Perspectives for 2017: Creating optionality

Authors
	Ron Chakravarti Global Head, Treasury Advisory Group, Treasury and Trade Solutions, Citi
	Kelvin Ang  Americas Head, Treasury Advisory Group, Treasury and Trade Solutions, Citi

Uncertainties in the macroeconomic outlook, geopolitical trends, financial system regulation and moves in tax compliance create new challenges for treasury teams in planning ahead. Change is becoming a constant and Citi’s Treasury Advisory Group finds corporate treasury teams actively considering scenarios and assessing actions.

Citi projects global GDP growth to be slightly higher in 2017, at 2.8%, as growth picks up in emerging markets (EMs) and the US. With inflation likely to rise further over the next six to 12 months, the prospects for additional monetary easing by most major central banks are diminishing, with the US Fed expected to hike in end-2016. Based on a mix of expected fiscal easing, tax holiday and possible trade protectionism, Citi expects the dollar to strengthen further, about 6% to 7% against G10 currencies over six to 12 months.

The situation remains fluid – from the continuing conflict and displacement of people in the Middle East to the changing geopolitics of energy and new security developments in the South China Sea. Brexit and the US election result are causes and symptoms of the increase in uncertainty in even major markets.

In Citi’s view, geopolitical instability will be a feature of the landscape for the foreseeable future across EMs and industrialized economies, creating downside risks for the overall growth outlook. A consequence is that treasury centralization and evolution is now far more than an aspiration to be best in class and well-functioning; it is now becoming a real need in order to free capacity to face uncertainty, risk and market volatility.

Treasury teams are aware, painfully perhaps, that know­- your-customer and anti-money-laundering regulations have placed tighter controls on bank account and transaction management. Most are also broadly aware that Basel III-related regulation has reshaped banks’ capital and liquidity management.

What is not so well appreciated is that changes continue to ripple through the financial system. For example, recent Basel Committee proposals on bank leverage ratios and on capital assessment for loans to large corporates may have impacts on notional pooling, a popular cash management technique, and on the cost of bank credit lines. Any impacts will depend on the finalized rules and on what national regulators implement.

The larger point is that change is becoming a constant. Treasury teams need to maintain an ongoing dialogue with partners to prepare for what may be coming, including strategic implications for banking relationships.

Tax: keeping treasury busy

The US Treasury recently finalized rules under Section 385 and addressed “earning stripping” with the use of cross-border debt that could reduce US income taxes. Also, with the finalized rules, many forms of cash pooling and short-term debt utilized for working capital purposes have been excluded and timelines in many respect seem more manageable. Now, companies can take steps to comply along the new timelines in step with reviewing their cash pooling structures to more effectively harness and utilize their liquidity. 

Meanwhile, the OECD-led Base Erosion and Profit Shifting initiative is transitioning into implementation in many countries. Here, the chief goals are to improve cohesion of tax rules across countries, while ensuring greater transparency and compliance. As a consequence, some companies are changing trading models that drive where taxable income is generated. Since trading model changes may affect the company’s cash and funding needs, both in amount and where these arise, treasury teams will be kept busy. 

The view ahead: creating optionality

Treasurers may sometimes feel as if new challenges never cease to arrive. What is clear is they cannot lessen the drive to centralize treasury operations and automate processes. Doing so equips treasury teams to shift away from tactical or operational mode, creating capacity to manage the unexpected and to bring treasury’s unique perspectives to the business for greater value.

^{This article is for information purposes only and does not constitute legal or other advice. The information contained in this article is believed to be accurate, but Citi makes no representation or warranty with regard to the accuracy or completeness of any information contained herein. Citi is not liable for any consequences of any entity relying on this article.}