Corporate treasurers who travelled to Spain’s second-largest city this month had direct experience of the geopolitical uncertainty that could stifle Europe’s economic revival.
Over the decade since the global financial crisis first broke, corporate treasurers have learned to expect the unexpected. Earlier this month, many travelled to Barcelona for EuroFinance’s annual international treasury management conference – a long-established major event in the treasury calendar and one at which C2FO regularly exhibits and contributes to the content.
C2FO has noted how a rapidly evolving and macroeconomic landscape on both sides of the Atlantic is intensifying the pressure on treasury to add value – and be seen by the company’s stakeholders when doing so. This year, inevitably both the repercussions of the Brexit vote and Donald Trump’s unexpected election victory were among the topics on the agenda.
However, the conference organisers could not have anticipated that the host city would suddenly become the focus of international attention just as this year’s event was getting underway. Two days before, a political crisis had erupted in Spain as the separatist government Catalonia region in the country’s northeast defied the national authorities by pushing ahead with a referendum on independence.
Heavy-handed action by the police, who in many cases attempted to prevent voters from accessing the polling stations, resulted in violent demonstrations. In protest, a general strike was called across the region, which was in progress as conference delegates arrived in Barcelona and meant that taxis and public transport were in short supply.
So it was apt that the opening keynote sessions included an analysis of the geopolitical issues competing for treasurers’ attention. It began with an analysis of US policy under Donald Trump. Jamie Thompson, head of macro scenarios for Oxford Economics, the UK university’s business research arm, focused on the “trial and error presidency” that has so far characterised the Trump tenure of the White House. “Tax cuts, infrastructure spending, and less regulation are offset by massive uncertainty, trade protectionism and anti-immigration policies,” he noted.
While the sabre-rattling between the US and North Korea is alarming and threatens to slow global economic growth, Thompson believes that a bigger concern is Trump’s determination to push ahead with trade tariffs against China and Mexico and also the likelihood that the Federal Reserve will have to reverse its policy of small but steady increases in interest rates over the past two years.
In response to this scenario, Naomi Holland, assistant treasurer at Intel Corporation Ireland, suggests that corporate treasurers should take the opportunity to assess their company’s cash structures and engage with their CEO and the board on the repatriation of cash. The options to be considered include shareholder dividends and share buybacks. Alternative strategies, such as Dynamic Discounting by C2FO, are also gaining significant ground with treasurers gaining high, risk free yield on cash while also putting trapped cash to work.
Until Spain’s constitutional crisis blew up, the picture was looking a little brighter in the Eurozone, which, following a near-death experience in 2012, is “now out of the emergency room even if not quite restored to robust health”, according to Erik Berglof, professor and director of the Institute of Global Affairs at the London School of Economics (LSE).
European Central Bank president Mario Draghi has achieved some success in meeting his four goals of restoring faith in the Eurozone; reversing the region’s high unemployment and output declines; reducing debt levels; and resolving the Eurozone project’s design flaws.
Berglof is optimistic for further progress over the next 20 years, but this won’t prevent a further financial crisis occurring before then. “Draghi will go down as the Eurozone’s saviour, so let’s hope that his successor is equally worth,” he says.
Holland urges treasurers to be ready to respond if any Eurozone member countries encounter fresh problems. “Stay focused on the possibility of business disruption, including any opportunities that arise,” she recommends. “For example, some M&A deals may become attractively priced.”
She also believes that current conditions and the near-term outlook for inflation make it an opportune moment for treasury departments both to approach the market for debt as well as pay off existing debt. US inflation has held at around 2% in recent years and near zero in the Eurozone. At the same time, the traditional link between inflation and labour has weakened, undermining the assumption of the Phillips curve that a tightening jobs market pushes prices higher.
The five-year inflation-linked swap rate also shows little prospect of any major uptick in inflation over the near term, so central banks are less inclined to tighten monetary policy. Future interest rate rises will be slow and gradual, as will the tapering off of quantitative easing (QE) policies introduced to kick-start economic growth.
C2FO’s Colin Sharp, senior vice president for Europe, the Middle East and Africa, agrees that talk by the authorities aimed at nudging interest rates higher is largely rhetoric with little evidence of action to back it up. “The challenges created for treasury by the low/negative interest rate environment aren’t about to go away anytime soon,” he suggests.
“Banks still don’t want their deposits and increasingly the company’s investors are pushing for evidence that cash is being used effectively but not directed towards higher-risk assets. Yet there are now ways in which they can access higher yield, while still retaining a fairly conservative policy towards risk.”
Inevitably, the conference turned its attention to Brexit and the slow progress made so far on determining the terms on which the UK will exit the European Union in March 2019.
Daniel Franklin, executive editor of The Economist and editor of ‘The World in 2018’, the new edition of the magazine’s annual outlook, notes that optimists contend that the UK economy has held up well since the referendum result. Despite the ongoing political brinkmanship, companies can probably look forward to divorce deal being hammered out before the end of 2018. Moreover, even in the worst-case scenario of no deal being achieved the resulting damage will be short-term and limited.
The more pessimistic analysts point to the UK’s recent slippage down the global growth league and believe a further deterioration is inevitable. They see corporate investment plans being delayed or scrapped entirely and the prospect of recession. Theresa May’s disastrous decision to hold a snap election last June means that the current minority government could fall at any time, replaced by an anti-capitalist administration headed by Jeremy Corbyn. Add to this the possible inability to reach a deal, which would see the UK crashing out of the EU with disastrous consequences.
Franklin himself expects a deal will be reached, albeit only at the eleventh hour, with a transitional agreement that gives the UK a breathing space of at least two more years. However, in each potential scenario it will be difficult to manage and contingency plans are essential; hence the plans by many banks and insurers to transfer much of their London-based business to alternative locations, such as Dublin and Frankfurt. “Sector after sector will need to review the fine print in their contracts,” he warns. “Talented individuals also face hard decisions on where they live and work, whether this continues to be London or a different city.”
As recent events have proved, civil unrest and breakaway republics are phenomena no longer confined to the world’s newer economies. Philip Worman, managing director of business management consultancy GPW, reports that trillions are now being invested in emerging market regions, where a recovering oil price is helping commodity exporters and a weaker US dollar has boosted currency bonds. Both the Russian rouble and the Nigerian naira have been strong performers this year.
Against this, countries flashing warning signs include Turkey, where GDP is currently rising at an annual rate of 5% but which is fast becoming a one-man state, and South Africa, suffering its second recession within five years as accusations of corruption mount against president Zuma.
Holland recommends that corporate treasurers be at the centre of any expansion and growth plans that their company has for the emerging markets. “Ask about how easy it is to get your money in and out, who you partner with and whether it’s possible to implement all of your policies,” she says. “Be aware of how the best local partners are. Staff up and resource up if necessary.”
For Colin Sharp, EuroFinance 2017 underlined the fact that treasury’s task of maximising working capital and putting cash to work is more challenging than ever. Fortunately, the market has responded, helped by the pace of technological development and a wider range of options is now available to help meet those goals.