The current landscape of heightened global volatility – brought on by escalating geopolitical crises, unusually high-interest rates in Western economies, and uncertain political, business and economic outlooks as more than half of the world goes to the polls this year amid greater financial, social and environmental stress – presents both challenges and opportunities for treasury risk management.
“Not only is treasury management becoming more pressured, but it is also becoming more and more important as the global environment becomes more dynamic and volatile. It is important to stay up to date with not only market developments but also dynamic solutions that can help financial controllers manage their risks more efficiently, says Bianca Botes, Director at foreign exchange and treasury experts Citadel Global.
SHIFTING GLOBAL RISKS IN 2024
Geopolitical risks, such as political instability, tensions, and military conflicts, affect the global economy directly and indirectly through financial, trade, and commodity price channels. “This necessitates treasurers to manage these risks and shore up institutions that promote stability,” explains Botes. Elevated interest rates are also significantly impacting cash flows and treasury risk levels, requiring treasurers to assess the potential costs of specific scenarios and recommend appropriate actions.
“Treasurers play a crucial role in reducing exposure to financial threats brought on by uncertainty in the business and economic environment and subsequent market volatility, changes in interest rates, liquidity risk, and credit infrastructure. Risk management has evolved along with the business model changes, from individual, transaction-based decisions based on a combination of judgment and underwriting criteria to looking at aggregated portfolios of risk enabled by more robust analytical tools,” she adds.
In the face of these new challenges, she recommends that treasurers focus on three solutions, namely, maximising working capital efficiency, harnessing the power of technology, and adopting new data-driven fundamentals. Data and technology can be especially useful for cash flow forecasting, structured debt repayments, investment hedging, liquidity planning, loss prevention, and the establishment of treasury policies, says Botes.
GAPS TO ADDRESS IN SOUTH AFRICA
Botes highlights that the Institute of Risk Management South Africa (IRMSA), in its 9th Annual Risk Report, emphasised the urgent need for strategic and comprehensive actions to address South Africa’s escalating polycrisis. The business environment has changed because of the COVID pandemic, new regulations and escalating cyber risks triggered by the pandemic.
“In response to these challenges, South African companies should prioritise establishing a strategic risk intelligence capability to support decision-making. The days of doing business without highly strategic risk management are over,” Botes emphasises.
Botes also believes an unexploited opportunity in South Africa is the adoption of open banking. Open banking is enabled when banks use application programming interfaces (APIs) to exchange client data with independent financial service providers, enhancing innovation, product choice and customer experience.
Regulations established by the South African Reserve Bank oblige banks to make their systems accessible to third parties to stimulate innovation and competition in the financial services industry. However, there are several reasons why South Africa might not fully embrace open banking, including security concerns, regulatory and technical challenges, and consumer awareness and comprehension of the terms and conditions they may be asked to sign.
TECHNOLOGY TO THE RESCUE
Technology, particularly Artificial Intelligence (AI) and Machine Learning (ML), has significantly improved treasury risk management in several ways, says Botes. It has improved; efficiencies, the accuracy of complex data, the identification of data anomalies, and movements in customer and competitor behaviour.
“By analysing large datasets in real-time, businesses can make informed choices based on current and relevant information. For instance, market segmentation becomes easier, predictive analytics can help forecast trends, and technology can alert treasurers to real-time events such as exchange rate fluctuations. All of these benefits help businesses manage their cash flow better, and back-test and stress test for risks, as required by global prudential regulators,” Botes explains.
LOOKING TO MORE MULTI-FACETED TREASURY SOLUTIONS
In addition to using the best available supportive technology, Botes believes South African and global companies and their treasurers need to make a habit of implementing regular internal and external risk assessments to uncover unseen threats. They also need to pre-plan for risk responses, which could involve diversification, hedging, adaptive planning, and stress testing, and establish clear, well-managed ongoing risk management objectives.
“Effective risk management in volatile markets demands a combination of strategic foresight, adaptability, and proactive decision-making,” she says.
HOW TREASURY ADMINISTRATION IS CHANGING IN 2024
Botes points out that in highly volatile periods, like the one we are currently experiencing with its polycrises, it’s more important than ever to make efficient working capital management a top priority. External volatility causes financial stress for businesses. Companies need an organisation-wide approach that embeds the cost of working capital into decisions that impact financial and operational processes.
Botes concludes: “Treasurers should; embrace a digitally driven, data-first future, insist on their companies adopting measurable key performance indicators (KPIs) that are relevant and data-driven, and lastly get back to basics with fundamental approaches to control risk. Treasurers can close gaps in full visibility and accessibility of cash by leveraging readily available technology, and that can mean the difference between businesses surviving or not surviving the current volatilities in the global and local markets.”