New Zealand’s treasurers have not felt the full force of the pandemic to the same degree as their peers in other countries, yet they are grappling with many of the same post-COVID issues as their treasury colleagues around the world.
When the COVID-19 pandemic started to unfold, New Zealand took quick and decisive action while many countries seemed to dither. And now the country leads the pack in another way – this time by raising interest rates – as the world emerges from the pandemic and tackles the prospect of inflation.
The forecasts for New Zealand’s economy from earlier this year were positive. According to May 2021 figures from the Organisation for Economic Cooperation and Development (OECD), growth was expected to reach 3.5% in 2021 and 3.8% in 2022. During the pandemic, the OECD notes that private consumption had been robust. Also, the economy was buoyed by a wealth effect that was created by a 24% increase in house prices between March 2020 and 2021.
Since then, inflation has been picking up, and the Reserve Bank of New Zealand (RBNZ) has taken action. It had loosened its policy back in March 2020 and cut the official cash rate to 0.25%. In early October, the central bank announced that it was tightening again – to rein in inflation – and raised the official rate 25 basis points to 0.5%. It was the first time for New Zealand to raise rates in over seven years. It was also one of the first countries to start raising rates post-pandemic, which has put it out of step with many other countries, points out Will Thomson, Corporate Treasurer at Contact Energy.
It remains to be seen whether RBNZ’s action will have the desired effect. Inflation is expected to increase, and according to Trading Economics, is expected to peak above 4% in the near term, before slowing to 2% in the medium term. There are a number of factors driving the increase in prices, including rising oil prices and transport costs. These figures are in line with business expectations. In a central bank survey from August 2021 businesses expected that inflation would be around 3% in one year’s time, which is the highest figure for one-year expectations since December 2010.
New Zealand seems to have moved quicker than most when it comes to tackling inflation, and the same could be said for its handling of lockdowns at the beginning of the pandemic. In March 2020, New Zealand was quick to close its borders and the whole country went into self-isolation. While the country avoided the death rates seen elsewhere, it has since been slower to come out of its lockdowns. The country has since changed tack and has moved away from its ambitious of eliminating COVID and having zero cases. “This is a change in approach we were always going to make over time. Our Delta outbreak has accelerated this transition. Vaccines will support it,” Prime Minister Jacinda Ardern said in early October this year.
Like in other countries, the pandemic and the lockdowns have forced people to go digital. And treasurers in New Zealand have been affected by similar issues to their peers elsewhere. Thomson at Contact Energy comments that while COVID has affected all roles, there are specific ways it has affected treasury management. One of these is e-signatures and getting banks to adjust to the new, digital, way of doing things. There are still laggards, however, among the banks in New Zealand that still insist on ‘wet’ signatures and paper documents. “Certain banks need the original signed copies – you have to physically post them,” says Thomson.
In the last couple of months there have been more discussions about moving away from physical signatures, comments Thomson. It is still an issue because even when working from home isn’t mandatory many companies are moving to hybrid working. If certain documents, for example, need multiple signatures this can create a headache if all of those people are working at home. Thomson gives the example of anti-money laundering requirements, which require certified copies of passports, that are incredibly inconvenient in a working-from-home world. This is how a routine part of the treasurer’s role can become very tedious and more complex, comments Thomson.
Richard Eaddy, Chief Executive Officer of Hedgebook, a New Zealand treasury software company, has also seen how the adoption of new technology has been a big issue. “There are a lot of legacy and outdated systems being used but the transition is still relatively slow. On the one hand we are seeing companies embrace the new technology that is available to make their jobs more efficient but there are still a number that aren’t changing due to intransigence or lack of budget on the back of the impact of COVID,” says Eaddy.
He has also noticed the challenges of remote working for treasurers in New Zealand. “One of the key changes we have seen from this is a move away from relying on spreadsheets to better use of software solutions that are more robust with information being able to be shared more easily. I am aware of some companies that have banned the use of spreadsheets as they try and move to more robust systems,” Eaddy says.
There are a lot of legacy and outdated systems being used but the transition is still relatively slow.
Richard Eaddy, Chief Executive Officer, Hedgebook
In solving these issues, he says that the wider adoption of technology is an obvious answer. “Most companies are more open to using cloud solutions, whether that is their accounting system, cash forecasting tool or treasury management system. By adopting better and newer technology it then allows for easier sharing of information within this new environment,” says Eaddy.
Brett Johanson, a treasury management specialist and Partner at PwC in New Zealand, has also seen how technology and digital innovation – as well as cybersecurity – have become big issues for the treasury community.
One topic, in particular, is the use of APIs [application programming interfaces] and using them to streamline the use of different software packages. Eaddy comments, “Previously there has been a lot of talk around the use of APIs but we are seeing some of our clients asking to develop to our API so that they can import or export information more easily. We are seeing this happening with other systems as well as companies embrace technology and digitalisation.”
There have been other issues that the pandemic has also brought into focus for treasurers, many of which are similar to the challenges in other countries. Eaddy comments that the main impact for treasurers in New Zealand has been the sharper focus on cashflow forecasting. “Pre-COVID there was more certainty over supply chains, supplier payments and export markets remaining open. With all the issues attached to these new conditions, cash once again has become king. This has also brought a shorter-term focus as it has become more difficult to forecast out too far,” Eaddy tells Treasury Today. One effect of this is that there has been more focus on foreign exchange hedging. “Companies found some of their long-term hedges were not required and therefore these deals needed to be closed out or restructured. This has led to a shorter-term hedging focus for the moment,” explains Eaddy.
Johanson at PwC has also seen that COVID-19 and lockdowns in New Zealand have had an impact on cash and liquidity management, as well as working capital management. Also, he notes there have been increased committed stand-by facilities, with tenors lengthened. He also comments on the other challenges that treasurers face at the moment, which include the need for treasurers to have timely and reliable forecasts from their business units. Also increased costs and uncertainty are an issue due to supply chain disruptions and closed borders.
Despite the upheaval of the last year, the Herbert Smith Freehills Corporate Debt and Treasury Report 2021 notes that most treasurers who were surveyed reported that they had managed liquidity successfully through the pandemic. This, in part, was due to the measures that were put in place in the wake of the global financial crisis. PwC notes that this is also a trend among treasurers in New Zealand.
Also, according to PwC, there have been differences in how companies in the UK and New Zealand responded to government schemes. In the UK, many corporates registered for government schemes that would help their cash flow, but the majority – 70% – did not use them because they feared it would affect the perception of how well-managed they were when they sought funding in the future. “This strongly contrasts with businesses in New Zealand, where 77% reported having accessed COVID-19 related financial support from the Government in 2020,” the PwC June 2021 treasury newsletter stated.
Johanson at PwC also notes that other issues for treasurers include seeking alternative debt funding sources – such as non-bank lenders and credit funds – and their access to debt capital markets. This is an issue that Simon Till, Director Capital Markets at Fonterra, raised in a previous interview with Treasury Today. Given the size of a corporate like Fonterra, relative to the size of the New Zealand economy, it is crucial it can effectively raise funds in the global markets in all conditions. Also, corporates that rely on overseas funding need to build good relationships with investors around the world.
This is challenging in the best of times since New Zealand is so geographically isolated from the major financial centres. But in a pandemic, when treasurers can’t fly, it has disrupted the nature of the relationships with the investor community. Thomson explains that in the US private placement market, for example, “They like you to go and show your face,” which has not been possible in recent times. Although there have been alternatives like virtual roadshows, it has made maintaining those relationships more challenging.
Another hot topic in treasury in New Zealand, notes Thomson, is sustainable finance. “It feels like it has moved to the mainstream quickly – it was a bit niche, but now there is an explosion in expectation from investors,” says Thomson.
“We are quite well positioned for that,” says Thomson of Contact Energy, which has already gone green and converted its borrowing to sustainability-linked loans, for example. In a sense it has been easier for a company like Contact Energy to do this because sustainability already aligns strongly with what the company does. Thomson notes the energy company is already building a renewable energy power station, for example.
This focus on sustainability also echoes the comments of Fonterra’s Till in a previous interview for Treasury Today. In the past, he commented, it was only in Europe where investors would ask about the environmental impact of the corporate’s business. Now, he comments, it is the first question that investors ask in all meetings around the world. “Investors are increasingly demanding around sustainability and with that will come real change by the businesses,” Till said.