Treasury Today Country Profiles in association with Citi

What does 2018 have in store?

Coin operated binoculars looking over view of a city

Compared to the major political and economic upheaval of 2016, 2017 was relatively calm. But what will the next 12 months bring? And how can treasurers begin to take advantage of new and emerging technologies in the year ahead?

Twelve months ago, the world was still reeling with the impact of unexpected world events in the form of Brexit and the election of President Trump in the US. Many were concerned that further shocks could dominate the headlines in 2017 – and consequently caution and uncertainty were uppermost in treasurers’ minds.

Another year on, has this changed? “In some ways, geopolitical risk is less front and centre of mind today than it was a year ago,” says John Feeney, Head of Global Corporates at Lloyds. “One of the great concerns for 2017 was European risk, with quite a few key elections on the horizon. We’ve moved through that period – and broadly it’s a calmer European political landscape today, and a much stronger European economic picture as well.”

That said, Feeney points out that whereas a year ago President Trump was a concept, “he is now a reality. There was a lot of uncertainty about whether President Trump would be different from candidate Trump, but we’ve now seen that the two are very consistent in terms of the approach taken by the United States administration. The expectation that comes from that is that there will be surprises through the course of the year.”

Brexit, meanwhile, continues to dominate headlines. With continuing uncertainty around the process and the ongoing relationship between the UK and the EU, Feeney notes that Brexit is still “front and centre of treasurers’ minds”. Consequently, 2018 will see a “huge focus” on the progress of the political and economic settlement with the EU, and the ongoing trade relationship.

Rising rates

Also significant is the question of how the interest rate environment will develop in 2018. Last year saw the Bank of England finally raise interest rates for the first time in a decade, albeit by only 0.25%. In the US, meanwhile, the Federal Reserve increased rates in March, June and December, with three further increases expected this year. And in Europe, the ECB has begun the process of scaling down its quantitative easing programme.

“We have had a decade of ultra loose monetary policy, and indeed there are many people in treasury teams who have never seen an increasing interest rate cycle,” comments Feeney. “They are used to funding being ample and diverse and, in many cases, have never experienced difficulties in managing access to liquidity.” Consequently, Feeney says that if interest rates rise above and beyond the market’s expectations, “it may ask new questions of treasury teams which may not have been through this before”.

Feeney says that a combination of factors – such as access to relatively cheap longer dated funding, the apparent turn in the interest rate cycle and the likelihood of further geopolitical drama on the horizon – means there is currently an interesting window for treasurers who may wish to take advantage of very supportive conditions while they last. He adds, “we’ve seen quite a few clients take advantage of this.”

Developments in Asia

In Asia, meanwhile, “currencies have stabilised – in fact, some of them have appreciated against USD – and emerging markets have performed better than people were expecting last year,” notes Gourang Shah, Head of Treasury Services Solutions for Asia Pacific at J.P. Morgan. “So for me that was the biggest change in terms of people’s expectations at the beginning of 2017 versus what happened, which in a way was a positive surprise for many people.”

At the same time, however, companies have had to take more restrictions into account when moving money out of China or Malaysia. In November 2016, Bank Negara Malaysia re-enforced rules prohibiting offshore ringgit trading – a move which Shah says had a continuing impact on treasurers in 2017. In China, meanwhile, regulators took steps at the beginning of the year to restrict the movement of renminbi offshore, although this was later relaxed in April.

“Treasurers have certainly had to adapt to these changes,” said Shah. “Of course, these changes have made cash more trapped in certain markets – but at the same time, with negative rates in Europe and dollar rates not very high, people have started sweeping less from Asia into Europe. Yield in the developing world is low compared to historical standards, but it’s high on a relative basis compared to the developed world. This I think has played a role in keeping more liquidity in Asia.”

Shah adds that this could change if tax incentives make it more attractive for companies to move surplus funds to developed markets. “But the operating liquidity in Asia is growing: most companies have got a higher revenue share here, and they’ll have to keep that money here for managing their businesses. Everybody is looking for growth, and it’s coming from Asia.”

Looking forward

Three treasurers share their plans and priorities for the year ahead:

Rick Martin, Group Treasurer, GasLog Ltd

“Being in shipping, we are always mindful of any trends towards protectionism,” comments Rick Martin, Group Treasurer of GasLog Ltd, which specialises in the transportation of liquified natural gas. “So far, it would seem that it is more talk than action, which is good news – and not just for us, either.”

Also key for the company is the continuing growth in demand for natural gas (methane). Martin explains that trends in China and India towards cleaner fuels are helpful, as is Korea’s move away from nuclear power. He adds, “we welcome the opportunity not only to grow our business, but to help reduce the global carbon footprint as well.”

Combined with the supply/demand balance for LNG shipping moving into more favourable territory, Martin says, “we are looking forward to 2018 – albeit without ever letting down our guard in what can be a quite volatile market.”

Marianna Polykrati, Group Treasurer, Chipita

As the Group Treasurer of Greek food company Chipita, Marianna Polykrati has been paying close attention to geopolitical risk in recent years. She notes that 2018 is a year that will probably be “quite vulnerable to geopolitical developments, with a main focus on the Brexit finalisation and the effects on the European Union”.

Nevertheless, she has plenty of plans for advancing treasury in the year ahead. As in 2017, she says the top priorities include the automation of treasury, “since we consider that the treasury digitalisation era has started, and the IT landscape shall be materially changed in the near future”. She notes that a side effect of this automation will be the increasingly higher levels of fraud and the safety measures that need to be taken as a result – a concern which is another priority for Chipita’s treasury.

“And as always, we are investigating solutions to make the treasury function more effective within our Group, focusing on in-house bank set ups, cash flow management and seeking alternative funding sources,” she says.

George Dessing, Senior Vice President Treasury & Risk, Wolters Kluwer

George Dessing says that with the world becoming more ‘global’, complex, connected and volatile – and therefore more uncertain – the information, software and services provider is “translating these projected trends and possible risks into opportunities”.

For example, he says that Wolters Kluwer is protecting its people, environment, assets and reputation by investing in programmes such as a cyber risk governance framework and incident management and crisis communications. “Furthermore, proactively we translate these risks into new and innovative ways to help our customers,” he notes, adding that digital and services now represent 88% of the company’s total revenues.

Where priorities for this year are concerned, Dessing plans to “stay ahead of the curve by being closely connected to our business, whereby we are further building on our internal treasury and risk communities as a key enabler for integration and adding value to our business”. He adds that other upcoming challenges include US tax reform, GDPR, and new IFRS regulations relating to leasing and derivatives.

Technology

Geopolitical risk continues to be a concern for treasurers around the world – so how can treasurers make sure they are fully equipped to manage the challenges that lie ahead?

“Geopolitical risk is and has been a part of the world we live in,” comments Peter Seward, ION Treasury’s VP of Product Strategy at Reval. “Clearly there are ongoing developments in areas such as North Korea, the Middle East, Britain and the EU that can have meaningful effects on FX, interest rates, the availability of funding and overall government policy and regulation.” But while it is always difficult to assess the impact of geopolitical events as they are happening or in advance, Seward says that treasurers always need to be proactive and prepared – and that technology “can really help codify information in real time and model possible outcomes and their impacts to treasury”.

For example, Seward points out that treasurers will need to be ready to comply with new leasing and hedge accounting regulations coming into effect across North America, EMEA and Asia Pacific. Likewise, treasurers will need to understand the impact of increasing interest rates in the US and the end of quantitative easing in Europe. “Scenario planning and simulation tools are key in assessing the impact events may have on treasury,” he comments, adding that treasurers “need time to assess and implement system changes to comply with any new regulations that will impact their organisation”.

With an eye on market developments and upcoming regulatory changes, it may be an opportune moment for treasurers who rely on spreadsheets to consider how more sophisticated technology could help them manage their risks and operate more effectively.

“FX exposure and cash forecasting is still often performed via a series of spreadsheets and manually pieced together through reports,” comments Andrew Marshall, Managing Director of consulting and technology solutions provider Covarius, pointing out that these manual processes can be slow and inherently prone to significant errors. “By turning to data lakes and outsourcing the analysis of this kind of data to machine and predictive learning services, treasurers can begin to realise some incredible insights around cash forecasting and FX exposure.”

New and emerging technologies

Treasurers may also be paying close attention to new and emerging technologies, from application programming interfaces (APIs) to artificial intelligence (AI). Meanwhile, development continues in the area of blockchain: notable projects include the Digital Trade Chain initiative, a trade finance project which is being built by a consortium of seven banks. But from a treasury point of view, real progress is still some way off. “There is still a lot of hype,” comments Sven Lindemann, CEO at Hanse Orga. “We have connectivity to a payment service provider who is also offering blockchain payments, but we do not really have existing customers with existing use cases today. From a technology standpoint we are ready to receive files and pay files via blockchain – but when it comes to interesting use cases, I think that’s what everybody is waiting for.”

It may be a while before some of these developments translate into viable opportunities for corporate treasurers – but it’s never too early for companies to begin exploring the potential benefits. “Everybody has been talking about the technology revolution and we are hearing a lot from people who are talking about data analytics, APIs and robotics,” says J.P. Morgan’s Shah. “However, most treasurers are actually a few steps away from this: they hear about the developments, but they don’t know what the value is to their own organisations. Many companies have therefore created a digitisation expert whose job it is to figure out what makes sense of these technologies and how to implement them in their own ecosystem.”

Embracing innovation

Andrew Bateman, Head of Corporate Liquidity and Bank Treasury at FIS, predicts that 2018 will bring continued innovation across all areas of treasury and risk, “but especially within the areas of payments, fraud mitigation and artificial intelligence,” noting that demand for advanced fraud mitigation technology has never been higher.

Meanwhile, as a result of continuing cyber threats, Bateman says that treasurers have been “tasked with playing a greater role, in co-operation with the CTO, in understanding and mitigating cyber risks, and have therefore pushed technology vendors to strengthen their security offerings”. He predicts that increased need in the market will result in improvements in preventative, detective and machine learning security.

Application programming interfaces

Where other developments are concerned, Bateman predicts that advances will be made in payments automation and simplicity. “FIS recently worked with Citi to enable real-time payments for corporate treasurers through Citi APIs,” he notes, adding that the increased availability of API technology will transform how financial services are going to be both consumed and provided.

Artificial intelligence

Bateman also predicts that AI will begin to have strong, practical benefits for treasurers in 2018, “as organisations seek solutions which can not only process data, but learn from that data in order to improve analytical output and reduce human intervention in decision making”.

He adds that liquidity management and payments processing are two areas which could lend themselves to AI improvement. “On the payments side, there is an opportunity for systems to better learn from payment histories, using counterparty and value data in order to improve the identification of potential fraud, or to identify opportunities for lower cost channels, or payment types,” he says. “Liquidity management, specifically cash forecasting, on the other hand, should be able to use a history of data in order to better predict future cash flows.”

As a result, Bateman says that treasurers “should expect an AI-enabled world to introduce itself over the next several years, within individual functional components of their software”.

Questioning assumptions

In light of all these developments, there are plenty of opportunities to pay attention to this year – alongside the numerous challenges. “I think 2018 is going to be an exciting year,” concludes Feeney. “I suspect change will come and there will be moments of drama. From a treasury perspective, the key thing is to expect the unexpected, keep appropriate flexibility of funding and keep plenty of healthy banking relationships. At the same time, this cultural evolution is a very important point – it is a time when we’re going to have to question some of our long-held assumptions and innovate more than we are seeing now.”