Risk management is a key area of focus for banks and corporates in 2011. The 2010 gtnewsTreasury Risk survey, for example, found that organisations in Asia identify liquidity risk as: “their top risk to manage over the next 12 months”. Foreign exchange (FX) risk is also high on the agenda for many treasurers, and inflation is a growing concern as it edges higher in many markets. While that’s not to say that credit and other risks have disappeared, liquidity, FX and inflation seem to be higher on the list of concerns.
FX risk has drawn greater attention due to rapid fluctuations in rates. As Deutsche Bank’s Chris Collings recently told Risk.net, over the past 18 months, “we have seen implied volatility move systematically and sustainably higher to trade around 15% for many of the G-10 currencies,” and, “this has effectively tripled the FX risk faced in many cross-border transactions.” As Fran Berndt of Travelex also noted in gtnewslast month, “these signs of extreme currency volatility have placed an increased focus on the need for global treasurers to have risk measures in place to protect their business’ bottom line against losses resulting from currency fluctuations.”
Corporates are taking a variety of steps to mitigate the risk. At a strategic level, one step companies have taken is training. As Eaton Asia-Pacific vice-president David Foster told Finance Asia, their training programme saved the company “millions of dollars on approximately US$2bn in annual currency transactions.”
Then, whether they need foreign currency for trade or a merger or acquisition (M&A) deal, corporates are using a variety of methods to manage the risk. Hedging as well as deal-contingent forwards are, of course, common techniques. Companies with more sophisticated tools and data are also using techniques such as inventory management, borrowing in weaker currencies, or a ‘leads and lags’ strategy to collect foreign currency receivables early in weaker currencies and pay foreign currency payables earlier in strengthening currencies.
A focus on liquidity risk might seem a little more surprising, as economies in Asia are recovering and banks seem to be awash in liquidity, yet it’s top of mind for treasury staff. Along with the gtnewsTreasury Risk survey showing it as a key issue, the Corporate Executive Board said in January that, although “corporate credit markets are beginning to show signs of improvement, lending standards remain stringent” and “companies need to explore alternative funding sources to ensure adequate liquidity levels.”
Corporate treasurers have placed greater emphasis on “the security and availability of corporate liquidity” for the short term, as Andy Webb wrote in Finance Asia, and for the longer term, they are working on fostering “a cash-friendly culture in the corporation and the closer alignment of liquidity management with other treasury activities.” For corporates, liquidity risk practices continue to include better metrics, liquidity stress testing, scenario analysis, collateral management and alternative sources of credit. Banks, of course are also continuing to focus on meeting Basel III requirements.
Finally, inflation is rearing its head and has reached far higher levels in Asia than some might have expected just a few months ago. Fitch Ratings head of Asia-Pacific sovereigns, Andrew Colquhoun, recently told Bloomberg that: “inflation in China could hinder Asia’s economic growth and damage the ratings outlook for countries in the region this year.” Concern about inflation is apparent in other countries too. Corporates are considering a variety of strategies, from swaps or derivatives to inventory management and price indexing, to manage the risk.
While it might have appeared just a few months ago that liquidity, FX or inflation risk were on the wane as the great financial crisis receded, this is not the case. Treasurers are once again maintaining their vigilance and implementing strategies to deal with these continuing risks.
When it comes to the relationship between Europe and Britain – uniformity isn’t a word that currently springs to mind. And that’s not just a reference to Brexit. Whilst the Europe and Britain do find themselves in the midst of a political break-up – their monetary policies are also showing signs of divergence.
Europe’s introduction of the General Data Protection Regulation (GDPR) next May will have implications for businesses around the world and US corporates should start getting ready if they haven’t already done so.
The recent NotPetya cyberattack underlined the need for organisations to address their exposure and how to mitigate the risk.
As anticipated, US organisations exited prime money market funds en masse following last year’s SEC reforms. AFP’s latest Liquidity Survey indicates what it will take to encourage them back.