Challenges as economy recovers

The UK economy may be showing signs of sustained recovery, but many corporate treasurers remain optimistically cautious in their outlook, writes Rebecca Brace

Corporate treasurers are known for having a cautious mindset. Tasked with responsibilities, including cash management, investments, funding and managing risk, many responded to the financial crisis by building large war chests of cash, developing evermore sophisticated processes to monitor and manage risk, and prioritising security over yield when investing.

Now the world has moved on from the crisis and the latest economic growth figures tell a positive story. In April, the Office for National Statistics announced that the UK economy had grown by 0.8 per cent in the first quarter of 2014. With five consecutive quarters of growth, GDP has risen 3.1 per cent in the last year.

While the UK’s treasurers naturally welcome the more positive macroeconomic environment, the cautious approach that has been finely honed over the last few years is unlikely to be scaled back anytime soon.

David Felton, UK-based vice president of international treasury at Discovery Corporate Services, explains: “There is the beginning of a feel-good effect within banks and corporates now, but since the recession has been so deep and so long, many corporates are still hesitant about the longevity of the improvement.”

Alison Wilson, treasurer of smoothie and juice company innocent, says: “Signs of improvement in economic and trading fundamentals in Europe are acting as a more pleasant tailwind for us and our European customers.” However, she also notes: “The UK economic climate continues to present some challenging trading conditions for some of our customers.”

In the evolving climate, the close focus that treasurers have held on risk for a number of years is showing no signs of diminishing, although the types of risk they are looking at continue to shift. On the world stage, concerns about the break-up of the eurozone are giving way to more recent developments.

Yuri Polyakov, head of financial risk advisory at Lloyds Banking Group, says recent events in Ukraine have introduced significant uncertainty regarding the future direction of oil prices, which will impact on any major industrial company. As such, he recommends that companies should now be evaluating their businesses to understand the impact of any political escalation that may occur.

Since the recession has been so deep and so long, many corporates are still hesitant about the longevity of the improvement

Meanwhile, as companies begin to focus more wholeheartedly on growth, another key challenge is managing risks in new markets. “Companies need to make sure that their risk management strategies are adapted to growth mode rather than value-preservation mode,” says Mr Polyakov.

International expansion has been a theme for UK companies for the last few years, which presents additional challenges from a treasury point of view. As well as additional risks, new markets bring with them additional currencies, payment systems, regulatory structures and tax regimes, which may be particularly complex when the company is focusing its attention on emerging markets.

While China continues to be a focus for companies expanding overseas, other markets are beginning to attract more attention. David Blair, managing director of Acarate Consulting, says Africa is being touted as the new frontier, but risks and inefficiencies mean corporations need to adapt their business models to African ways of working.

Michael Mueller, head of cash management at Barclays, says Africa is still “a bit of a white space on the map of many corporate treasuries”. However, he adds that multinational companies are now beginning to look at Africa in a more consolidated way, with growing numbers of requests for proposal (RFPs) being issued for regional cash management solutions.

Whatever the destination, expanding overseas presents additional challenges for treasury. “Buying and selling internationally brings with it the need to hedge our currency requirements and at innocent we have a US dollar and euro hedge programme,” says Ms Wilson. “With sterling strengthening against both these currencies recently, there has been an opportunity for us to lock in some price certainty.”

While economic growth and overseas expansion present treasurers with a range of challenges and opportunities, there is another factor simmering in the background. Largely devised in response to the financial crisis, a wave of regulatory change is beginning to take effect, impacting corporations as well as financial institutions.

Keeping up with all the ongoing changes is arguably a full-time job, adding to the challenges faced by the many treasury departments which are already under-resourced. As such, optimism regarding new opportunities is likely to be tempered by the onerous task of understanding and addressing the changing regulatory landscape.

Treasurers have had to evolve a great deal in the last six or seven years. Once seen as occupying an ivory tower within the company, the treasurer’s role has become more visible across the organisation. Economic conditions may be improving, but rather than scaling back their vigilance and disciplined approach, treasurers will be using the same skills they honed during the crisis to support their companies in a more positive economic climate.