Optimism and Pragmatism: the Outlook for 2013

It is usual at this time of year to comment on how quickly the past 12 months have gone, to consider what has changed and to look forward with optimism and confidence to the coming year. 2012 however was not like 2006, when financial markets were last at their peak in terms of value and activity levels, and it is important to recognise that our world today is materially very different.

Individual days have certainly rushed by, and when you speak to people at any level in any organisation, the common theme is how busy we all are. It’s not easy. We are faced with an increased pace of work and a wide variety of challenges and issues that need to be addressed and solved on a daily basis. From a long-term view, 2012 was a slow and hard year, with progress made one step at a time.

It’s a Marathon, Not a Sprint

In terms of where we are now, it is in some ways similar to running a marathon. By the 22-mile mark, the initial euphoria has evaporated, energy levels are at their lowest and the finish line feels very far away. We are at the stage when runners are ‘hitting the wall’.

In another sense, ‘change’ has new meaning for treasurers and chief financial officers (CFOs). Dealing with crisis is now business as usual, and for better or worse, it became the ‘new normal’. Treasurers have had to get to grips with the resurgence of different types of risk, from counterparty risk when banks and business partners suffered in the midst of the global slowdown, to liquidity risk when traditional sources of funding became more difficult to access. Market risk has also come to the fore, particularly since the start of the eurozone crisis, as historically high levels of volatility have impacted returns on many asset classes, particularly risk assets such as equities.

Addressing Change

Because of the financial crisis, the gradual change we’ve seen in the role and remit of the treasurer has been cemented. It is no longer optional, rather it is mission-critical for them to have a single, holistic view of their organisation’s health, operations and cashflows on a day-by-day, if not hour-by-hour, basis. Risk is now a core responsibility for many.

But it’s not all doom and gloom, and recent history provides a compelling reason to be optimistic about the year to come. The good news is that because treasurers have had to demonstrate adaptability and resilience in the face of change, many are now in a strong position to deal with what comes over the 2013 horizon, because they have more robust and transparent systems and processes in place than in the pre-2008 era. And, like marathon runners, they have done their training and are better prepared for unexpected events, having established strong support networks among partners, peers and advisers that should stand them in good stead for the next 12 months.

Economic and Political Decision Making

Undoubtedly, the year ahead will see transaction banking continue to be driven by the imbalanced economic recovery. The major economies are likely to remain in rate-easing mode, whether that is with the aim of stimulating growth in the UK and US, or to cushion a slowdown in gross domestic product (GDP) growth such as in China and Australia. And progress at a global level will most likely stay uneven – but there are bright spots.  China continues to post positive data, even if the economy is not as buoyant as previously, and certain markets in Latin America present exporters with interesting opportunities. Corporates have a greater appreciation of regional diversity and opportunity, and are taking a more nuanced look at individual markets than in the past, pinpointing areas of growth such as Indonesia rather than looking at Asia Pacific or South East Asia as a single entity.

At the intersection of economics and politics, business will also be paying close attention to how the US government ultimately comes out of its negotiations over the
fiscal cliff
, and what combination of tax and stimulus packages can be delivered by President Obama’s second term of administration. 

On the other side of the Atlantic, the eurozone crisis remains unresolved and risk management and contingency planning are top of the agenda for any corporate doing business in the region, or with partners or suppliers based in Europe. It is not possible to predict exactly what events will occur and how, but it is possible to identify the most likely scenarios, analyse their potential business effects and put in place plans that mitigate operational impact. Best practice principles in cash management remain the same: control what you can, understand cashflows, review credit continually and ensure you have open, transparent and honest communications with suppliers, customers and providers.

Survival to Growth and Delivering Value

Just as governments are focused on stimulating the economy, the balance for businesses has tilted too, and many corporates are now concentrating on growth rather than simply survival. For them, it is a question of being risk-aware rather than risk-averse. Opportunities that expand their businesses and deliver shareholder value are being actively considered. One way in which treasurers can support this drive in 2013 is to look at new ways of achieving greater end-to-end operational efficiency, using technology such as data enhancement through virtual accounts and integrated solutions that can be scaled to a global level.

At the same time, managing liquidity in 2013 will be more important than ever. Corporates and financial institutions have built up comparatively high levels of cash, either as a buffer or to satisfy tighter regulation around capital requirements, and are therefore very liquid compared to historic standards. This has become a critical issue for many boards and their shareholders, because of its impact on financial performance and the capacity to invest for growth. As a result, corporates are seeking and taking advice from their banks and talking to peers about their experiences concerning working capital and the effective management of these elevated cash levels.

The SEPA Challenge

Another issue which grabbed the attention of boards in 2012 was regulation, which will certainly not go away in 2013. In the international markets, Europe generally has the lion’s share of new regulation coming down the pipeline that will require detailed analysis and implementation. In particular, with the migration date now set, one of the biggest focuses in the region will be on the single euro payments area (SEPA) with companies working hard to become SEPA-ready by the implementation date of 1 February 2014.

It is clear that the implementation of SEPA could have wide-ranging benefits, from helping to mitigate risk associated with the eurozone crisis to allowing corporates to benefit from economies of scale and improved efficiencies. However, the regulation will not automatically lead to these perceived benefits, and there are some significant migration challenges that organisations have to overcome.

Firstly, there are differences in the amount of data that must be collected in each country to make the legacy payment and collection messages SEPA-compliant. Secondly, banks have varying interpretations of certain implementation guidelines, such as the use of optional fields in SEPA messages, and this leads to an inconsistent approach which runs counter to the enhanced standardisation SEPA aims to achieve.

Thirdly – and perhaps most important – is that in order to avoid the much talked-about ‘bottleneck’, it is imperative that corporates start their migration process as early as possible so that any issues can be addressed in a timely manner. There are many paths one can take when migrating to SEPA, depending on the nature of the business, and each involves a different level of resource. With proper planning and by aiming to be SEPA-ready well in advance of the migration deadline, corporates can help ensure such resources are efficiently used.

The Importance of Collaboration

What has become clear over recent times is that in order to better deal with the plethora of economic and regulatory challenges, collaboration between corporates and banks, and between banks themselves, is vital. When companies are increasingly sophisticated, geographically diverse and striving to meet regulatory changes in a tough economic climate, open, honest and transparent relationships are essential.

This is really about knowing who your friends are and working towards a common goal that ensures mutual success, facilitates business and sustains the financial stability of the markets in which we all operate.

Being Race-fit

There are still hard miles to run in 2013, but there are reasons to be optimistic. Today’s treasurer is no stranger to tough times, and is pushing through the wall to build a strong business, industry and economy one step at a time.

As if preparing for a marathon, corporates and banks have trained well over the past few years; they have strengthened their relationships with one another and they have built stamina. This has created a strong support network that should provide organisations with the inner strength to cross the finish line, and move out of the present uneven recovery into full growth.

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