Challenges mount for SA treasurers amid growing uncertainty and volatility in 2013

So far, 2013 is shaping up to be another challenging year for local treasurers as companies continue to face headwinds from volatile global markets and a lacklustre economic outlook. Ongoing regulatory changes are adding to the complexity of treasury mana

This was the scenario discussed today at the Nedgroup Investments Cash Solutions Treasurers Conference hosted in Johannesburg. Ian Ferguson, of Nedgroup Investments Cash Solutions, says the role of local treasurers, though still responsible for daily cash management duties, has now evolved from a processing unit to a strategic division accountable for improving the bottom line. The importance of the treasurer function to the overall health of corporates has been growing in recent years as cash flows fall under the spotlight and the treasurer function becomes more integrated with the rest of the business.

“In a volatile environment of uncertain interest rates, questionable credit and increased regulation, local treasurers need to become careful financial planners as well,” he says.

According to Ferguson, the global credit crunch is the single hottest topic of conversation among treasurers, and they view balancing credit, duration and yield as their greatest challenge in the short and long-term. Due to interest rates being the lowest they’ve been in forty years, Ferguson says another challenge for local treasurers is the temptation to chase yield by taking on what could turn out to be poor credit.

“However, this challenge is not simply defined by difficulty in borrowing and cash management, but by a permanent change in the way financial risk is identified and managed.”

Ferguson points to the impact of new regulations such as Basel III which continue to have a profound impact on the treasurer's role. “On top of this, the changing accounting rules under International Financial Reporting Standards (IFRS) have meant that treasurers must look at how they can best manage multi-currency flows.”

Ferguson adds that another key challenge local treasurers are tackling at the moment is the direction of interest rates. “It emerged last week that local money markets have done a “U” turn and started to price in the possibility of an interest rate hike later this year, given the negative effect that the weaker rand will have on inflation.

“Forward rate agreements are pricing in a 35% chance that interest rates will rise by half a percentage point by the end of this year, and are fully anticipating a hike of that amount by September next year. Having said this, we believe the interest rate hike is unlikely until late next year, unless the currency continues to depreciate dramatically.”

Ferguson says that given this level of uncertainty, treasurers face difficulties when deciding whether to fix yields or keep them floating in anticipation of higher rates.

“There is a lot of demand for interest bearing paper at the moment so corporates and banks are issuing at very low rates, often raising more than they need, but taking advantage of the low yields to secure cheap funding for a while.”

Uncertainty in the local political and economic arenas is also placing a severe strain on treasurers. “Many corporate treasurers appear to be building slightly larger cash reserves than usual as a buffer in case their circumstances suddenly change and profits dip or they find production stopped due to labour unrest. Many corporates have unexpectedly seen solid positive cash generation swing  to cash burn. This is difficult to pre-empt and creates a very difficult situation for the corporate treasurer. If they are not well prepared, treasurers are left with few options.”