Treasury management in an unpredictable world

Global commerce is at a crossroads. Businesses must navigate an increasingly unpredictable trade environment – and while they can do little to sway the decisions of governments and central banks, they can and must adapt. Our conversations with business and finance leaders of international corporates indicate that they recognise this imperative, making agility and resilience core elements of their operating strategies.

At HSBC we believe there are three macro trends at work today which finance and treasury functions must position for; and these three trends surface the most in our discussions with our clients.

The first is the balance of trade and investment between countries and industries, shaped by the trade policies such as tariffs being implemented globally, the impact on activity in these trading corridors, and the accelerated growth in corridors such as China-ASEAN, China-Mexico and India-West.

Second is an elevated interest rate environment. Previous predictions of sustained rate cuts are being revised: instead, some jurisdictions may even see rates rising again to tackle potential inflation.

Third is increased volatility (e.g. FX) and counter party risk given the uncertainties around trade flows and divergent interest rate trajectories across currencies.

Each of these trends has consequences for treasurers.

Changing trade patterns will lead to altered supply chains and a need for new counterparties as companies not only amend their sourcing locations and product mix but also expand into newer markets. The good news is that corporates are not giving up on globalisation – in our HSBC survey¹ of over 1,100 customers, 96% still consider international expansion important, to facilitate growth, economies of scale, and risk diversification. Managing these supply chain shifts will be increasingly important.

A higher-for-longer rates environment will raise external financing costs, while the expected volatility in foreign exchange markets will impact foreign currency assets and liabilities. This will require careful identification of exposures and proactive risk mitigation. For companies conducting businesses internationally, volatility will also result in greater complexity in underlying cash flows.

All these influences will likely increase pressure on margins, and therefore return on investment. That will make cash a scarce strategic corporate resource – one that treasury functions will be expected to manage with skill and agility. It’s an expectation that invites decisive change.

Actionable Insights for treasury

While geopolitical and economic uncertainty is top of mind for corporates, they have swiftly focused on the trade policy implications to their business. In nearly all conversations with corporates, the importance of cash as a precious resource – and its appropriate management – surfaces repeatedly.

There are three prominent themes and corresponding actions to consider that are intrinsically linked to treasury.

The first theme is capital preservation of cash assets, which in turn means the de-risking of cash. Exposure to country risk, currency depreciation and counterparty¹ defaults is never more important to manage than during a period of uncertainty. At the same time, cash must be available at the right place and the right time for the smooth operation of the business.

It is useful for a treasurer to ask themself: if the board asked me to give them a view on the cash position for a global company as of today or even yesterday, could I do it? And do I only have optimal but not excess cash in markets that are becoming more volatile due to policy changes?

We also observed this in HSBC’s Corporate Risk Management survey² where nearly 55% of CFOs interviewed highlighted cash flow forecasting and monitoring as the most important aspect of their Treasury management and also the area to improve upon.

This is easier said than done, but there are practical steps a treasury can take, such as mitigating FX risk and enhancing cash visibility / forecasting through centralisation. This could mean using in-house bank structures or even changing invoicing currencies to rationalise FX management and centrally executing payments for group entities.

Doing so brings swift and tangible benefits. as one of the world’s largest building materials group found when it simplified its global banking infrastructure, spanning 170 entities in 19 countries, using HSBC’s Liquidity Management Portal. This helped the group optimise its fx, improved its efficiency and mitigated risks allowing them to operate more dynamically in real time.

The second theme is the opportunity cost of cash, especially in the context of inflation and higher-for-longer rates. Is cash working hard enough for the business? How do you mitigate the operating margin compressions caused by higher input costs with financial efficiency gains? We know this is a top-of-mind issue, as 58% of CFOs at HSBC’s surveyed² corporates said inflation-linked higher interest and its impact was among their top macro concerns.

Cash can be made to work harder by optimising liquidity across entity structures using automated cash concentration and freeing up trapped cash across jurisdictions or even calibrating treasury investment policies to optimize returns. Take the example of a Middle Eastern fertiliser producer that set about automating and centralising liquidity structures with HSBC’s assistance, moving liquidity away from local exposures to the central headquarters. It used cash concentration to minimise idle balances and trapped cash, lowered borrowing costs by promoting self-funding, and reduced dependency on borrowing and overdraft facilities.

The third theme is about the need to build more future-oriented treasuries: those that don’t just respond to the news of the hour, but can adopt an all-weather operating strategy, one built upon agility and the creation of long-term value. Such a treasury can withstand volatility – and will need to, as volatility is here to stay.

A future-oriented treasury is a digital treasury, using new tools to achieve global, real-time insight over cash positions and financial exposures. Forecasting by overlaying external variables and embedding AI tools helps a treasury function to understand what the precise liquidity and funding needs will be if a particular scenario plays out.

An increasingly vital function

This resilience and adaptability is doubly important as treasurers are playing an increasingly strategic role within their organisations. They are expected to report to boards and risk committees on risk management and operational readiness. Treasury teams are no longer just custodians of cash — they are enablers of business growth.

I would suggest all corporates re-assess the effectiveness of their group-wide liquidity management, remembering that now more than ever, cash is king: the lifeblood of any organisation at a time of volatility.

This is also the time to think long-term and build a digital treasury infrastructure designed to increase your circle of influence to manage volatility, now and in the future.

The best time to start a digital-led treasury transformation journey was five years ago: such a journey would have prepared corporates for today’s risk environment. But the second best time is now – and we are very happy to play a role in supporting the journey with our insights, innovative solutions and international capabilities.