When it comes to liquidity matters, 2018 has been a year of significant events for treasurers the world over. Treasury Today takes a look at the likely key themes for the coming 12 months in the company of industry experts.

The continued rising interest rate environment is creating two major facets from a US perspective, notes Lori Schwartz, Managing Director, Head of EMEA Liquidity Solutions, Treasury Services, J.P. Morgan. She sees excess working capital increasingly becoming more expensive for many corporates, and at the same time, as rates rise in the US market, there has been a notable diminishing of USD in that market.

Indeed, Schwartz notes, post quantitative easing, where the Federal Reserve has been taking cash out of the system, whilst it is true that cash on the corporate balance sheets has in many cases risen, there is less cash in the general market and in the Fed liquid market. “As we head into 2019, this underlines the importance for treasurers to continue working around the three pillars that are ‘visibility, centralisation and optimisation’,” says Schwartz.

Fortunately, there has been a proliferation of technologies to help companies achieve these goals, she notes. With this in mind, as the quest for effective cash forecasting continues, she sees a move away from the old retroactive approach, towards a much more predictive view. In fact, with ongoing pilot programmes using artificial intelligence (AI) and machine learning to help facilitate this move, Schwartz says there has been some “extraordinary successes” in pinpointing future cash flows, at least in the short-term period out to 30 days. It is a promising start.

Throughout 2019, the impact of what’s happening in the payments space will be more keenly felt, especially as e-commerce becomes further embedded. Resultingly, as ‘real-time’ comes to the fore and clearing systems head towards ‘always on’ status, treasuries will face more pressure than ever to manage cash and liquidity in accordance, says Sungmahn Seo, Managing Director, Head of EMEA Payments and FX, J.P. Morgan.

If ‘faster payments means faster liquidity’, Seo argues that treasurers, previously reliant on batch-processes, will have to migrate to real-time. For payments, they will do so selectively. But if cash is collected in real-time, cash positions will change constantly and will need to be managed as such: real-time is coming.

“This presents a unique opportunity for the corporate treasurer to further progress the centralisation agenda,” says Schwartz. “More automation in the system, and more inter-company activity taking place via treasury centres, means treasury will be better equipped to leverage immediate payments.”

Of course, 2019 will not be short of regulatory considerations either, not least the further fleshing out of US tax reforms. Here, the question arises as to whether the fungibility of cash between US and international subsidiaries becomes easier. “The general expectation is that it will, which may open up opportunities for having US entities participating directly in pooling structures and currency management solutions,” says Schwartz.

This begs the question as to how progress will impact the structuring of treasury centres, with reforms possibly presenting an opportunity for treasury to combine US and international centres/in-house banks. It demands deeper engagement of treasury with tax and accounting partners in their liquidity solution conversations because the more cash that can be consolidated, the more working capital can be released. In a rising interest rate environment, at least in certain jurisdictions, getting those structures in place now will be advantageous.

FDI and real-time

For Lance Kawaguchi, MD, Global Head – Corporates, Global Liquidity and Cash Management, HSBC, instant payments and the “velocity of cash management” will also continue to be a big theme for 2019. “Multi-day clearing cycles are a thing of the past,” he says. With 41 live instant payment systems and 12 planning globally (according to InstaPay Tracker), it is the mobile payments channel that is boosting 24/7 cash flow.

As SWIFT and DLT providers bring to market their initiatives that focus on the real-time concept from a cross-border and global flow perspective, Kawaguchi believes that progress in this space is inevitable too. This will be driven in part by demographic change in vast consumer markets such as India and China where more consumers are “connecting to the world through mobile devices”.

Accordingly, another theme that Kawaguchi believes will continue apace in 2019 is the further internationalisation of corporates. Their expansion into new territories has seen overall FDI increasing from around US$406bn in 2012 to US$476bn in 2017, and the number of foreign affiliates increasing in number by around one third in the period 2008 to 2015. This is not a story of Western domination though, he says, noting strong ex-Asia flow, both to the US and Europe. Such expansion – often led by M&A – requires treasurers to seek new liquidity structures “if they are to facilitate greater efficiencies”.

The third theme in 2019 for Kawaguchi is that of what to do with ageing corporate cash management systems. Instant payments and the facilitation of open banking by PSD2 means companies are having to consider their structures “to make sure they are not only in line with corporate policies but also fit for purpose in terms of regulatory change”. This, he adds, must essentially include a strengthened approach to cyber-security, both as protection for the business and for its clients.

The final major theme for Kawaguchi is therefore technology, in particular the development of platforms to enhance the client experience. Banks, he says, will continue to work with fintechs, partnering to become much more “nimble” when meeting client needs. Of specific interest for liquidity management is the progress of ‘next generation’ virtual accounts. This is now not only about concentrating cash in a single physical account, he says, but also, from a bank perspective, enabling movement of control back to the client “where treasurers can leverage self-service”.

Tying these themes together, says Kawaguchi, is the widespread understanding that data is critical, to the point where it is becoming “more important than anything else”. With its management to the fore, treasurers should be taking a step back to review their current payables, receivables and, especially, liquidity structures, “to work out how best to restructure for the next five to ten years”.

Tax and uncertainty

The themes of repatriation and US tax reform – applicable to every US-headquartered business with overseas operations – will still be playing out in 2019, says Mark Smith, Global Head of Liquidity, GTS, Bank of America Merrill Lynch. Some of the major pharma and tech companies were well-prepared but Smith believes that the majority of companies “are still figuring it out”.

This one-time taxation of all offshore cash does not demand repatriation but it does remove any disincentive for it to brought onshore (previously it triggered a US tax event). However, having built the new rules on top of the existing tax code, rather than rewriting the code, the consequent complexity means many tax departments are still analysing what the changes mean for them. Others are waiting for anticipated rule clarifications. As a result, many companies with sophisticated offshore structures face a lot of work to understand the tax implications and liquidity options around their on- and offshore cash holdings.

A second issue that Smith says will carry through to 2019 is geopolitical uncertainty. This translates into corporate caution. With treasurers expected to have more cash on hand in 2019, according to Novantas research, deposit levels are likely to grow as treasurers maintain a watchful stance and remain liquid.

This does not mean cash is sitting idle, nor that treasurers aren’t seeking yield. For example, for the first time since the financial crisis, banks are reporting meaningful growth in interest-bearing deposits, as cash rotates out of non-interest-bearing deposits in search of higher returns. “It is a clear indication that treasurers are seeking more value”, says Smith.

Despite continuing macroeconomic challenges, continuing low rates in Europe will still see treasurers trying to optimise returns, says Henrik Lang, Head of Liquidity, GTS EMEA, Bank of America Merrill Lynch. He also sees liquidity remaining the number one goal, certainly over yield.

Bank consolidation and account rationalisation may become a more pressing objective in the coming year. But, warns Smith, there remain some challenges to doing this. “There’s only so far you can go because of the strengths and appetites of different banks in different geographies,” he explains. Of course, cash and liquidity management must be balanced with financing needs, so as a company’s expansion continues into new countries, as many will in 2019, it may even be forced to add different banks.

Rising cheque-use in the US aside, the promise of instant payments is firmly on the agenda, at least in the consumer space. However, Smith reports that he is “yet to talk to a treasurer who says that real-time payments is a solution to a big problem they have”. The feeling is that “it is a solution in search of a problem”. Real-time information is a different matter.

As a means of reconciling payments in real-time, Smith says virtual account technology is “gaining momentum”, particularly across Asia. In 2019, greater progress will be made but there is still a lot of education work to be done, with many treasurers unaware of how it can help not just with reconciliations but also with liquidity structuring and FX netting, for example.