to the impact of war in Europe. What can treasurers do to stay a step ahead, or at least not end up on the back foot? Is technology the answer, or a closer focus on people, skills, and technical treasury prowess?
With January done and dusted, it might feel like the toughest part of 2023 is over. But as corporate treasury teams prepare to navigate through the remainder of the year, the disruptions of the recent past – principally Covid-19 and war in Ukraine – create a highly uncertain landscape ahead. After all, the pandemic’s supply chain disruption and lockdown-induced acceleration of new working patterns have now been joined by a massive spike in energy costs, commodity prices, and supply volatility triggered by Russia’s invasion of its neighbour.
Inflation has also spiked to 40-year highs in many economies and accelerated the end of more than a decade of low-to-zero interest rates. While there are signs that inflation peaked in many countries in late 2022, whether it can rapidly return to the 2% level sought by the world’s major central banks remains questionable – in economies across the globe.
In the UK, for example, The Bank of England (BoE) predicts that inflation will have returned to 5% by the end of this year but then sees it falling to 1.5% by Q4 2024. However, as the British Chambers of Commerce (BCC) has cautioned “this simply means prices will stabilise at a very high level and Government plans to reduce energy support after April 2023 could put upward pressure on inflation again”. And Julie Fabris, Treasurer, Britax Childcare Group, sees little to support the BoE’s optimistic inflation outlook.
“The focus will again be very much on liquidity, but while the government was there to help three years ago when the pandemic hit there won’t be the same support this time, although the cost-of-living crisis has come back to bite companies,” she notes. While businesses in some sectors have managed to pass on their cost increases in price rises, the ability to do so depends on the strength of their brand and their business.
Additionally, for UK businesses last September’s notorious mini-budget will have a long-term impact on borrowing costs for both businesses and consumers. Alongside the effect of changes in corporation tax, which rises from 19% to 25% from 1 April and business rates on “already dwindling business confidence, this is likely to lead to a 3% contraction in firms’ investment in 2023,” the BCC predicts.
On both sides of the Atlantic, last year’s successive interest rate hikes have already extended to the first months of this year; even at the risk of stifling nascent economic recovery. Having been tardy in responding to the threat of resurgent inflation, the US Federal Reserve, the BoE and the European Central Bank were all forced to hike rates substantially faster and more sharply than anticipated last spring. While the hiking cycle appears to be nearing an end, rate reductions before Q4 2023 appear unlikely.
Against this backdrop, the environment for treasury during 2023 has echoes of previous challenging times, principally the first energy crisis and inflation spike of the mid-1970s, the tech boom-to-bust 25 years later and the 2008 financial crisis. “This time it may play out differently,” predicts Chris King, Co-Founder of corporate finance and risk management firm Dukes & King. “The volatility is more pronounced and real,” he notes.
“There are a number of indicators that would suggest that we’re in the early stages of a distressed cycle and the question is how best to navigate it? In these environments, the need for good treasury skills come to the fore. Do you have people around you who can manage distress?”
In such an environment, “Liquidity, and cash, become king once again. Companies will need to conduct an investment appraisal – in light of both the changed inflation, rates and macro environment, but also with significantly elevated volatility – which may substantially change the viewpoint around long-term projects, as the need for all the good old technical treasury skills are coming to the fore once more.”
Although many market participants see a year ahead as immensely treacherous, “the trajectory at the end is likely to be much better,” he adds. Nevertheless, King believes that any significant easing of the rate-tightening cycle is unlikely to come earlier than 2024.
Like King, Kemi Bolarin, Head of Treasury – Europe, GXO, reports that recent events have seen a “back to basics” approach for treasury and a renewed focus on where its core skillset lies. “Our own exposures are reviewed regularly, and we have enhanced the monitoring of key indicators such as counterparty credit ratings, partners’ business profiles, inflation rates and interest rates, such that as a treasury team we are alerted to potential issues early and are able to take precautionary action,” she says. “In addition to monitoring these economic indicators, compliance with evolving US and European sanctions is high on our agenda.”
Edward Mundt, Senior Global Treasury Consultant, PMC Treasury, reports that the firm’s clients – particularly those in private equity – are adjusting to the new reality, although there are signs of increased risk aversity. “The pandemic provided a real stress test of supply chains,” he adds. “Some responded by overbuying and still have substantial inventories as a result. Inevitably, there is a knock-on effect on working capital.”
He agrees that the current challenges underline the importance of a strong corporate treasury team, one that includes good technical skills. “Our generation is good at Excel and traditional treasury management system solutions, while younger people joining the profession have coding skills. Companies must decide how these newer competencies can best be leveraged by treasury.”
It is not just skillsets that are changing. Amid recent reports that some companies are deciding that after three years of working from home, it’s time for employees to return to the office, Mundt cautions: “We have seen instances where practically the whole treasury department has quit, so there is a continuing need for flexibility in response to the new reality.”
As part of this new normal, ESG issues have steadily risen up the treasury agenda in recent years, with companies increasingly required to demonstrate both to stakeholders and to the public that they regard ESG as more than a box-ticking exercise. However, last year was marked by evidence of an ‘ESG investor backlash’, particularly in the US. The sharp rise in oil prices during 2022 was unhelpful to the ESG cause, as funds that had eschewed investment in fossil fuels missed out on the gains.
A more questioning, even hostile, attitude to ESG was becoming evident. Last May, Stuart Kirk, Global Head of Responsible Investing, HSBC, was forced to step down after controversially accusing central bankers and other officials of exaggerating the financial risks of climate change. However, his views attracted widespread support from others, including Elon Musk who took to Twitter to denounce ESG as “a scam”.
King believes that the episode marked a step change and that as 2023 continues to unfold companies will focus on “more concrete and structured areas, such as carbon credits. Possibly we’ll hear fewer ESG announcements, but they will also be more meaningful”. This might not be enough to prevent further backlash against ESG, however, such as that taken by the US state of Florida, which in December 2022 removed $2bn from the management of BlackRock, the largest fund divestment to date.
But, at the same time, ESG can no longer be ignored. “We all recognise that the world isn’t in a good place due to global warming and that we’re responsible for addressing it,” says Royston Da Costa, Assistant Treasurer, Ferguson.
“The new generation now joining the workforce is our hope of rectifying the environmental sins of the past. Even five years ago, treasury probably wasn’t too interested in tackling the issues, but the greater focus on them was accelerated by the pandemic and ESG must now form one of treasury’s top five priorities – treasury can now take out green revolving credit facilities [RCFs], for example,” notes Da Costa.
Tied in with this shift in talent is the need for greater flexibility in managing the workforce. He continues: “Treasury always had to be present in the office in order to use the systems, but the move to the cloud means it’s no longer essential. Treasury was able to continue working remotely during lockdown, due largely to companies having to invest in facilitating remote working and today’s generation expect to be offered that option.”
Could this year also prove to be the one in which the cashless society becomes reality, or CBDCs gain mass acceptance? For some time, March 2023 has been set as the date on which Sweden finally dispenses with its remaining banknotes and coins to become fully digital. With more than 98% of Sweden’s citizens owning a debit/credit card and mobile payments the norm, the journey is almost complete, yet the government has enacted measures that an adequate system for cash distribution remains for Sweden’s more isolated communities. The country could instead see neighbour Norway become Europe’s first cashless country, with coins and banknotes used for only 3-4% of transactions.
As for CBDCs, China has been a front-runner in their development with a digital yuan wallet piloted ahead of last February’s Beijing Winter Olympics. However, the launch doesn’t appear to have spurred other countries into accelerating their own CBDC initiatives. Despite a handful of launches such as the Bahamas’ Sand Dollar and Jamaica’s JAM-DEX, most countries are at the research, proof-of-concept or pilot stage in developing a CBDC and the digital dollar and digital euro will take longer than 12 months to become reality. “To a degree, particularly for corporates, CBDCs are the solution to a non-existent problem, given recent investment and advances in real-time payment systems and infrastructure,” observes Mundt. “Moreover, the shift towards CBDCs would likely entail cost and resource implications for treasurers. That said, there could be cross-border payment benefits in the future if multi-CBDC [mCBDC] solutions prevail,” he adds.
Indeed, Da Costa cites recent developments such as J.P. Morgan’s launch of the JPM Coin System – the first blockchain-based deposit account and ledger rail offered by a global bank – as a signal of things to come. “Central banks are already exploring potential solutions involving collaboration between themselves, which could prove quite beneficial to corporates,” he predicts.
“And I also see the use of fiat currencies being replaced by the fast-evolving digital currencies over time – although this isn’t likely in the near term due to the prevailing uncertainty and investors’ nervousness. Interestingly, a number of digital currencies are pegged to a fiat currency like the US dollar in the case of JPM Coin,” he notes.
The nervousness Da Costa references is understandable, in the crypto space at least, given the bankruptcy of FTX in November whose swift rise and fall continues to impact on its peers. The first weeks of 2023 have already seen the EU approve stringent rules to limit banks’ risks from crypto asset holdings, ahead of the Markets in Crypto-Assets (MiCA) regulation, now expected this April.
China also made news in the closing weeks of 2022 as a result of the sudden abandonment of its strict zero-Covid policy after three years of strict lockdowns, mandatory testing, and travel restrictions. To date, data for the resulting spike in Covid-19 deaths and infections remains unknown, but the draconian original policy and its sudden reversal will have undermined confidence in the leadership of President Xi Jinping.
Even pre-pandemic, growing geopolitical tensions between China and the US were persuading many Western companies, whose supply chains were heavily dependent on Chinese suppliers, to consider other locations. This trend has accelerated in the past three years, according to reports as other countries vie to supplant China as the ‘factory of the world’. Vietnam is a particularly strong contender, with India, Thailand, Malaysia, Taiwan, and Bangladesh also among the rivals. China’s recent aggressive stance towards Taiwan could persuade more companies to switch to alternative locations for both their manufacturing and supplies.
China nonetheless remains at the centre of global supply chains and the reopening of the Chinese economy in 2023 will impact on the rest of the world. Demand for commodities – particularly industrial metals such as copper, a key component in the manufacture of essentials from electric vehicle batteries to wind turbines – is already reviving and pushing prices higher.
China is also a motivator in the first examples of trade in national currencies that bypass the US dollar. The quinumvirate of emerging economies dubbed the BRICS (Brazil, Russia, India, China and South Africa) has long been keen to challenge US dollar hegemony. Both US-China trade tensions and sanctions against Russia, which trades oil and commodities in rouble and national currencies, are accelerating the trend. The dollar’s dominance in oil pricing and trade, which goes back nearly 50 years to the first oil crisis, will not be undermined suddenly, but its slow erosion may now be underway.
Summing up, Da Costa comments: “There is no doubt in my mind that China will play a critical role in getting the global economy back on its feet this year – it has to be the main force in preventing the downward spiral.”
A further near-certainty for 2023 is that the incidence of cyber-attacks will continue to grow and that the methods employed by criminals will be increasingly sophisticated. US multinational cyber-security company Fortinet has released predictions from the FortiGuard Labs’ global threat intelligence and research team about the cyber threat landscape for the year ahead and beyond. It includes several alarming predictions on how the dark web will fuel the development of new attractive business models for threat actors, such as cybercrime-as-a-service (CaaS), which will require treasury teams to work more closely with their company’s chief information security officers (CISOs) in keeping updated on evolving new threats and taking pre-emptive action.
“As cybercrime converges with advanced persistent threat methods, cybercriminals are finding ways to weaponise new technologies at scale to enable more disruption and destruction,” warns Derek Manky, Chief Security Strategist and Global Vice President Threat Intelligence, FortiGuard Labs. “They are not just targeting the traditional attack surface but also beneath it, meaning both outside and inside traditional network environments.”
To conclude, another testing year is in prospect. Treasury will need to forge a closer relationship with the banking community and have more communication than usual because change is happening so fast, says Britax’s Fabris. “They’ll tell you what’s happening in the market and where their credit risk is sitting – and from this you’ll get a feel for when the best time is to approach the market.”
But Bolarin worries that testing times could also result in collateral damage. “As we power through 2023 with our crises management playbook, I do wonder if certain areas of treasury could be casualties due to a reduced focus; areas such as talent development and the adoption of treasury technology,” she suggests. “Challenging economic situations almost equate to cost reduction and a tendency to postpone projects that are viewed as non-commercial.”
As such, treasurers will yet again need to be on the front foot in 2023, proactively embracing digitalisation, upskilling talent, and inserting themselves in early-stage business discussions, looking to add value at every turn.
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