Uncertainty Principle

The Art and Science of Treasury in Troubled Times

Every conference has a theme, but when times are somewhat changeable, often with very little notice, pinning down that theme is a challenge. With that in mind, the organisers of this year’s ACT Annual Conference, held in Liverpool on May 21-22, opted to boost treasury’s role in saving the day, going for Tomorrow’s Treasurer: Thriving in Uncertainty.

The idea that treasurers are rising to the challenges of operating in an economic maelstrom was clearly one that resonated with the 1,162 attendees at this year’s ACT annual conference. Many sessions enjoyed a healthy turnout, especially the keynotes that sought to unwind the barrage of complications facing businesses today. But here, urgent themes such as rising costs, the ongoing polycrisis, and imminent funding challenges, were necessarily tempered by words of wisdom and support from a British athletics legend.

Price of business

Raging uncertainty is obviously a tricky customer for anyone who tries to forecast, let alone use that data to build out strategies and resilience to effectively manage their risks. Nonetheless, in her opening keynote, The World in 2024, journalist Katrine Kielos-Marçal proffered four fundamental views of commercial life through the shifting prices of time, energy, of being human, and of peace.

Aware of the challenges of forecasting even in the best of times, she pre-empted her presentation with a disclaimer, citing economist J. K. Galbraith’s entertaining observation that “the only function of economic forecasting is to make astrology look respectable”.

In The price of time Kielos-Marçal considered how borrowing money enables something to be done today that would otherwise have to wait until tomorrow. The price of shifting time is therefore the interest rate. Interest rates may be slowly falling in Europe (if not in the US), but prices are still rising. And so, she noted, the era of cheap money “did not end with a bang, it just ended”.

In trying to contain inflation, central bank policy tends to fluctuate wildly: too much one way, then too little the other, before eventually finding the balance. Typically, it takes between 18 and 24 months before the desired effect is achieved. As such, in the current cycle, she believes that the worst is not yet over. However, she warned, “the price of time will not be close to zero again”.

The price of energy is also a concern. With the green transition underway, and much more work in this space to come, Kielos-Marçal said the cost increase “just has to be accepted”. But it will not be forever. She cited Wright’s Law, which provides a framework for forecasting cost declines as a function of cumulative production. The expectation is that costs fall by about 20% for every accumulated doubling of production. “Renewable energy technology is on this curve,” she stated. The expectation is that renewables will save vast sums over fossil fuels. Could there ever be a zero-energy cost? “Think about it…,” she urged.

The value of humanity is rising in the face of the invasion by AI and robot-kind. In the price of being human, Kielos-Marçal suggested while these technologies “change everything”, the second machine age will be a very different affair to the first.

Regarding the Industrial Revolution, which largely spanned from about 1760 to 1840, she noted the German philosopher Friedrich Engels’ observation that it took a long time (about 50 years) “for machines to create anything other than misery”. Whereas this period generally saw lower status, manual workers suffering most (and hence the rise of Marx, Engels et al), this time around, the march of technology will affect the more politically and economically powerful. As such “more fuss is likely to be made”.

The commercial adoption of AI marks a distinction “between head, hand, and heart”, AI is adept at replacing jobs that require thought (head), but not so good when it comes to purely manual tasks (hand) or those that demand empathy or social skills (heart). 

It means the core economic problem is widening: it is not just about tackling price stability but also now about employment. With many Western market economies focused on public sector work, the care economy, and managing nature (for example with finance necessarily tying the cost of capital to sustainability) she argued that “the impact of this widening scope is an issue for all companies to consider”.

The business world has seen the price of peace escalate in recent times from a low base to something “significantly higher”. There is always a conflict of some nature raging in some part of the world, but when many overlap, in simple commercial terms, the cost of doing business rises, especially when the theatre of war bisects key trading routes.

If the trade world had integrated into a single ecosystem, the power of self-interest would have ensured stability, said Kielos-Marçal. The interdependency of economic relationships would create harmony as no party would want to destroy its own economy. She cites the overarching aim of the EU as a case in point.

However, there is no single system, and Russia’s invasion of Ukraine has forced the EU to impose sanctions. Putin’s action, and the response to it, drives a wedge between one economic system and another. With the threat of Russia entering the Baltic states, the understandably nervous nations of Sweden and Finland have been quick to join NATO. The bottom line, said Kielos-Marçal, is that conflict demands more defence spending which, at scale, is always inflationary.

But ongoing conflicts are also now driving corporate policy shifts on supply chain management and the positioning of production facilities. The aim, she noted, is no longer finding the cheapest routes and locations but the most secure. A fundamental shift in approach is now driving the price of goods and services. At a sovereign level, she commented, the economic problems noted by the International Monetary Fund (IMF) in Germany today, in part demonstrate the impact of Merkel’s government having bet on the price of peace being zero – by placing its energy needs in Russia’s hands – and losing that bet. The price of peace, she concludes, is rising.

International rescue

A follow-on keynote pitched itself at all companies with an actual or intended international trade portfolio. The panel, The Future of Globalisation? Geopolitical Crises and the impact on Financial Services, sought to explore how current threats to commercial life can be mitigated. And despite the obvious challenges within the trade environment, Chris Southworth, Secretary General, International Chamber of Commerce  United Kingdom, is broadly optimistic for the future.

His attitude, and indeed that of the other panellists, stems from the background work being carried out to smooth the flow of international trade. A key aspect for Southworth has been the shift in English law that at last allows digital documentation to be accepted. This at least gives room for major process improvements in every jurisdiction globally that operates under this legal framework.

With the legal systems of France, Germany, and Japan currently following a similar path of acceptance and ratification, he believes that, with the dismantling of legal barriers, the next three years will be “game-changing”. With global documentation standardisation at last able to take a step forward, the business case for digitalisation is strong, he said.

Citing the examples of one exporter that had derived 15% more profitability, and another that was able to double its trade flow, just by going digital, Southworth commented that the push for digital transformation is now “an absolute prerequisite” for the realisation of a more efficient global trade process.

Given the barriers to global trade that some may perceive, he felt that this cannot come too soon. In a world where changing social values have given rise to populism, protectionism, and less willingness to co-operate, Southworth argued that industry “must now say what it needs to drive growth”.

Calling for stakeholders to be practical in their approach to both digitalisation and pushing into international trade circles, Clare Francis, variously the Chair of Risk, Non-Executive Director, Board Member and Senior Adviser for a number of organisations, suggested that, “thinking about resources, remaining agile and being open to challenge” should be paramount.

There is plenty to gain, too, said Tim Reid, Chief Executive Officer, UK Export Finance. The country’s professional services sector in particular has “significant talent” when it comes to engagement with overseas projects. As such, it should understand the opportunities presented by using the tools that government can provide to help win such contracts.

But players in many other sectors also have potential to trade overseas, and they should also be seriously considering ramping up their interest. Exporters are typically growing faster, and paying better wages than those that do not, Reid noted. What’s more, it’s an opportunity open to companies of all sizes, with SMEs especially encouraged to explore their cross-border options.

That said, for many potential international traders, Reid acknowledged affordable and secure financing as a possible barrier. However, he countered, this can be de-risked when using the resources of bodies such as UK Export Finance. To ensure growth, there is a real need to explain the practicalities of overseas trade and supply chains to the uninitiated. He mentioned Germany as having been an exemplar of global trade, its long-established structures able to facilitate contract progress.

Today in the UK, Reid noted that it is important to engage bodies such as UK Export Finance and the ICC, and to leverage international trade events, because industry “needs to put its mind to it”. Market share is hard to acquire, he accepted, but those structures help to ease the flow, especially in the face of protectionism, and where Brexit has forced UK companies to find a new bridge back to previous trading partners.

But new routes are important too. And with tools such as blockchain likely to be at the forefront of trade, aiding security and growth in emerging territories, especially as tokenisation of money and assets gains momentum, technology also needs to be embraced by participants, said Francis.

“Technology is a huge friend, and now is the time to use it to remove archaic processes,” opined Southworth. A UK roadmap is being drafted, but meanwhile, although tech investment is huge, it can often be misplaced. “Interoperability is essential to transform trade,” he counselled. Trade participants need to move, but with caution. “Start simple, keep it simple, be familiar with what’s out there, and then feel the benefits as you transform your company.” Those benefits, he added, “are cheaper, faster, simpler, and more sustainable trade”.

Star power

It requires a deep understanding of commercial processes, more than a little dedication and, sometimes, nerves of steel, to be a great business leader. In Unlocking Peak Performance Within Treasury: a fireside chat with Colin Jackson CBE, the 110m hurdler who won 21 medals – including 12 gold – across the Olympics, World Championships, European Championships and Commonwealth Games, drew parallels between elite athletics and strong corporate leadership.

Jackson, who is now a BBC pundit and presenter, and a motivational speaker, first took up athletics as a child. He did so only as an alternative to his first love, cricket, and certainly not as a possible career move. Despite his close affiliation to ‘leather on willow’, a crucial timing issue one day forced him to choose his sporting direction. With key athletics and cricket events scheduled for the same time, he opted for the one with the earliest finish, enabling him to return home in time to watch his favourite TV programme. Athletics’ gain was cricket’s loss.

Having made a hugely successful career choice, albeit one not without its challenges, Jackson sees a similarity between the personal traits that kept him at the peak of his game for more than a decade, and those required to successfully navigate the demands of business.

In both instances, he said the need is to be mentally strong, with focus and commitment, the ability to understand failure and bounce back, and to always keep the dream alive. Aspiration, he asserted, “is number one”.

To frame his mindset of success, Jackson acknowledged that although he won a lot, he also lost a lot. It demands considerable fortitude to come back from defeat, so in the first instance, setting realistic minimum goals is a key to success, he advised. But moving these goals forward is essential, using the feeling experienced when winning as a primary motivator.

In setting personal goals, it is essential to balance short-term wins with long-term aims. For Jackson, this meant using an annual overview of his performance within a four-year cycle to keep on track and stay motivated. And while his combination of natural ability and an impressive success cycle is a strong driving force, he explained that he always held on to his earliest dreams of winning to keep pushing, even when he was at peak performance. “A personal best needs to be beaten, even if that personal best happens to be the world record!”

However, such great achievements are never all down to the individual. Although a track event such as 110m hurdles is an individual sport, there is a strong team element at work. None of Jackson’s success, he said, would have been possible without the effort of the coaches, physios and other supporting professionals who worked behind the scenes to keep him at peak performance. That there are often many people involved in individual successes must, he stated, always be acknowledged.

Another element that can be drawn upon as a motivational force is the other competitors. They are always there, and you are always being watched, said Jackson. He admitted to being interested in his opponents’ activities but was mindful of keeping his aims broad and knew, when he was ahead, never to let complacency set in. The latter was something he learnt the hard way.

Indeed, his biggest failure stemmed from overconfidence. At the 1992 Olympics, he was hot favourite to win gold in the 110m hurdles, but finished seventh in the final, having neglected his usual warm-up routine and sustained an injury during the race. However, he called upon the unerring belief of his team to help him bounce back, subsequently winning the World Championships twice and retaining the world record for more than a decade.

As an elite athlete, dealing with pressure comes with the territory. But, said Jackson, “it can be your friend”. Often that pressure comes from within, but if it can be controlled it can be used to maintain focus. “Work with it, don’t let it overpower you, and never ignore it,” he counselled.

While Jackson admitted that handling setbacks was never easy, today he welcomes the fact that mental health is more openly discussed, in sport and in other settings. He is adamant that an individual’s mental and physical state “should never be separated”, and that it is important for everyone “to learn how to switch off your brain, and mentally and physically rest”.

On retiring from athletics, Jackson was keen to use his experience to help up-and-coming athletes, and indeed those beyond the sporting world, better strive for success. Part of his approach has been to instil in others an acceptance in that change is inevitable, and that it can be beneficial. “Let’s work with it,” he enthused. Today, “staying relevant” remains one of his objectives, drawing upon his past experiences while respecting the emergence of new ways.

And while Jackson clearly remains a hero for many, he indicated that role models may be found “in all walks of life: it might even be your next-door neighbour”. Whoever is chosen – and he is a particular fan of sprint “legend” Usain Bolt –  he stressed the importance of understanding that “you can never be that person”, but that much is still to be gained by listening to and learning from their experiences, remembering personal goals, and applying those lessons to your own circumstances.

Funding vs regulation

The finalisation of Basel III, taking effect in the UK from 1 July 2025, will usher in a number of changes, especially around the calculation of risk-weighted assets. Under the changes, banks will have to reconsider their capital allocation strategies. The session entitled Corporate funding: are you ready for the effects of new bank regulation? considered how Basel III will affect corporates and what actions can be taken to optimise funding structures as it is enacted.

The financial world is now in the final chapter of “the Basel III saga”, noted Liam Girvan, Associate Director, Deloitte. The intention is for it to enhance comparability of risk measures, with the current standardised approach creating a number of “unfair outcomes” for some banks. However, he explained, while the new measures will be more risk-sensitive they will be more complex. Basel III proposes “salami tactics” in that the standards will be adopted piecemeal around the world, using a staggered approach, with different domestic interpretations likely. In short, costs may be going up for corporates.

Taking a big-picture view, Christopher Blake, Education Director, UK Asset & Liability Management Association (UKALMA), and, Head of Treasury, Unity Trust Bank, said banks had gone from a pre-Basel freeform approach of “volume and revenue”, to one of many constraints under Basel’s standards.

With banks now making a lower return on capital, someone has to pay, said Blake. This falls to either the banks’ depositors, or their shareholders meeting costs, or more charges being applied to assets. And with potentially less capital to lend, some treasurers may be forced to shop around as some banks and products will be more affected by the changes than others.

The increase in operational complexity, noted Edward Coxhead, Basel 3.1 Optimisation Director, HSBC, suggests that smaller banks may be more subject to an increase in risk sensitivity. As such, he believes Basel III will generate “winners and losers”.

Banks will be able to leverage Basel III rules such as the allowance for different treatment of unrated corporates which, for Blake, may be a new incentive for affected corporates to seek a rating. While some corporates may still be able to arbitrage their banks, one thing that is certain, he notes, is that banks are “not sitting with spare capacity waiting to go”. Indeed, he believes, “some are already lifting their foot off the lending accelerator”.

Data quality will be essential in helping banks decide on their approach, said Girvan. It means banks are likely to become even more “intrusive” in their enquiries, and the amount they are willing to commit to an advance may reduce.

The arrival of Basel III brings with it a not inconsiderable documentation package. Coxhead suggested that the banking community will need a couple of months at least to absorb the 1,000-plus pages of rules. After that, relationship managers must be armed with the right information to work out best outcomes for their corporate clients.

At this stage, it is hard to assess whether or not the rules will impact on RCF prices, said Blake. If banks are still keen to provide committed RCFs, then corporates will almost certainly have to pay more for it. While there are many uncommitted RCFs sitting in banks, it will, he said, be up to corporates to decide whether or not to pay up, but added that refinancing an RCF now, before the rules are implemented, “might be premature”.

The new rules may steer corporates towards other capital sources, notably the non-bank or ‘shadow’ world of private debt that falls outside the scope of prudential capital and liquidity regulation. However, noted Blake, banks will still have to remain competitive, but suggested external corporate ratings may indeed be effective in helping banks apply lower risk weightings.

The bottom line for corporates, advised Blake, is that they need to keep up to date with regulatory events, and to maintain open dialogue with their banks. It would, added Girvan, be advisable for treasurers, via bodies such as the ACT and EACT, to use their right to communicate with the regulators and exert proper influence over the outcomes.