If visitors to 2014 Association of Corporate Treasurers (ACT) UK conference in Glasgow, UK, this week were not already aware that there is ‘Something Going On’ in the background, then they would very soon realise a major independence vote is imminent. Everything from billboards to cinema advertisements publicise the referendum this coming September on whether or not Scotland’s voters wish to annul the 307-year old act of union that made it part of the United Kingdom.
A no vote would have profound implications for the UK treasurers attending the 2014 ACT show, with evermore varied tax regimes north and south of the border; potential custom duties if Scotland had to reapply to the European Union (EU) in the event of a yes vote; and its status as part of the British Pound ‘single UK currency’ up for debate.
Should I Stay or Should I Go Now: Scots to Decide UK’s Future
A few months ago it appeared unlikely that a Scottish breakaway from the UK would happen, but a so-far uninspired campaign to persuade Scots to remain has largely focused on the negative arguments, with companies such as insurer Standard Life threatening to relocate from its Edinburgh headquarters to south of the border in England and politicians suggesting that the Pound currency union would have to be sacrificed.
As this year’s ACT conference got underway, Deutsche Bank’s chief economist, George Buckley, warned of the major negative economic effects if the 18 September referendum sees the electorate vote for dissolution of the union, creating an independent Scotland from 24 March 2016 onwards, with the economic uncertainty caused and who’d claim the future oil revenues off Scotland’s North Sea coastline just some of the issues.
The opening keynote speaker in Glasgow was the UK’s ‘100 day chancellor’, aka Alistair Darling who served as the UK’s chancellor of the exchequer between 2007 and 2010 and ruled throughout the 100-day crisis from 15 September 2008 onwards when the world’s financial system was in meltdown. Regular readers may recall from a recent gtnews’ report that his description of how the UK government saved Royal Bank of Scotland (RBS) from imminent demise at the height of the financial crisis in October 2008 is fast becoming a conference favourite. He reiterated the experience here for the ACT Conference attendees.
However, ex-Chancellor Darling added some fresh observations, such as his fear that banks once deemed ‘too big to fail’ were now instead becoming ‘too big to manage’ thanks to more stringent capital adequacy requirements and increasing regulation which demand more and more specialist information. He also believes that the European Central Bank (ECB), which “performed a miracle in 2012 in preventing the European banking system from collapse” may yet have to do more in the form of quantitative easing (QE) if the fragile shoots of economic recovery in the EU are to strengthen into a full blown recovery.
Darling also admitted to being a fan of the Bank of England’s (BoE) current governor, Mark Carney, even if it was his successor as UK Chancellor and political opponent, George Osborne, who was responsible for attracting Carney from the Bank of Canada last year. “I fully agree with how the BoE has adopted a policy of forward guidance and he (Carney) has been quite blunt about when UK interest rates will start to go up again,” said Darling (i.e. next year).
Despite the Glasgow venue, Darling was also candid when asked about the economic prospects for an independent Scotland. “This is a country of only 5m people and England is its single biggest market, so putting up barriers and the inevitable increase in costs is not a good idea,” the former Chancellor suggested. An independent Scotland would also need to establish its own currency and its own financial regulator, according to warnings from the UK government, while its tax system would start to diverge, affecting the large pensions industry. “There’d also be the uncertainty of trying to get back into the EU as a standalone member and being at the mercy of its 28 member states voting intentions,” he concluded. “Change will come at a cost.”
The World of 2050: Economic Predictions
If some of Alistair Darling’s presentation at the opening day of the ACT Conference 2014 was dour, the following presentation from HSBC’s senior global economist, Karen Ward, was largely upbeat, focusing in on her predictions of what the financial world of the year 2050 might look like.
The addressed chimed in quite well with the overall theme of ‘If Treasurers Ruled the World’ which guided this first day – with the ACT chief executive (CEO), Colon Tyler, targeting the growing regulatory burden that three quarters of the delegates agreed in a poll had grown noticeably heavier in the past 12 months as one instance where action could immediately be taken.
HSBC’s Ward, however, focused on the positives and began her economic overview four years ago when the developed economies of North America and Europe were still stagnant or mired in recession after the financial crisis with emerging market growth the only prop to worldwide economic advancement.
“This development posed the question of how long emerging market growth could outperform that of the developed economies,” said Ward. “What were the implications of this shift in the world order – and would there be sufficient energy, food and water to sustain the trend.”
Her assessment took into consideration two main factors: the stage of development that an individual economy, such as China, was at, plus its potential for development given each emergent country’s level of education, health, the rule of law, corporate governance, monetary policy, government policy and democracy. Added to these two factors was the issue of demographics and whether the emergent country had a growing or dwindling workforce.
Based on these assessments, HSBC’s Ward believes that several “emergers” such as South Korea, Argentina, Saudi Arabia, Poland, Mexico and Venezuela are still at the very early stages of development, with extremely low income per capita levels compared to the US. There is therefore still huge potential for further growth.
As she pointed out, income per capita in China, despite decades of double-digit growth, is still only 7% that of the US, while for India the figure is only 4%. “Press reports might suggest that China is about to suffer a period of stagnation or even decline, but in fact the country is still in the very early stages of development – equivalent to where the US stood back in 1900,” Ward suggested.
Her economic league table for 2050 shows the world’s top six economies headed by China, followed by the US, India, Japan, Germany and the UK, with Mexico rising to eighth position from its current ranking of thirteenth. “The report has struck fear into some people, but should be seen as fantastic news,” said Ward. “The rise of the emerging markets shouldn’t be seen as signalling the downfall of the developed economies.” Indeed for both the US and the UK the outlook is positive as both countries are set to benefit from rises in their working populations.
By 2050, a total of 19 of the world’s top 30 economies are likely be those currently regarded as emerging markets. “So businesses should start planning now for the world of 2050, by which time global output is likely to have tripled,” Ward concluded. The only potential cloud in this rosy scenario is that of adequate natural resources and the triple challenge of providing sufficient energy, food and water.
There are therefore still many fast-growing and emerging countries for treasurers at multinational corporations (MNCs) to handle cross-border cash flows for, subsidiary arrangements, elongated supply chains and so forth. As developed countries recover from the post-crash hangover as well the general economic picture is looking better with any relative tail off in emerging markets hopefully being covered by recoveries in the ‘West’. In the UK’s case, of course, that recovery is dependent on the country staying together and that topic of debate continued long into the Scottish night.
The Challenges for Heathrow’s Assistant Treasurer
Continuing the ‘If Treasurers Ruled the World’ theme for the first day of the ACT show, a session hosted by Credit Agricole suggested that ‘every risk would be an opportunity’. Pedro Madeira, assistant treasurer at Heathrow outlined the risk management solutions employed by the world’s third-largest airport, which enjoys a very stable cash flow platform but also carries a whopping debt load of £13.1bn. Its treasury strategy is heavily influenced by a number of considerations when it comes to hedging, not least “new regulations which are making derivatives more capital intensive for the banks but also more expensive for their customers”.
“Heathrow has the UK’s largest corporate inflation swap book and favours a discrete execution strategy, completing small tranches over an extended period of time,” said Madeira. “Its swaps have no early termination clauses and relative to other regulated corporates, its portfolio is relatively clean.”
Conclusion: Managing Currency Exposures
ACT show delegates had a range of workshops to choose from at the end of Day One, with Lloyds Bank hosting an interactive session on the topic of coping with volatile emerging market currency exposures. Yuri Polyakov, managing director, head of financial risk advisory at Lloyds Bank Commercial Banking and Jeremy Adam, the head of FX markets solutions, noted that multinationals such as Coca-Cola, Unilever, Diageo and Renault have all admitted to having their fingers burned from weak currencies. Hardly surprising when the Brazilian real (BRL) and South African rand (ZAR) have both sunk by 50% against sterling in just two years, while the Indian rupee (INR) has lost 40%.
As Polyakov noted, in a perfect world simply reserving a percentage of profit against future FX impact would be a viable option. However, the harsh reality is that having no FX hedging strategy is no longer an option for companies with any sizeable presence in the emerging markets. Favoured strategies among ACT members according to an on-site straw poll are analysing and prioritising FX risks while adjusting hedges for diversification and cost efficiency or, alternatively, only heading ‘tail risk’ low delta options with a dynamic underlying market approach.
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