Pandemic prompts rethink of liquidity management
There is now a renewed push for systemic changes that were set in motion in the wake of the 2008 financial crisis, but which were eventually put on hold as access to funds improved amid one of the longest-running economic expansions on record.2
Ultimately, companies best placed to ride out the pandemic, as well as future crises, are those who follow three key tenets: 1 - Maintain a tight grip on cash positions – because cash is king; 2 - Build a war chest to help ride out long running crises; and 3 - Prioritise digitising treasury operations.
In 2009, financial institutions facing an existential crisis were largely unable to lend, triggering a massive liquidity crunch. Companies responded by pushing to centralise their liquidity and treasury operations. This helped them deploy precious cash more efficiently and reduced their cost of borrowing – a huge advantage at a time when credit was expensive and hard to come by.
This time around, the world’s financial system is flush with cash, as governments around the world have acted quickly to pump money into their economies to save jobs and businesses, and stimulate growth.3 However, as the pandemic still rages across most of the world and threatens to bring about another financial crisis,4 companies are struggling to plan for a future that remains uncertain. As a result, once again, cash is king.
Flight to quality
Crucially, there is growing caution from lenders. Amid declining profits5 and the challenge of higher bad debt provisions,6 banks are willing to sacrifice higher yields and limit their lending to companies with the best credit ratings. Such corporates typically operate in sectors that have done well during the pandemic, such as pharmaceuticals, technology and e-commerce.7 This has left hard-hit sectors – such as aviation, hospitality, real estate and commodities – facing a credit squeeze at a time when they greatly need funds to survive.
While banks focus on key client relationships, corporates, for their part, are consolidating their list of lenders to a few core banks based on their specific needs and on banks’ expertise to service their requirements. Many are requesting waivers, deferring large investments and planned capital expenditures, as they adopt a ‘wait-and-see’ stance, while using borrowed funds to build a war chest in an attempt to outlive a potentially extended economic downturn.
Renewed push for centralisation
There is also a growing push among companies to centralise their liquidity management operations, as demonstrated by the core themes of requests for proposals for cash management seen in the first half of 2020. Some of the key benefits of this move include greater visibility and efficient deployment of end-of-day cash positions across a company’s operations.
Some corporations are already reaping rewards from having centralised their cash management operations following the previous crisis. For instance, certain multinationals have used funds generated by their Asian operations – which have fared better than others thanks to the region's success in controlling the virus – to honour much-awaited dividend payouts.
However, the process of centralising liquidity operations comes with its share of challenges. Foremost among these is the lack of a uniform regulatory framework governing various Asian markets, which means dealing with the complexities of understanding and complying with a mosaic of laws. Then there is the human factor – head offices commonly find local executives reluctant to relinquish control of their domain and crucial cash flows.
The way forward
Clearly these are trying times. Both for companies coping with the need to plan for a near-opaque future, and for banks to balance the risks of lending in an uncertain and volatile environment while trying to remain profitable. This has long-term implications for managing liquidity risk and some changes are already under way.
One area that is being transformed is the business continuity planning (BCP) process. While long-term previously meant about two years down the road, BCP efforts now include treasurers attempting to gaze farther ahead in time and take into account crises that could potentially stretch on for several years affecting credit lines and capital expenditure plans.
Additionally, as companies struggle to balance the need to maintain liquidity while earning better yields with their idle cash in a low interest rate environment, treasurers may find that solving this particular conundrum will become a key performance indicator for them. Corporate treasuries that have not already done so will be prompted to seriously consider centralising their liquidity management operations and consolidating their banking partners by focusing on a panel of three or four core banks. This is also ideal from a risk management perspective – fewer accounts means less exposure to fraud.
Then comes the all-important digitalisation. With COVID-19 accelerating the world’s embrace of technology as remote working becomes mainstream, more processes will be forced to move online. As more corporates look to transition from legacy systems in a secure and seamless way, this will create a major opportunity for banks to offer digital solutions that help treasurers make informed decisions in real-time.