Managing Risk in an
Era of Disruption
The ongoing trade dispute between the U.S. and China has created uncertainty across financial markets and the global economy. Against this backdrop, risk management has been identified as a top priority over the next 12 months by CFOs and treasurers of leading companies in Asia Pacific, according to a recent survey conducted by J.P. Morgan.1
Treasurers - who serve as financial risk managers for their organizations - need to remain agile as they continue to support their firms' growth strategies while managing increasing market volatility as a result of shifting geopolitical and economic events. This article examines three key areas that treasurers will need to focus on as they navigate this era of disruption.
Managing Supply Chain Disruptions
Tariffs can significantly impact the supply and demand of goods, causing disruption to existing supply chain dynamics and buyer-supplier relationships as companies seek new, cost-effective measures for their businesses. According to the American Chamber of Commerce in China, 35 percent of American-based companies surveyed are considering shifting their production facilities in China to ASEAN countries such as Malaysia and Vietnam, to de-risk exposure to U.S.-China trade escalation and its impact on global supply chains.2 Others are exploring locking in fixed pricing in exchange for longer-term contracts with existing suppliers or finding alternative suppliers of raw materials from regions and markets not affected by trade tariffs.
U.S. companies considered delaying or cancelling investment decisions due to ongoing trade disputeSource: American Chamber of Commerce China survey, September 2018
Ensuring an efficient global liquidity structure that centralizes and automates liquidity across the entire organization can help treasurers better manage disruptions. A multicurrency notional structure that's integrated within a global cash pool will enable treasurers to centralize surplus balances across regions, subsidiaries and currencies into a single account, providing increased visibility and flexibility to optimally deploy cash to fund supply chain adjustments as needed. Cash flow analysis should also be conducted on an ongoing basis to understand the organization's operating requirements and working capital needs. This will allow treasurers to determine the optimal level of cash for the group and build in cash buffers that evolve with supply chain changes.
Illustration: A global liquidity structure with flexible cash and pooling solutions
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Adopting Modular Solutions
Treasurers need to continue to plan and ensure their businesses are well-prepared regardless of market conditions. Managing FX risk remains key amid the volatile currency markets, particularly in the emerging markets (EMs) that have borne the brunt of the sell-off amid the U.S.-China tensions. The normalization of monetary policy in the U.S. and Europe is also expected to result in the further tightening of global liquidity, which could exacerbate FX volatility and capital outflows in the EMs that are dependent on foreign funding. Many corporates have opted for a conservative approach towards investment and are choosing to hold cash; hence treasury decisions on how to best deploy and optimize cash have become more important than ever.
Average depreciation of key emerging market currencies since the start of the trade disputeSource: J.P. Morgan Global Data Watch as of January 4, 2019
Adopting flexible solutions to centrally manage cash, liquidity and risk can help treasurers cope with prolonged periods of uncertainty. J.P. Morgan continues to invest in new technologies to deliver innovative solutions and support clients' evolving treasury management needs. Solutions such as Just-in-Time Funding can help minimize trapped cash by funding transactions with the right amount of cash as and when needed, while Cross-Currency sweeping allows treasurers to leverage their primary functional currency accounts to fund transactions in non-functional currencies and keep FX exposures to a minimum. Digital solutions like the Virtual Branch and Virtual Account Management (VAM) can also help treasurers further simplify their account structures and streamline payment processes to improve visibility and enhance efficiencies.
Building a Technology-Driven Treasury
With rising geopolitical uncertainties, and as treasurers increasingly take on broader strategic roles within their organizations, technology will become an important resource for treasury teams to deliver more with less.
For example, as markets fluctuate, treasurers may find it challenging to accurately capture FX exposures across business functions in a timely manner to effectively deploy hedging strategies and manage cash flows. Robotics process automation (RPA) can make a difference in this space by helping to efficiently consolidate short-term FX exposures across business functions, calculate variances in currency exposures against approved FX limits and compile market data such FX rates and forward points for exposure monitoring, all without manual intervention. For longer-term FX exposures, treasurers can look to predictive analytics to optimally forecast cash flows based on historical and forecast data, factoring in assumptions about future market conditions.
By extracting the full value of technologies to automate and standardize workflows, treasurers are then able to devote more focus on strategic objectives and support the organization's growth agenda during periods of uncertainty.
New Treasury Calls for New Skills
While finance practitioners recognize the importance of technology in their operations, embracing digitization remains a journey: 52 percent of global finance leaders surveyed by EY have indicated that their current teams lack the necessary skillsets and competencies to operate the more technology-driven teams of tomorrow.3
Treasurers need to focus on upskilling their teams by deepening existing business skills and developing new ones focused on embracing change and technological innovation.
Grow existing skills
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Think strategically. Anticipate market changes to stay relevant.
Understand key business drivers and situations to make better informed decisions.
Advance interpersonal skills, and develop social and emotional intelligence to better manage relationships.
Develop new skills
Get analytical. Translate analyses into actionable plans.
Embrace change. Get comfortable with shifting priorities.
Develop new ideas. Cultivate an innovative mindset.
To learn more, please contact the
Asia Pacific Treasury Solutions team
or your Treasury Services representative