AS THE world wrestles with geopolitical tensions, Covid-19, high inflation, rising interest rates and soaring energy prices, corporate treasurers must grapple with multiple uncertainties and prepare for rapid changes in the way they manage their business.
Inflation that is at a 40-year high is forcing the US Federal Reserve to raise interest rates. Chairman Jerome Powell has signalled a series of increases this year to contain the impact of continued supply chain pressure and a tight labour market on a rebounding economy fuelled by a glut of liquidity from years of fiscal stimulus programmes.
A surfeit of liquidity - but geopolitical tensions mean inflation expectations will likely rise despite rate hikes
During the pandemic, many corporate treasurers built up a war chest of liquidity by borrowing from banks or accessing capital markets. This was desirable while the future was uncertain: expansion plans including capital expenditure were put on hold and cash cushions would be useful as the future remained uncertain. Treasurers parked this liquidity as short-term deposits with banks - which witnessed large increases in their deposits portfolios.
This dynamic has now been turned on its head. Rising interest rates mean corporates will be charged more for credit, and inflation is adding to the opportunity cost of holding cash. Companies must find a more productive use for their cash - either by repaying loans, reinvesting in their businesses through capital expenditure or acquisitions, or increase shareholder value through share buybacks and dividend payouts. At the same time, treasurers must also reckon with an ongoing pandemic, rising costs of raw materials and energy, that is, increasing working capital costs - and an uncertain outlook for the global economy.
Broadly speaking, treasurers manage cash deposits for 2 purposes. The first is operational: the liquidity required to maintain the day-to-day operations of the business. They must rely on strong banking relationships that are important in making their operations as resilient as possible, optimising working capital and limiting unnecessary credit costs. Banks are also motivated to work with cash management clients on a long-term basis, as stable, 'sticky' corporate deposits are beneficial for banks' own balance sheets and liquidity ratios. This gives banks an additional incentive to support long-term cash management clients with a full range of bank services, including solutions that can provide a cushion against increasing credit costs and volatility.
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Treasurers' second priority is to maximise the yield on excess non-operational deposits. In the current environment, there is a higher chance that the short-term liquid investments that were predictable winners last year may suddenly be less reliable, or less suitable for that purpose. The focus on centralisation and global visibility of cash that allowed treasurers to navigate the pandemic will continue to remain at the centre of treasury initiatives this year as well.
Cross-border matters - managing the local currency risk
Treasurers need to be mindful of foreign exchange risk. In Asia, where large multinational corporations (MNCs) have subsidiaries in numerous jurisdictions, fluctuations in interest rates affect the value of local currency deposits. At the outset of the pandemic, when the US Fed cut rates, all other central banks in the region followed suit. We now expect regional economies to follow in Fed's footsteps - to avoid a large depreciation of their local currencies vis-a-vis the dollar.
While many MNCs have their regional headquarters in Singapore or Hong Kong, their core manufacturing operations are spread across Asean, India, Korea, Taiwan, or China. This means that any increase in rates also has an impact on these local operations: their local borrowing requirements become more costly, which requires treasurers to plan ahead by seeking alternative sources of liquidity, for example, intercompany loans.
Banks in competition - greater focus on product innovation
This year, as companies put more of their excess liquidity to work, corporate deposits will become even more valuable for banks. A counterparty bank with a high credit rating is extremely attractive for large corporate treasuries. This is a key component of our ability to provide liquidity management services for corporate clients at attractive costs.
With corporations rapidly adopting ESG standards, strong sustainability credentials are increasingly a differentiator for both corporates and financial institutions. By offering sustainable deposit solutions that support our ability to fund green and sustainable projects, and our clients' KPIs, BNP Paribas is progressing in financing a carbon neutral economy by 2050.
The long view - relationship matters
Banks that aspire to become core liquidity providers for their customers will need to structure end-to-end solutions encompassing the suite of products and services from across the bank: cash management, FX, structured products, medium and long-term funding (including equity and debt capital markets), and in the existing environment, mergers and acquisitions.
Inflation, volatility and rising rates pose challenges for corporations, just as they do for financial institutions. In these circumstances, banks must take a holistic view of the corporate treasury relationship. Those that want to work with their clients for the long term will step up with useful and innovative solutions and price their services accordingly.
The writer is head of corporate deposits & liquidity, Apac, at BNP Paribas
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