Treasury Today Country Profiles in association with Citi

Navigating political uncertainty

Colourful game of Jenga

Last year, corporate treasurers faced unexpected challenges in the form of Brexit and the outcome of the US elections. But to what extent have geopolitical challenges affected the world of corporate treasury this year – and what are treasurers doing differently as a result?

If 2016 had just one defining characteristic, that could be said to be the geopolitical uncertainty which was manifested in developments such as the UK’s decision to exit the European Union and the election of President Trump in the US. These events have had wide ranging consequences which continue to affect treasurers in a number of different ways.

For one thing, Brexit continues to have a lasting impact on FX rates: the value of sterling has remained considerably lower since the referendum took place. Consequently, many UK importers have seen their costs rise – although exporters have conversely benefited from the higher value of overseas sales. “As the unexpected result of the Brexit referendum demonstrated, major political changes can have a rapid and drastic effect on currency and foreign exchange risk management strategies,” comments Steve Wiley, VP Treasury Solutions at FIS.

“Political changes in the United States have added an additional element of uncertainty, leaving treasurers confounded as to how foreign and economic policy changes will impact their business.”

Steve Wiley, VP Treasury Solutions, FIS

Indeed, the challenges of these currency movements have proven insurmountable for some companies. The recent collapse of Monarch Airlines, which left 110,000 passengers in need of repatriation, has been attributed in part to the drop in the value of the pound following Brexit – both because of rising fuel and aircraft costs, and because a weak pound has deterred many UK-based holidaymakers from travelling abroad. Many other companies have likewise seen profits suffer as a result of currency movements, although some have been insulated to an extent by hedging strategies implemented before the referendum took place.

Beyond Brexit

Treasurers are paying close attention to these issues: a survey carried out by the ACT, The Business of Treasury 2017, found that 61% of the treasurers surveyed were worried about Brexit. But while the impact of Brexit looms particularly large for companies operating in or trading with the UK, numerous other geopolitical developments are also causing a considerable headache for corporate treasurers.

“More recently, worries in Spain related to Catalonian independence have resulted in similar, though less significant fluctuations in currency, driving the euro down against the dollar,” says Wiley. “Political changes in the United States have added an additional element of uncertainty, leaving treasurers confounded as to how foreign and economic policy changes will impact their business.”

For example, President Trump’s position on the North American Free Trade Agreement (NAFTA) continues to generate uncertainty across the region. The US is currently in the process of renegotiating the proposals, with the Trump administration seeking adjustments such as a sunset clause which would require the agreement to be re-approved every five years. The president has also indicated that the US could even exit the agreement entirely if a deal cannot be reached.

Another consideration is that while European regulators have focused on opening up relationships with countries such as Iran, the US has perhaps been moving in the opposite direction. “There are certain things that banks with operations in the US appear more reluctant to do,” explains David Stebbings, Director, Head of Treasury Advisory at PwC. “So if you want to develop business with Iran, a focus on non US banks has been the preferred route for many.”

Challenges for corporates

For companies operating internationally, these issues bring considerable challenges. “Geopolitical shifts complicate a treasurer’s ability to forecast risk, whether related to cash flow, external financing, commodity prices, foreign exchange rates or interest rates,” comments Patricia Hines, Senior Analyst at Celent.

Indeed, the ACT survey found that 69% of respondents were concerned about geographical uncertainty aside from Brexit – higher even than the number of treasurers who were concerned about Brexit itself. Meanwhile, the 2017 AFP Risk Survey similarly found that 52% of treasury and finance functions are considering the impact of geopolitical events in general on their organisations’ growth.

The AFP survey also illustrated that geopolitical risk can incorporate a number of different risks: respondents cited loss of customers/revenue (53%), currency/volatility risk (49%) and supply chain disruptions (30%) as the most pressing issues.

Inevitably, different companies have been affected by these developments in different ways. In some cases, the net outcome has been a positive one. Rick Martin, Group Treasurer at GasLog, an owner, operator and manager of liquified natural gas, says that while the wave of populism has thrown up some “interesting political outcomes”, these have not – so far – impacted the company’s business model.

“Indeed, if anything, these outcomes have been beneficial,” explains Martin. He notes that President Trump is supportive of US natural gas exports, while “a number of governments rightly see natural gas as the cleanest fossil fuel going, and by a long chalk, looking to replace other sources such as coal”.

Martin also points out that central bank actions to date have been benign, “helping to keep the global economy ticking over rather well”. He says that whether these waves of populism ultimately lead to unhelpful uncertainty, or even anti-business policies, remains to be seen. “However, to date, we have been able to stick to our business plan, and gratefully so!”

Diversification and flexibility

However, the picture for other companies is somewhat different. For Greek food company, Chipita, geopolitical turbulence looms large in the current environment. “It’s the first time in all the years I’ve been working for Chipita that political events have had such a huge impact on the treasury,” comments Marianna Polykrati, the company’s Group Treasurer. For example, she explains that recent political turmoil in Turkey has affected the value of the lira – meaning that the company most probably needs to revisit a previously approved budget rate for the following year. Likewise, Polykrati says that turmoil in Russia and Ukraine has had an impact on the group’s companies in these markets.

“In the past, due to the Group’s diversification across several geographies – including Western Europe, the US, Russia, Ukraine, Turkey and India – we felt quite secure and ring fenced, meaning that when one country/region was not performing very well due to political and economic issues, it would be offset by others that were,” she explains. “But today, we are seeing that increased globalisation results in a butterfly effect – so if something happens in Russia, it can have a knock-on effect in many other markets.”

As such, Polykrati says the company is working on different ways of minimising the risks that the company faces in different countries. For one thing, the company is looking at hedging more than in the past. Flexibility is also important: Polykrati says that because Chipita has factories all around the world, it is straightforward for the company to change which of those factories are used to provide particular products. “Being flexible allows us to allocate the sourcing in accordance with the costs and expenses,” she explains. “This enables us to absorb any sudden and extraordinary costs.”

Changing role of the treasurer

One of the more positive consequences of geopolitical turbulence is a growing awareness of the role played by the corporate treasurer in managing risk. “Developments such as Brexit and the US elections have created financial uncertainty, which always raises the profile of treasurers in their organisations,” explains Stebbings. “For example, many companies have seen unexpected FX gains or losses as a result of the recent fall in the value of the pound – and questions about whether or not to hedge FX exposures put treasurers centre stage.” Stebbings says that while political turbulence brings challenges, it can also have a positive impact on treasurers by “giving them more influence and an opportunity to be more involved in the business than they are in quieter times”.

“The risk management function has expanded within treasury to include not only those areas most sensitive to the global political landscape, such as interest rate, and foreign exchange risk, but also cyber risk.”

David Stebbings, Director, Head of Treasury Advisory, PwC

Polykrati agrees that geopolitical pressures have contributed to the evolution of the treasurer’s role in recent years. “In the past, the treasurer was envisaged as an accountant or a cashier, focusing on the flows of cash in and cash out,” she says. “At Chipita, the role has transformed a lot the last couple of years, especially after the Greek crisis. The treasury reports directly to the deputy CEO in order to advise on topics such as bank relationships, commodities and risk management. So my role has been upgraded due both to changes in the business and due to the challenges brought by the political landscape.”

That said, treasurers still need to play a proactive role in seizing the opportunities. “The definition of a good treasurer is the one who is leading the discussion, putting the issues on the table and presenting the solutions, rather than simply letting it happen and then responding to what the business wants,” Stebbings says.

Adjusting to the new normal

In many cases, companies have not been fully prepared for the impact of recent geopolitical events. “Few of these recent events have been widely or effectively factored into company risk management strategies, and so the question for treasurers becomes how to best manage global political, economic, and regulatory uncertainty,” comments Wiley. He notes that planning for and reacting to changes in the global political landscape has always been a tricky task for treasurers, “due to the fact many of these changes occur abruptly, unexpectedly, and have uncertain ramifications for currency rates, interest rates and counterparty risk”.

It is clear that there is a need for some companies to adjust their approach in light of recent developments. According to Wiley, corporates have responded to the ever-changing global economy and more uncertain political landscape by taking a fresh look at their risk management strategies and existing technology. “The risk management function has expanded within treasury to include not only those areas most sensitive to the global political landscape, such as interest rate, and foreign exchange risk, but also cyber risk,” he notes.

Consequently, Wiley says that treasurers are taking a fresh look at the technology used to manage these risks, in order to mitigate the negative effects of the next unexpected Brexit-scale event. “Treasurers without best in class risk management processes, and the latest technologies which can accommodate these processes through stronger analytics and decision-making tools, will find themselves the most challenged,” he adds.

Likewise, many treasurers are keeping a close eye on the banking landscape – particularly in the UK, where a question mark also remains over the longer-term impact of Brexit on banks. “There’s a lot of uncertainty right now about what the banks are doing,” says Stebbings. “Treasurers are keen to know what services banks will offer post-Brexit and whether they will move certain of their teams out of London. That’s very difficult to ascertain right now, but it should become clearer if and when a transition deal is done.”

Brexit: seeking a transition deal

While the outcome of the 2016 referendum caught many by surprise, this year has brought further controversy where Brexit is concerned. After triggering Article 50 in March, Prime Minister Theresa May announced the following month that she was calling a snap general election. This was intended to secure a mandate for Brexit – but the move backfired, with the Conservative party losing its overall majority in Parliament.

As Brexit talks continue, considerable uncertainty remains about the outcome of the negotiations. Particularly significant is the question about whether a transition deal will be signed which will protect companies from a ‘cliff-edge’ departure.

With the UK set to exit the EU in early 2019, the need for a transition deal is becoming more pressing. In a recent speech, Sam Woods, a Deputy Governor at the Bank of England, warned that a Brexit transition deal is needed by Christmas – otherwise firms will “start discounting the likelihood of a transition in the central case of their planning”.

In the absence of a formal agreement, trade between the UK and the EU would become subject to WTO rules, with large tariffs imposed on some goods. Without a transition deal, EU nationals in the UK would also face considerable uncertainty. Meanwhile, the imposition of a new customs regime could bring considerable disruption for businesses as well as congestion at the country’s ports.

Looking forward

Moving into 2018, treasurers are continuing to monitor geopolitical developments closely. Jack Spitzer, Treasurer of Isagenix, comments: “Obviously we are curious how any US tax reforms from Trump and Congress will impact the company and ownership, being privately held. We are trying to understand and predict what might happen, if anything, and be in a position to take advantage of any opportunities.”

Looking further ahead, Spitzer says the company is currently considering expanding into a few locations around the world which have high levels of political tension, and that the company remains concerned with any potential changes around free trade agreements. “All of these issues are fraught with uncertainty due to the current US political leadership,” he adds.

In the meantime, treasurers are likely to proceed with caution while paying close attention to the impact of political developments on everything from their banking relationships to their hedging decisions. Above all, the events of last year illustrated the importance of expecting the unexpected – a worthy lesson for treasurers everywhere to keep in mind.

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