From the March Special Report issue of Treasury & Risk magazine

The Year Ahead for Treasury: Promising Signs for 2014

The year ahead holds reasons for cautious optimism. Citi projects global GDP to accelerate to 3.3% in 2014. Compared to recent history, growth prospects have improved for advanced economies, while the reverse is true for many emerging markets. For treasurers, the task will be that of refining strategies to manage an increasingly diverse portfolio of currencies, funding needs, cash investments and commodity exposures against a setting of changing regulatory frameworks and market volatility.



Despite the relative slowdown in many emerging markets, given the continued shift in global demand, companies continue to look to these markets for an increasing share of top-line growth. Many are investing into an even broader array of countries, with regions such as Sub-Saharan Africa coming into focus. With more operating exposure to these markets, which often come with capital controls and other complexities, treasurers face greater challenges in funding and risk management. Trapped cash continues to grow.

Treasury departments are also putting more time and resources into regulatory compliance. Many key financial industry regulations — driven by Basel III, Dodd-Frank and EMIR — are still being finalized. Even with Basel III, the result of a globally coordinated effort, national requirements and phase-in periods vary greatly across countries. Meanwhile, the pricing and availability of banking services is adjusting as banks meet the regulations. And, proposals for changes in taxation may impact structures used by many multinationals. Treasurers will need to stay abreast of the changes as they occur and plan for the potential impacts.

Money market funds, used by many companies for investing short-term cash reserves, may be redesigned depending on revisions to regulations. A common thread between the SEC’s Proposed Rule on Money Market Fund Reform and the European Commission’s proposal for Regulation on Money Market Funds is the potential to shift the industry from money funds with stable (or constant) net asset value towards floating (or variable) net asset value.

Finally, in a Citi survey for corporates, a third of the respondents reported that they had a major treasury transformation project linked to technology initiatives. This is even though many companies have been investing for years to rationalize systems, with the treasury department one of many stakeholders.


Treasury Priorities

For many companies, treasury and banking practices vary greatly across globe, making it harder to manage a growing diversity of currencies and mismatches in liquidity sources and needs. Treasurers are focusing on getting consistent visibility and control of cash and on working with operating businesses to improve balance sheet efficiency.

Optimizing internal liquidity helps reduce dependence on external funding, deploys otherwise idle cash, and improves the quality of the balance sheet – all performance indicators for treasury departments. Changes in regulations and advances in banking technology allow companies to include subsidiaries in many more currencies and markets in global cash pools. Consequently, many companies are significantly extending how they manage global liquidity. Leading companies are also expanding structures such as In-House Bank (IHB) for the advantages these add in systematically deploying liquidity.

With top management focus on balance sheet efficiency, working capital improvement is increasingly on the core agenda of many treasurers. In Citi’s Treasury Diagnostics research program, between 2009 to 2013, the proportion of treasury departments involved in working capital management initiatives increased from 56% to 74% of respondents.  Treasurers are becoming catalysts for building cross-organizational understanding of the opportunity costs of poor working capital management and helping drive accountability for improving practices across the entire working capital chain. They are also actively engaging with the business to add value through practical approaches and solutions.

Regulatory changes in emerging economies are occurring rapidly and often require interpretation. While changes require added effort to ensure compliance, they may also create new opportunities. Given the importance of regulatory interpretation and change management, many treasury departments have established work streams with dedicated staffing, infrastructure and budget, rather than performing these on an ad hoc basis or relying largely on shared corporate resources. For example, proactive treasurers are assessing potential impacts of banking regulation and considering the implications for financing and bank relationship strategies.

Leading companies are using a variety of active strategies to reduce the build-up of trapped cash, including advanced structures around intercompany and third-party commercial flows, such as netting centers, reinvoicing centers and procurement centers. These require close coordination between treasury and tax, as well as active engagement with relationship banking partners to help identify new opportunities.

Many companies are also reassessing how to organize treasury functions most appropriately to align with the evolving needs of the business and the broader remit treasury is taking on. In an increasingly complex world, the treasury department needs to have a global organizational structure with centralized policy management, controls, processes, people and systems in place. Extending centralization structures such as In House Banks, noted earlier, also facilitates better management of liquidity and foreign exchange risk. However, “intelligent” centralization also accepts that globalization adds many intricacies in local financing, risk management and regulatory requirements. This makes a strong case for the evolution of treasury — with centralization and automation of routine processes to gain advantages of scale and control, while maintaining skilled resources on the ground, close to key growth markets, to better understand the business and provide the in-depth guidance for more optimal decisions.

Finally, investing in technology remains critical for risk visibility and control across an increasingly globalized business and treasury span of responsibility. Staying close to key enterprise-level technology projects makes it easier to influence change and get incremental resources.


Back to Normal?

Following several years of returning capital to shareholders, 2014 may mark CEOs turning more actively to both organic and inorganic growth strategies. For treasurers, this means being prepared: focusing on supporting growth strategies, while retaining the good practices strengthened in the years since the financial crisis, including improved governance, enhanced risk visibility and management, and tighter processes and controls. Equipped with upgraded infrastructure and resources, treasurers have the opportunity and rationale to work proactively to be a real catalyst for the success of the business.















Read the March Special Report on Liquidity & Cash Management.

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Fabio Della Malva

Americas Head, Treasury Advisory Group
Citi Treasury and Trade Solutions


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