Insight & Analysis

New variant but no major change for treasurers

Published: Dec 2021

Despite its more rapid spread than previous variants of coronavirus, omicron has not yet precipitated a significant shift in strategy among corporate treasury teams.

A surreal enigmatic picture on canvas

In late November there was cautious optimism that the UK had seen the worst of the pandemic’s economic impact. Manufacturers were reporting record levels of demand and growth in the service sector was encouraging.

Fast forward barely a fortnight and the outlook is much less certain. Research firm Springboard reported a drop in footfall in areas close to office buildings last week and upward pressure on inflation looks likely to continue.

Of course, corporates are now used to the impact of restrictive measures. Sander de Vries, Director of treasury consultancy Zanders, observes that they can leverage previously prepared scenario stress testing and adjust the scenarios based on the latest expectations – with the worst case scenario including an impact for a period longer than one quarter.

There is so much uncertainty around the new variant that planning must focus on what may and may not happen as opposed to what is expected to happen. That is the view of Ken Lillie from treasury consultancy Lillie Associates, who notes that the key for any treasury when managing cash flows and exposures is reliable information sources and regular and timely data flows.

“Even in the best of times, these flows of information will vary according to the nature of the businesses and tolerance levels for accuracy have to be set accordingly,” he says. “In the current environment of increased uncertainty it is vital to ensure that the systems running within treasury deliver the most up-to-date cash and exposure positions possible.”

It may also prove expedient to review the current system configuration to ensure that the data is accurate and complete – in other words, that there are no hidden silos of data carrying unexpected cash or debt positions of which treasury is potentially unaware.

Building a forecast during a pandemic is fraught with problems of uncertainty and individual business sectors will have their own levels of difficulty in pulling together any meaningful information for management and planning purposes acknowledges Lillie.

“Once again, having the appropriate systems in place will help to consolidate this information and run variations and tests on those forecasts,” he adds. “However, building alternative scenarios – both short term and long term – will be a challenge.”

Thus far the government has stopped short of suggesting workers should not return to their offices, with both the Health Secretary and the Prime Minister’s spokesperson stating in recent days that there were no plans to reintroduce working from home guidance.

However, given the frequency with which government policy has changed since March 2020 corporates would do well to note the spokesperson’s comment that it was ‘keeping the evidence of the variant under review and will take action if necessary’.

Corporates may also be impacted by the latest Covid variant’s impact on monetary policy. Michael Saunders, an external member of the Bank of England’s Monetary Policy Committee, told a webinar last Friday that a key consideration for the bank’s December policy meeting would the possible economic effects of omicron and the potential costs and benefits of waiting to see more data on this before (if necessary) adjusting policy.

The Bank of England’s November monetary policy report forecast assumed there would be no further new Covid-related severe restrictions or lockdowns in the UK. While Saunders says this is still a reasonable assumption, he warns that forecasts are inevitably uncertain.

“It is within the range of possibilities that omicron will significantly affect the economic outlook,” he says. “Apart from the direct impact of any additional public health measures on economic activity, aggregate demand and supply could also both be affected by increased precautionary behaviour as well as effects on supply chains and the composition of spending.”

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