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Rethinking Treasury: Risk management focus - from supply chains to FX
19 Plays4 years ago
Welcome to the third part of our ‘Rethinking Treasury’ miniseries. In this episode, our experts look at the risks and opportunities corporates are facing in the context of a changing trade and wider macroeconomic environment.
Holger Zeuner, Head of HSBC’s Corporate Sales Thought Leadership team for EMEA, is joined by Shanella Rajanayagam, HSBC Trade Economist, and Yasemin Artar, HSBC’s Head of Corporate Sales for Europe, to discuss risk management priorities for a post-pandemic world.
To read HSBC’s ‘Rethinking Treasury: The road ahead’ survey report in full, click here.
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Transcript
Introduction to HSBC Global Viewpoint
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
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Thank you for listening.
Overview of Rethinking Treasury Mini-Series
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Welcome to the Rethinking Treasury mini-series, where we analyze the changing role of corporate treasury today and the road ahead for corporate risk management.
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In June and July 2021, HSBC and Acuras partnered to survey CFOs and treasurers across the globe to find out how corporate risk management was evolving to meet the challenges of today and build resilience into the future.
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A full report titled Rethinking Treasury, The Road Ahead, covering the trends emerging from the survey, has been recently published.
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You can find a link to access this report in the podcast description.
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In this series, HSBC is bringing together key experts to discuss the main themes arising from the survey in more detail and discover just what drives VFOs and treasurers today and how those themes will impact their work tomorrow.
Episode Introduction with Holger Pfeiner
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Welcome to today's episode, where we're going to discuss both risks and opportunities from a changing trade and wider macroeconomic environment.
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Thanks for tuning in.
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My name is Holger Pfeiner.
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I'm the head of HSBC's Corporate Sales Thought Leadership Team for EMEA, and today I'll be talking with Shanela, Regina Yagam, and Yasmin Atar about how changing trade patterns are driving risk management decisions and how corporates can best prepare for a still challenging drive ahead.
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Before we start, let me quickly introduce our experts.
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Shanela joined HSBC in 2018 as a trade economist from the UK Treasury, where she worked on a range of trade policy issues related to Brexit.
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Prior to that, she had worked as an economist at the New Zealand Ministry of Foreign Affairs and Trade for four years.
Impact of Pandemic on Corporate Treasury
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Yasmin is HSBC's Head of Corporate Sales for Europe.
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She holds a Master in Business Economics, and her Master's thesis was themed, Why do Corporates Hatch?, which is something of a theme she has followed very closely over her career.
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Ladies, thanks a lot for your time today.
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Thank you for having me.
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It's a pleasure to be here, Holger.
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Thank you.
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Let's get started.
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We've clearly seen the pandemic environment leave a dent and in some cases completely throw over the evolution of treasury.
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Cash became king again in 2020 and it rains still last widely.
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As the supporting facts from our survey for the audience, 90% of CFOs said keeping sufficient cash buffers has become a more important treasury duty over the past three years.
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And 85% say the same for optimizing working capital.
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Yasmin, starting with you, from your conversations, do you see this as a lasting trend?
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Thanks, Holger.
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I think, you know, this is more of a temporary measure.
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We have seen during the course of COVID there has been ample cash.
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This is also supported by the relatively easy access of funding via the government schemes.
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Meanwhile, we also saw, on the other hand, a lot of the corporates delaying their investments due to the uncertainties created by COVID environment, which caused ample cash.
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In certain regions like Eurozone, there are penalties of keeping excess cash due to the negative rates environment.
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I think this is more of a temporary measure rather than lasting for a long period of time.
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Thank you, that's a very good point.
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Shanela, obviously also pandemic-related measures, they've driven that focus on liquidity, as Yasmin mentioned.
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But when looking at risk priorities today,
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CFOs pointed to commodity risk and supply chain risk as most frequently on top of the agenda now.
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What do you think are some of the reasons they have crept up?
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Well, Hauke, the COVID-19 pandemic has significantly disrupted trade and also supply chains.
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So over the past year, as many businesses would be familiar with, there have been a very strong demand for consumer goods from Western economies, but also movement restrictions affecting activities at ports.
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And so this has led to congestion at major ports around the world.
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There's been issues around the availability of shipping containers.
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and also air freight capacity remains limited due to the grounding of passenger aircraft.
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So as a result, many businesses are facing severe supply chain disruption.
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They're grappling with input shortages, particularly around semiconductors, and also with container freight rates surging.
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And really the big issue at the moment is that all of this is happening as businesses are in the midst of peak container shipping season.
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So as
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retailers try to get their orders in ahead of Christmas.
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So given the lay of the land at the moment, it is likely that shipping disruption will persist at least until the end of this year.
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And we expect freight rates to only start normalizing after Lunar New Year next year.
Role of Emerging Markets and Trade Dynamics
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And just very briefly, you mentioned commodity prices, and yes, commodity prices did rise quite strongly in the wake of COVID, but the global commodity price upswing has lost a bit of momentum recently.
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And this really reflects a range of factors, including slowing global growth as the Delta variant continues to spread,
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but also a slowdown in Chinese infrastructure and property investment.
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So there could be a bit of respite for businesses concerned about commodity price pressures.
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Thank you, Shanella, for that outlook.
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We're looking next into emerging markets, which are expected to provide a boost to business models.
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And it's also one of the strongest growth factors, which is coming out of our CFO survey.
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How does this square up with the vulnerability of supply chains you mentioned and the continued issue of protectionism in global trade?
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Shanela, maybe staying with you, how do you see terrorist threats on one hand and liberalization on the other developing?
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Which are some of the markets more favorable positioning for corporates to do business in?
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Well, emerging markets, especially emerging Asia and China, have really been a key driver of trade growth in the wake of the pandemic.
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That region in particular played a very important role in supplying consumer goods and also medical supplies.
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And actually the recent trade data shows that trade volumes in most emerging market regions,
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have actually rebounded to be well above their pre-pandemic levels, with the exception of Africa and the Middle East.
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So these economies have certainly played a key role in the trade recovery.
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But there is also a bit of a longer term story here for emerging markets because
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These economies beyond China do stand to benefit from ongoing supply chain reconfiguration.
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And this was something that was already happening even prior to COVID, but could certainly be accelerated in the wake of the pandemic.
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So as China continues to move up the value chain, it is increasingly outsourcing production.
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to other economies in the region, if we think about Vietnam, Bangladesh, Cambodia, to take advantage of lower labor costs over there.
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And then there's also the issue of US-China trade tensions.
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And really, the longer these US-China tariffs remain in place, the more likely it is that US businesses will look to alternative suppliers to circumvent these duties.
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And indeed, China has already lost some import market share in the US to other emerging Asian countries and to Mexico as well.
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However, barriers to trade and doing business like tariffs and red tape do still remain high in emerging markets.
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But having said that,
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These countries are taking steps to advance trade liberalisation, especially via new trade deals.
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And I'll just mention too, there's the Regional Comprehensive Economic Partnership deal in the Asia-Pacific, which is due to take effect next year, and also the African Continental Free Trade Area, which brings together about 54 African countries.
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And these new deals should help to open up some more trade opportunities.
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Great, thank you, Shanela.
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Yasmine, how do you see corporates take action towards that changing pattern?
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Yeah, I was about to chip in as well.
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So from our discussions with the corporate clients, as Shanela mentioned, the supply chain challenges, this is clearly leading the corporate clients to diversify,
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of their supply chain.
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So primarily from Asia into other regions as well, especially as highlighted before by Chanel around transportation and shipping costs dramatic increases.
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So it's not for certain sectors, especially like the retailers or so, it doesn't make sense
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for the Western clients to import certain products from Asia, then they are looking into diversifying to other regions, for example, like Turkey for Europe, for the retailers is becoming an increasingly popular area.
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So we will see more and more those changes and diversification in the supply chain.
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Thank you both.
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And it's also something which is backed by our data where more than 80% of
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I see most concerns that they've moved the supply chain closer to their customers in order to combat some of those challenges.
Inflation and Interest Rate Implications
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Let's move to interest rate next and inflation, which could be one of the clouds which is most frequently seen, especially by smaller companies, who might lack the bargaining power and who might lack the ability to offset potential higher costs.
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How much of an issue could this become for growth?
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Maybe, Chanel, I'm starting with you again.
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Yeah, sure.
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So supply chain challenges are clearly impacting prices for various consumer products across the world.
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As it stands, the conventional view at the moment is that inflation will be transitory, and that is our view too.
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This remains, but it is increasingly coming under strain.
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So it is clear that the transitory peak for inflation has indeed got higher, but also the period of transitory inflation has become persistent.
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And as our global economists have written about extensively, you know, goods prices are no longer well behaved.
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And although we have automation coming through, particularly in services, which could help to offset some of these effects of higher goods prices, it is clear that the idea of structurally low inflation is not necessarily guaranteed anymore.
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I will say, however, in Asia, producer prices are high, but the pass-through to consumer prices has been a bit more limited.
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So overall, the risks do remain, and certainly the longer supply chains remain disrupted, the more likely higher input costs may actually be passed on to consumers.
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Yasmin, how much do you have seen an adjustment yet on that outlook?
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Is there anything corporates are doing differently compared to interstate this nowadays than a couple of years back?
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I think we need to look into the regional variation.
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So the dynamics, inflation dynamics differ from region to region.
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The worries about inflation are a lot less in Asia compared to Latin America and EMEA is in between.
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So the same pattern could be seen in the monetary policy outlook as well with Latin American central banks being the most aggressive when it comes to rate hikes.
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Similarly, cost pressures on inflation are passed on to end consumer inflation a lot more visibly in Latin America compared to the rest.
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So there is a regional deviation and we can see it reflected in the corporate risk management policies as well.
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In general, corporates don't want to have uncertainty in their cash flows and they are nervous about interest rate rises.
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For example, with the Bank of England potential move of expected move of next year higher interest rates, we see a lot of the UK corporates looking into hedging those risks as well.
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Thank you for those interesting perspectives.
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So moving from interest rate risk to FX,
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which still seems to trouble a lot of corporates despite some improvements over the past couple
Evolution of Corporate FX Risk Management
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of years.
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So 57% of CFOs overall have said they have incurred lower earnings due to significantly and still unhedge FxWiz in the past two years, which is just a tad lower than the 70% who said the same in our initial survey in 2018.
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Yasmin, we learned from your study time on, you've developed or observed that behavior closely, but how are corporates managing this risk today?
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And which changes have you observed, Yasmin?
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Even though, despite the reduction in the survey, like from 70% to 57% in the responses, I think, you know, it's still on top of the agenda of all of the corporates.
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We've seen the corporates have been extending the tenors,
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They are incorporating more flexibility.
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So their main focus has been hedging the operating cash flow.
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And also COVID has a significant impact on the conventional risk management strategies as well.
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So a lot of the corporate we have seen and we have talked to, they have been reviewing their treasury policies and making adjustments according to new era that we are going through at the moment.
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And also another point that we have been discussing around the supply chain issues and the challenges that also made a change and they have been adapting or incorporating different effects exposures into their treasury policies with the chain in their supply chain.
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Thank you.
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And probably let me stay with you for the next question as well.
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We're looking into largest areas for improvement.
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CFOs stated they want to see their treasury increase knowledge on regulation, tax, and hedge accounting predominantly, whereas treasurers prefer to focus further on digitization projects and optimizing cash flow forecasts.
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Do you see a problem for such contrast between perspectives, and how can both roles better align on risk management?
Treasurers vs. CFOs: Focus and Perspectives
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I think it's normal to have different viewpoints.
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I think this is something that should be expected as well.
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The treasuries are primarily concentrating on the risk management side and how to adapt their treasury policies into evolving market environment as well as the challenges where the CFOs are primarily focused on the bigger pictures.
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One of the other things that's on the focus of the CFOs recently is the sustainability agenda as well.
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So overall, this is quite expected from where they are looking at things.
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Okay, thank you.
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And Shanella, moving back to you, digitization came out as having entered finance departments on a very broad basis.
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And this trend obviously is even more pronounced in the underlying business, where the industry 4.0 revolution is still in place.
Digital Transformation in Trade and Manufacturing
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Looking ahead, what do you see as a main future impact of technology, especially on trade?
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Is 5G going to be the next wave corporates should be thinking about?
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Yeah, sure.
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So digital technologies are certainly transforming how goods and services are not only produced, but also how they are traded across borders.
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And 5G will have an important role to play in that as well.
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So compared to what we have currently, 5G does offer faster connectivity, it offers lower latency, and also greater bandwidth.
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And I think the key benefit of 5G is that it will be used as a facilitator to enable other technologies.
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So if we think about artificial intelligence, about augmented reality, virtual reality, and also the internet of things, and these types of technologies can be applied across various sectors.
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So for example, in retail, it could help to facilitate more immersive consumer shopping experiences.
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You know, consumers can actually talk to a
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a human avatar with artificial intelligence to help guide them through their shopping journey.
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In ports, for example, 5G should help to support the rollout of Internet of Things technologies and also enable traders to remotely monitor their cargoes.
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So the applications are almost endless across various manufacturing industries, but also in services too.
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And so it does offer these compelling benefits to manufacturers.
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It should help to improve efficiency and also help them see some productivity gains.
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Thank you.
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That's really interesting.
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And we probably could continue to talk for quite a while about some of the findings and how that relates with the wider economic background and trends you've been both observing.
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But as we already approach the end of our podcast time, one final question.
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What do you think that corporate should be focused on when balancing between still present risk on one end and opportunities on the other?
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Yes, sure.
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So I think corporates should focus on digitization and diversification.
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So with digitization, you know, we already spoke about 5G, but businesses would really do well to embrace the next wave of digital technologies.
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So we have AI, Internet of Things, blockchain, all of these technologies could help businesses enhance their value proposition.
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They could better cater to the needs of their customers.
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and also better manage inventories and trade more easily.
Strategic Advice on Digitization and Diversification
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And then when it comes to diversification, I think if the pandemic has taught us one thing, it's the importance of spreading risk and that really applies to trade as well.
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So looking for new ways to trade your product, looking for new market opportunities and also thinking about diversifying suppliers to the extent that that's possible.
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Thank you both so much for your time today and your keen insights into risk management.
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We all at HSBC look very much forward to support your organization's journey with our expertise.
Conclusion and Resources from HSBC
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Thank you for tuning into this episode of Rethinking Treasury.
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If you're interested in learning more about the 2021 Corporate Treasury Risk Management Survey, click the link in the podcast description or talk to your HSBC representative.
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Thank you for listening today.
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This has been HSBC Global Viewpoint, Banking and Markets.
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For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.