Treasury and Trade Solutions

Opportunities in Uncertainty: Top Treasury Priorities for 2019

There is a sense of uncertainty over the global economic prospects as 2019 unfolds. The world economy has slowed and the possibility of recession seems to be increasing. While U.S. domestic demand remains strong despite uncertain global conditions, currency volatility remains quite calm across both developed and emerging markets.

The Economic Policy Uncertainty (EPU) Index has reached its highest level ever, driven in large part by a volatile geopolitical, regulatory, trade, and legislative environment. With the growing economic risks, treasury organizations should evaluate their priorities, identify opportunities and develop plans for what lies ahead this year, with sharper focus on the implications of geopolitical risk, the ongoing business model evolution, the move toward digital treasury and changes in financial services, the challenges of forecasting errors, and the continuous need to combat cyber threats.

Ron ChakravartiGlobal Head, Treasury Advisory and Market Management, Treasury and Trade Solutions, Citi

Kelvin AngAmericas Head, Treasury Advisory, Treasury and Trade Solutions, Citi

Duncan ColeEMEA Head, Treasury Advisory, Treasury and Trade Solutions, Citi

Andrea VanaraAsia Pacific Head, Treasury Advisory, Treasury and Trade Solutions, Citi

Treasury and Trade Solutions2

Dealing with geopolitical riskThere are few, if any, hedging strategies available when it comes to geopolitical risk. However, there is much that treasury can do to plan in anticipation of various scenarios, and execute accordingly. The crux to dealing with geopolitical risk is to plan early and understand the potential impact to treasury, its liquidity structure, intercompany loans, bank relationships, accounts and services. Three broad areas of geopolitical risk on the horizon are as follows:

• Brexit readiness — With no clarity over how Brexit will pan out, treasury should assess its degree of readiness. For example, it is important to be aware of any last minute legal entity set up due to licensing issues. This will necessitate dealing with capitalization and bank account openings, as well as ongoing funding.

• Trade tensions — Ongoing trade tensions between the U.S. and China are affecting global supply chains and prices of goods. Treasury needs to be aware of the potential change in sourcing raw materials, as this could impact payment terms, cash flows and currency exposure. It is best to review existing supply chain financing programs, future cash forecasts and working capital needs to help support these potential changes.

• Regional/Country instability — The results of numerous upcoming general elections around the world could potentially disrupt global trade flows, which may in turn impact cash flows, cost of doing business, as well as currency exposures.

Embracing business model evolution New business models are emerging, driven primarily by the globalization of supply chains, changes to major trade agreements, growth in computing power, storage and capacity, and the advent of newer digital technologies. Treasury should consider how they can adapt to the changes and how this will position themselves to compete with other treasuries.

Another aspect of business model change is M&A activity, which typically causes reorganization of the business. It is important to carefully assess the impact on cash flows, organizational structure, legal entity structure, global supply chain, treasury systems, and technology infrastructure. The proliferation of digital native businesses in recent years, with their nimble business model and technology roots crossing traditional industry boundaries, is also changing the business landscape.

Treasury efficiency can become a key differentiator in efforts to contribute to business competitiveness. To help achieve this efficiency, resource and talent planning should take into consideration a new set of skills to ensure treasury is nimble enough to change at the right pace to accompany new treasury requirements in an ever-changing environment.

Mobilizing to digital treasury Digitization and complete automation of treasury operations is fast becoming a reality with leading treasurers focusing on three broad themes to chart their digitization path:

• Implement machine learning to augment human capacity in nonlinear ways through the replacement of manual tasks with robotic process automation to offer machine-based recommendations and routing engines to execute against risk management policies.

Many paths may be adopted to achieve future digital treasury aspirations

Source: Citi Treasury Advisory Group.

Treasury journey steps

INTEGRATEDSecurely, horizontally connected across the internal and external ecosystem through API . . . and DLT?

SMARTData-powered, rules-based, machine-enhanced decision-making through AI

EFFICIENTLegacy journey to centralization structures for more efficient and effective liquidity and risk management

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Treasury efficiency can become a key differentiator in efforts to contribute to business competitiveness.

3Opportunities in Uncertainty: Top Treasury Priorities for 2019

• Deploy application programmable interfaces (APIs) to improve frictionless collaboration both internally to aggregate information across fractured technology ecosystems and externally with bank partners to initiate both transactional and maintenance activities.

• Seek partnerships or utilize alternate sourcing models and marketplaces either through embedding existing bank-provided capabilities within traditional enterprise resource planning (ERP) or integrated transportation management software (TMS) platforms or through a digitally-enabled treasury outsource services model based on digitized treasury policies and operating procedures, e.g., risk management services executed on behalf of companies through a next-generation multi-client ERP or TMS platform.

The path toward digital treasury can run alongside the traditional need to completely centralize cash and risk, which remains a long-term goal for many, and to achieve the high visibility required over the deployment of balance sheet resources and control over inflows and outflows at a time of heightened cyber threat.

Solving for forecasting errors The demand for cash forecasting accuracy has a strong correlation with the potential cost of inaccuracy. Forecasting errors across many industries are a primary source of earnings volatility and, to a certain extent, balance sheet deficiency. Accurate forecasting remains a challenge, and without new leading-edge technologies, companies today simply resort to reducing their hedge tenor and ratio. Although this may yield positive results under specific market conditions over time, it may not be all that effective.

Even though sophisticated forecasting models are being deployed these days, many corporates are still making intuitive guesses on inputs such as the forecasting error standard deviation. While it is conceivable that a futuristic real-time digital treasury may mitigate some of these concerns, there are two techniques that can truly free up treasury staff to focus on other priorities and mitigate ineffective hedging practices:

• Adopt machine-learning techniques that dynamically or automatically feed real-time and validated inputs, such as a forecast error variance measurement into a company’s risk management model embedded within its TMS.

• Utilize the data received to feed an automated rules-based hedging program based on company-specific risk thresholds and cost sensitivities.

Full automation can typically be achieved by combining both of these techniques, provided counterparty risk policies are digitally mapped alongside pre-agreed margins.

Preparing for cyber threats Cyber threats to business are escalating and associated damages are estimated to be in the hundreds of billions of dollars. Other than fraud loss, the impact is usually multi-fold including business disruption, reputational impact and loss of data. Highly sophisticated attacks are now commonplace and the assumption is that any organization can be breached at some point. Other than the wide availability of hack tools and softwares these days, the proliferation of smart devices and their connection to the internet exposes further weakness points to cyber criminals.

In response to this threat climate, regulations are forcing organizations to carefully assess security protocols or face heavy fines in the case of a breach. Treasury can help manage cyber security risk through a combination of developing a strategic and robust contingency plan, making a sound security protocol investment and adopting the following four-pronged approach:

• Take holistic approach — Strengthen with security best practices across the entire ecosystem.

• Layer security — Apply “protect, detect and respond” methodologies across people, processes and technology.

• Centralize for greater visibility, and the ability to simplify processes and standardize security and improve controls.

• Anticipate by staying ahead of the potential threats and by defining a comprehensive cyber security treasury policy.

There is much uncertainty on the horizon. Companies where the treasury team is effectively managing and mitigating the financial risks by collaboratively working as a true business partner and actively looking for opportunities to support the business will be best prepared to weather the storm. This is the real value of treasury.

In response to this threat climate, regulations are forcing organizations to carefully assess security protocols or face heavy fines in the case of a breach.

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