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Cash & Liquidity Management

From Obscurity to Competitive Advantage While objectives have not necessarily changed but merely increased in importance for the respective company since the crisis, treasury has taken on a more prominent role, and its status in the company increasingly recognised.

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From Obscurity to Competitive Advantage

by Dr Martin Thomas, Managing Director, Advisory Services, J.P. Morgan Treasury Services, EMEA

Liquidity became the watchword of treasurers following the global financial crisis. As liquidity became more constrained yet critical to business survival, the role of treasurers who take responsibility for liquidity management became more prominent. Similarly, while yield was for many, the top priority in their investment strategies, counterparty risk became a key issue as companies increasingly recognised that no counterparty is ’too big to fail’ and traditional means of measuring were proved to be inadequate.

Consequently, while objectives have not necessarily changed but merely increased in importance for the respective company since the crisis, treasury has taken on a more prominent role, and their status in the company increasingly recognised. This article looks at some of the factors that are influencing the breadth and complexity of treasury, and some of the ways in which treasurers are navigating through what is often unchartered territory.

A macroeconomic impact

In addition to the elevated role of treasury within many companies, macroeconomic changes continue to have a major impact on its activities. Increasing globalisation, for example, means that few companies, including small and medium enterprises, can afford to maintain a purely domestic focus, both for sourcing or consumer markets. This increases the complexity of treasury’s role, as liquidity, currency, counterparty and geopolitical risk become increasingly complex.

Some economists suggest that Korea is set to join what is rapidly becoming a small club of AAA credit rating countries within the next decade.

With China now the world’s largest exporter and the second largest importer, no company can ignore the opportunity that the country presents for accessing suppliers or customers. With increasing liberalisation of the reminbi (RMB) (see Simon Jones’ article in this Guide), the RMB will soon become a major trading currency. While this process is being closely controlled by the authorities in China, the direction of change is clear and decisive. Treasurers therefore need to consider the implications of a new trading currency on their imports and exports, and work with procurement and sales to design an appropriate and integrated sourcing, sales and financial management strategy. Companies that take early opportunity of RMB liberalisation have the opportunity to create competitive advantage by aligning RMB assets and liabilities and enhancing their ability to do business in China.

Likewise, foreign companies looking at opportunities in Brazil will find plenty of challenges along the way. Heavy regulation, complex tax rules, infrastructure issues and currency controls can create considerable barriers. Despite the challenges, the opportunities and growth potential of the region cannot be overlooked. The current regulatory requirements surrounding trade finance which are often seen as one of the main barriers could soon be relaxed and coupled with the efforts on the part of the Brazilian Government to allow the Brazilian real to become freely convertible, the appetite to further increase business with Latin America is set to grow. Again, without a synchronised strategy between procurement, sales and treasury, the full potential of the various opportunites the region might offer might not be realised.

The other half of the BRICs, Russia and India, are also seeing an incredible amount of focus and investment. In addition, despite being a developed country, South Korea has been growing at a speed comparable to Brazil. Some economists suggest that Korea is set to join what is rapidly becoming a small club of AAA credit rating countries within the next decade.

As procurement and sales in many multi national corporations will look to take advantage of these ’emerging’ opportunities, will the treasurer be equally optimistic while facing the challenges of managing an extensive cash portfolio that will require deeper risk mitigation against foreign exchange, trapped cash and a robust investment policy? 

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Dr Martin Thomas Article by
Dr Martin Thomas
Managing Director, Advisory Services, J.P. Morgan Treasury Services, EMEA

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