Treasury Practice

Year of the Rat: what’s in store for treasurers in 2020?

Published: Jan 2020
Two blue doors opening, revealing the sun

The Year of the Rat is traditionally associated with new beginnings – but for treasurers, 2020 is also likely to see the continuation of existing challenges, from an uncertain trade environment to funding constraints for suppliers. But despite these issues, there’s also considerable potential for new technologies such as AI and blockchain to drive greater automation and efficiency.

Saturday January 25th marks the Chinese New Year, which in 2020 brings the Year of the Rat. The rat was last seen in 2008 – a year still imprinted on many treasurers’ memories as marking the height of the global financial crisis. But as the first of the 12-year cycle of animal signs, the rat is traditionally associated with new beginnings, as well as with diligence and positivity.

That said, for corporate treasurers, 2020 is likely to include the continuation of a number of challenges. Risks arising from geopolitical events continue to be a major consideration for treasurers, not least because of the continuing trade war between the US and China. At the same time, treasurers in APAC will be confronted with numerous other issues, including regulatory change and the impact of funding constraints on suppliers.

But the year ahead will also bring plenty of opportunities for treasurers willing to embrace them. Technology has the potential to bring real benefits in the form of automation, efficiency and the ability to make better-informed decisions. By harnessing these developments effectively – and by partnering more closely with the business – treasurers will be better placed not only to overcome the challenges that 2020 will bring, but also thrive in this evolving landscape.

Shifting sands

Given the turbulence that has shaped global markets in recent months, in the year ahead treasurers will certainly be looking for opportunities to drive improvements wherever they can be found. But it’s unlikely that the recent challenges will subside anytime soon. Christopher Emslie, Asia Regional Treasurer at General Mills, says that 2019 was a “year of uncertainty” – and he expects this to continue into 2020.

“With that uncertainty comes a lot of risk,” he says. “For us, the first goal is to try our best to mitigate those risks and make sure we’re in control of everything that’s happening. That means making sure we have the controls in place that will help us navigate difficult times – whether that’s social unrest in Hong Kong, Brexit or the trade war in China.” Emslie adds that as well as impacting companies’ ability to do business, geopolitical challenges also have implications for foreign exchange and currency volatility.

“The geopolitical situation in 2019 will likely continue to impact in 2020 and be loosely monitored by treasurers – including the global effect of US elections in 2H20,” says Mark Evans, Managing Director, Transaction Banking at ANZ Institutional. “Treasurers will also keep a close eye on the impact of the changing interest rate environment.”

Against this backdrop, Evans says that “for borderless businesses, treasurers will be focused on ensuring their credit profiles are appropriate for the dynamic economic conditions.” He also notes that businesses will be keenly interested in being prepared for changing benchmark rates and a possible negative interest rate environment.

Regulation and beyond

In addition to the implications of political and economic uncertainty for trade, regulatory change is another area that has brought numerous challenges for treasurers in recent years – and in 2020, treasurers will be keeping a close eye on regulatory developments and government initiatives.

“Although automation is helping stay ahead of the changing local regulatory and compliance landscape, local knowledge will be critical in ensuring businesses stay compliant with key regulatory and legal changes,” says Evans. “This will be an important point of consideration in the decision-making process as businesses explore new markets and tackle the growing costs associated with regulation and compliance.”

Faisal Ameen, head of Asia Pacific Global Transaction Services at Bank of America, says that treasurers “should continue to monitor and assess the impact of regulatory changes such as the import/export rules, currency restrictions and data onshore rules on their day-to-day operations.”

He adds, “On a positive note, government-led initiatives on distributed ledger technology, trade digitisation and real-time processing are gaining momentum in Asia Pacific and treasurers should continue to work with their banking partners to reap the benefits and improve operating efficiencies.”

Other topics of interest will include:

  • Funding. Kjel Christiansen, Managing Director, Americas and APAC at technology company Taulia, notes that “other more subtle trends are coming out which will have a direct impact on treasury.” For example, he points out that the cost of funds is steadily rising, while “Australian banks are tightening on lending.”
  • FX risk. Ameen says that as prevailing market conditions continue to stay volatile, “it is important for treasurers to reassess their FX risk management strategy continuously based on their existing risk appetite to manage their exposures.”
  • The rise of ESG concerns. As ANZ’s Evans explains, another notable trend is that businesses are increasingly embedding environmental, social and governance (ESG) principles for sustainable finance models. “I see this as another key trend as we experience greater awareness within the industry,” he says.Bank of America’s Ameen likewise highlights the growing focus on ESG, which he says is “gradually becoming a business imperative, with treasurers now tasked to embed sustainable practices in their treasury processes.” He adds: “We expect this trend to turn into a priority with the rise of the millennials.”
  • Keeping track of cash. Challenging conditions are likely to keep treasurers’ attention squarely focused on the importance of razor-sharp cash management. “Prolonged economic certainty will keep cash at top of mind for Asian treasurers,” says Christiansen. “How we see that manifesting will be a renewed focus on liquidity and access to cash.”
  • Addressing supplier health. According to Christiansen, cash shortages will be most pronounced in the SME area, “where SMEs are still experiencing lending challenges from banks due to the lack of collateral to secure lending and a general lack of venture and growth capital. This then becomes a risk for larger businesses in the region and indeed the globe, as supplier risk increases.” He notes that treasurers can address this issue by implementing early payment solutions that will provide suppliers “with a confident source of liquidity.”

China-US trade war: the story so far

Among the notable developments of President Trump’s presidency, for corporate treasurers the trade war with China is one of the most significant.

Aiming to protect US jobs and support domestic manufacturers – and raising accusations of intellectual property theft – the US has so far imposed tariffs on over US$360bn of Chinese products. In response, China has levied its own tariffs on US$110bn of US goods.

These developments have prompted companies in Asia to assess the impact on their supply chains and could lead some to shift their supply chains away from China. “This is prompting treasurers to work alongside their procurement counterparts to expand their supply chain from China into other markets such as Vietnam, Bangladesh, India and Indonesia to safeguard supplies,” says Faisal Ameen, head of Asia Pacific Global Transaction Services at Bank of America.

The situation continues to evolve: in December 2019, a preliminary trade agreement was announced, putting a halt to further tariffs that had been planned on additional Chinese goods. The ‘phase one’ deal saw the US offer to reduce existing tariffs on Chinese goods. China, meanwhile, is reportedly set to purchase an additional US$200bn of American goods and services, including poultry, pork and soybeans, in the coming two years.

Of course, this issue is not the only concern for treasurers in APAC. As Ameen points out, “While the US-China trade war has larger global impact, within the region the Korea-Japan trade dispute and the protests in Hong Kong may have ripple effects on the region’s economic growth and stability.”

Harnessing technology

Another major theme for 2020 is the evolution of technology and the rise of digitisation. “The efficiencies available due to the technological changes would be on top of mind for most treasurers,” says ANZ’s Evans. “Treasury departments will benefit greatly by better understanding the impact of emerging technologies across the industry; particularly on the creation of more efficient working capital and liquidity management tools for their businesses.”

When it comes to specific developments, Emslie says that treasurers in the region will increasingly be exploring the opportunities offered by using AI/robotics to improve efficiencies and processes, while also improving control and mitigating risk.

“A lot of us aren’t there yet – there’s still a long way to go on our journey,” he says. “At this point I think it’s about building more efficiencies into our ERP and getting information in to gain a better understanding of how business works for us – as well as improving the lives of our people on the ground by taking away some of the need for manual intervention.” Emslie notes that by doing so, people can be freed up to spend more time analysing information.

It’s clear that treasurers have a significant role to play in spearheading the adoption of cutting-edge technology within their organisations. A 2019 survey commissioned by DBS Bank found that 30% of respondents say that CFOs and corporate treasurers as responsible for “pushing the agenda of their technology colleagues” – compared to 11.3% who saw this as the responsibility of the CEO.

Gaining momentum

Gaurav Jain, Senior Manager, Treasury Advisory Services at Deloitte Southeast Asia, says that a recent Deloitte survey found that “while liquidity and financial risk have been identified as one of the top priorities for treasurers, new and emerging technologies such as artificial intelligence (AI)/machine learning (ML), Big Data and robotic process automation (RPA) are also generating interest with wider community and are up for increased adoption.”

He notes that the ongoing political uncertainty around Brexit, US-China trade tensions and global growth challenges “still demand caution on FX management” – and they also “push for an increased use of technology in the treasury function for effective monitoring and management of risk.”

“We also foresee a greater push for intelligent reporting,” says Jain, noting that the treasury function has typically used treasury management systems to generate such reports in the past. “Having more sophisticated BI reporting will allow decision makers to have a more holistic view of risks and opportunities,” he says, noting that the move from producing financial reports towards the adoption of sophisticated analytical reports providing strategic recommendations to the CFO “will allow treasurers to be seen as value-adding partners to the business.”

Technology: developments to watch

Bank of America’s Ameen notes that there is no one-size-fits-all when it comes to treasury transformation, so treasurers should take the time to understand and evaluate the benefits each technology offers, considering its business objectives and resources available. He summarises the technologies that treasurers should keep an eye on in 2020:

  • Robotic process automation (RPA) and AI: “Advancements in RPA and AI are enabling treasury efficiencies while redefining treasury operations,” says Ameen. He says areas in which RPA and AI have been applied “to new levels of success” include cash forecasting, receivables reconciliation and the adoption of virtual accounts for cash concentration purposes.
  • Distributed ledger technology (DLT): Ameen notes that while DLT offers many possible applications and is touted to have the potential to transform treasury, the change is still yet to come. “However, 2020 could be the inflection point as industry bodies get down to developing market standards, as well as practical and executable solutions.”
  • Real-time processing: “The benefits are tangible – improved working capital and greater transparency on flows,” says Ameen. “Many treasurers are already leveraging automation to streamline business processes, and real-time treasury is a natural next step to optimise treasury.”

He adds that the payments space is leading the way, and is also the catalyst for broader change. “For instance, the move to real-time electronic submission of documentation could be combined with faster payments for greater efficiency in trade finance.”

Accuracy and automation

Taulia’s Christiansen is another to emphasise the role technology is playing in revolutionising treasury. “Cash forecasting tools which leverage AI will be able to predict cash flows with greater accuracy in a tenth of the time it currently takes,” he says. “Technology platforms are also filling a void around funding SMEs.”

In addition, Christiansen notes that many banks are being required to complete a greater level of diligence, which historically has been very manual. “Partnering with a tech platform simplifies and automates a very manual and archaic process,” he comments.

Overcoming challenges

But while there is clear interest in these technologies from corporate treasurers, companies may also need to overcome certain obstacles when seeking to adopt them. The DBS survey found that seven out of ten APAC companies “risk being left behind by a lack of digital strategy and execution plan.” The survey found that the three most significant risks to digital adoption were the speed of change and complexity of the enabling technologies, execution challenges and delivery of outcomes, and the availability of talent to help execute digital transformation efforts.

Business partnering

Last but not least, treasury may once have been regarded as a function that operates in relative isolation from the rest of the business. But since the financial crisis, treasurers have played an increasingly strategic role within their organisations – which requires strong communication between treasury and the business.

PwC’s 2019 Global Treasury Benchmarking Survey, Digital Treasury – It takes two to tango, reported that strategic thinking was seen as a crucial skill for treasurers of the future by 99% of respondents, while 84% cited the importance of business partnering capabilities. In addition, the survey highlighted the importance of a range of soft skills including communication skills, management skills and people skills, as well as experience outside treasury.

Becoming a better partner to the business is another of the 2020 goals mentioned by General Mills’ Emslie. “We’re trying to get as close to the business as we can,” he says. “We want to be able to give them a far better view of what’s happening so that they can make better business decisions – whether it’s cash, whether it’s helping with working capital and improving DSO, DPO and inventory.”

When it comes to achieving this, Emslie says the main focus is on communicating effectively with the business and explaining “what we’re trying to do on their behalf.” But as he explains, this is a two-way exercise: “We need to understand what business is doing, they need to understand what we’re doing – and then together we can come up with a plan to say, ‘This is what we can do for you’.”

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