Treasury and finance teams can better prepare for potential disruption and crises by codifying past lessons.
Over the last few years, treasuries have faced significant market and geopolitical shocks, including the onset of Covid, the war in Ukraine and extreme global financial market volatility. This year promises to be equally if not more challenging.
- Respondents to NeuGroup’s 2023 Treasurers’ Agenda Survey listed an economic downturn as their No. 1 risk this year. Financial market volatility was tied with political uncertainty for second place.
- On treasurers’ risk radar screens this year are an escalation in tensions between Taiwan and China, and political strife and currency devaluation in Nigeria, Peru, Chile, Brazil, India, South Africa, Venezuela and Turkey.
The value of preplanning. To prepare for trouble ahead, treasurers must leverage lessons learned in past crises and develop an action plan, so they can respond immediately and proactively to unfolding events. Over these past couple of years, NeuGroup has provided members with multiple forums to address their pressing challenges and benchmark and identify crisis management best practices.
- Examples include our popular Russia-Ukraine Crisis community (we often had over 100 members on these initially weekly, Monday-morning sessions); our Argentina Crisis community, as well as ongoing and targeted coverage of events as they unfolded through our flagship publication, NeuGroup Insights.
Crisis management learnings. The primary outcome from the various forms of peer exchange was the identification of key best practices in scenario planning and the development of early warning systems. Companies with significant investments in high-risk markets should review their exposures on a regular basis.
- According to one member, “It’s important to have a solid playbook that outlines scenario planning as well as an effective early warning system, which need to be updated by regions two-to-three times a year.”
- An effective early warning system should track indicators such as country credit ratings, credit default swap spreads, GDP, employment data, budget deficits, inflation rates and foreign currency reserves. The war in Ukraine introduced an added layer of risk, requiring careful monitoring of US and European sanctions.
- By monitoring these indicators and establishing lines of communication with decision-makers, treasurers can be alerted to potential trouble ahead and take necessary precautions.
What to look out for. An early warning system should take into consideration the following key questions:
- Country credit ratings: Has the sovereign been downgraded by the ratings agencies?
- Credit default swap spreads: Is the sovereign at risk of default?
- GDP: Are there extreme movements in either direction?
- Employment data: Are there volatile shifts in labor market data?
- Budget deficits: Does the sovereign have a fiscal policy with outlays that are not met by tax revenues?
- Inflation rates: Is inflation at the sovereign increasing at low rate on a monthly basis, or at a rate higher than earned income percentage for long and protracted periods?
- Interest rates: Are the rates steadily increasing, decreasing or are they highly volatile?
- Foreign currency reserves: Does the sovereign have the necessary foreign currency reserves for trade settlement?
In case of a crisis. Our extensive conversations with members revealed the following important steps treasury should take to protect the company’s assets and operations. For example:
- Establish and maintain clear lines of communication and decision-making processes with local operations and global decision-makers. Often, changes occur daily, and require an immediate action. The decision-making process should be announced by the CEO and should include a cross-functional crisis management team to ensure central coordination, communication and decisions.
- Develop information channels for fact-checking and quick updates; leverage relationships with banks and risk advisors as well as local experts to make sure you keep track of new developments.
- Connect with peers on a regular basis to source critical information and common approaches to solving emerging problems.
- Consolidate local cash and establish local banking relationships for short-term working capital. Existing banking partners may no longer be able to support or protect corporate funds.
- Maintain supply chain sustainability by ensuring continued supplier payments.
- Consider long-term funding options and cash repatriation options, e.g., dividends, intercompany loans or royalties.
- In extreme cases, assess the cost ramifications of exiting the market and consider different timing options.
- Incorporate operational changes into financial reporting systems (TMS, ERP) as well as the enterprise risk management framework.
- Build in monitoring mechanisms and automate alerts based on factors such as:
- Failed invoices
- Delayed banking payments
- Failed FX settlements
By following these steps, corporate treasurers can minimize the financial impact of a crisis and ensure business continuity.