Taming the Triple Threat

Macro Risk Management in 2022

The first quarter of 2022 has already presented numerous challenges on both geopolitical and macroeconomic fronts – from the ongoing pandemic to inflation risk, trade disruptions, and huge political tensions. TMI invites three experts from NatWest to explain why risk management needn’t be a Herculean task in the year ahead. They outline how treasurers can successfully navigate unexpected twists and turns, and prepare their organisation for growth.

Rather like a modern-day Cerberus, the current risk landscape is a dynamic, triple-headed threat. Treasurers are grappling with three interwoven layers of macro challenges: first, familiar risks such as geopolitical tensions (although new aspects are emerging); second, risks from the past that are experiencing a resurgence, such as inflation; and third, relatively ‘new’ risks, such as the Covid-19 health crisis and digital business models.

According to Conor Maher, Head of Transaction Banking Products, NatWest, “the biggest challenge for treasurers is to continue to navigate these risks in parallel. In other words, searching for an exit route from the pandemic-related struggles, while managing the future risk landscape in terms of interest and inflation rates, as well as the economic impact of tensions in Eastern Europe and elsewhere, alongside new technologies and best practices”.

With this ambitious goal in mind, here are six steps for treasurers to consider when drawing up a risk roadmap for 2022:

1. Getting to grips with global threats

When it comes to assessing the impact of geopolitical instability, Marcus Wright, Senior Economist, NatWest, cuts straight to the chase. “The tensions in Eastern Europe are an enormous concern. Aside from the horrendous human and political impacts of Russia invading Ukraine, which cannot be underestimated, there are inevitable economic consequences too. As we are already hearing, there will likely be further adverse impacts on energy prices, with a 45-50% increase anticipated by April 2022.” From there, Wright believes that additional hikes are expected, although these will likely be more contained in comparison – but further geopolitical upheaval could change that, so hedging strategies will need to be more on point than ever. 

The Ukraine crisis is also causing significant currency volatility, against a backdrop of already choppy markets in early 2022. Inflation is rearing its head in many Western economies, and interest rates are being raised by central banks as a means to keep that inflation in check. Economist turned banker, Mirka Skrzypczak, Head of Working Capital & Trade Products, NatWest, notes that today’s unprecedented level of volatility adds an extra dimension of complexity to managing these risks from a treasury perspective.

“There is no immediate end in sight for this volatility, which means that avenues for coping with it are somewhat limited. Treasurers may therefore wish to continue to build their cash reserves – and we’re seeing that among a number of our corporate clients, as they want to ensure they have a liquidity backstop,” she says. “While we’re no longer in the same challenging liquidity environment that we were two years ago, there are so many variables impacting liquidity that corporates are still looking for safety, and we expect that to continue well into 2022,” she predicts.

The complex macro landscape is also translating into a more challenging forecasting environment for treasury teams. Maher elaborates: “The traditional data points corporates use to help inform their forecasts, such as contraction in GDP, are much less clear than they used to be. There are so many forces impacting the FX market, supply chains, and buying behaviour too, making it much harder to predict the full impact of macro risks.” As such, technologies such as AI and ML may well assist the treasurer in their forward planning, since they provide the ability to conduct scenario analysis at the touch of a button.

Picking up on Maher’s mention of the supply chain, Wright highlights the ongoing tension between the US and China over the future of Taiwan as another significant risk concern. “Peace in the Taiwan Strait is key to the smooth supply of semiconductors, since the major manufacturers of these chips are based there.” Key facilitators of digitisation, semiconductors are essential to manufacturing everything from cars to smartphones, and are critical in the roll-out of Industry 4.0 – so their importance to global progress cannot be overstated. And, in Wright’s view, the tensions in Taiwan are unlikely to be resolved swiftly, so the process of building resilience into corporate supply chains must continue.

Maher agrees, adding that diversification of supply chains will be critical in order to avoid a single point of failure. Visibility of suppliers, and drilling down beyond direct suppliers, to ensure there are no blind spots will therefore be essential – as will supporting all tiers of suppliers with finance where needed.

Attaining this level of supply chain insight and stability could also assist UK exporters stuck in the shadow of Brexit. Wright explains: “Over the past 12 months, UK exporters have had to deal with additional paperwork and costs as a result of leaving the EU. On top of that, they have felt the squeeze of higher global shipping costs, staff shortages at ports due to the pandemic, and difficulties getting warehouse space. Now more than ever, robust supplier relationships are vital for avoiding additional bottlenecks.”

2. Leveraging pandemic momentum

For many, the risks of the pandemic receded somewhat during the first quarter of 2022, certainly in comparison with 2020. Wright explains: “Vaccinations have significantly reduced hospitalisations and deaths. Anti-viral treatments are also coming through strongly now. Together, these medical advances – and greater global access to them – will make a sizeable difference to the potential path from here, especially in the event of further Covid-19 variants.”

From an economic perspective, this means that the recovery “will hopefully get a good run, without too many additional pandemic roadblocks,” he notes. That said, the risks cannot be entirely discounted in terms of future variants and the need for restrictions such as lockdowns. Nevertheless, businesses have become increasingly adept at pivoting to incorporate restrictions into their day-to-day activities. So, as much as the pandemic remains firmly on the risk radar, Wright believes the threat is becoming more manageable with time.

Maher also sees the pandemic as a catalyst for treasurers to embrace the power of e-commerce and work with their internal stakeholders to deliver that. “Treasury has a central role in putting in place key components of a successful e-commerce strategy, particularly around collections. As such, there are new opportunities for cross-functional collaboration in 2022, for example with IT to prioritise the payment/collection methods that work best for treasury [resulting in the fastest and/or most cost-efficient collection of funds] at the online checkout,” he notes.

3. Exploring new payment rails and technologies

On the topic of collection methods, another risk to be aware of in 2022 is the growing obsolescence of traditional payment methodologies, and certain treasury technologies. Says Maher: “The way the payments industry has evolved over the past few years is phenomenal. If, as a treasurer, you’re still using the same payment and collection methods as you were three years ago, it’s time to review that and establish whether both time and money is being wasted by using those old rails – and old tech systems to boot.”

Skrzypczak quips that it is practically a “cardinal sin” to not have recently reviewed payment/collection methods. Even in the past 18 months, this area has moved on significantly, thanks to the advent of open banking and the rise of APIs, she says. Take, for example, and NatWest’s Payit™ solution, which leverages open banking rails to provide treasurers with a new means of sending and receiving online payments.

Payments are settled in real time, which improves cash flow and visibility over cash. This award-winning end-to-end solution simplifies the merchant’s financial supply chain and saves on a variety of costs, including interchange fees. In addition, customers do not need to enter their card details or register for Payit™, so the merchant also has no need to store customer billing data, which reduces the data protection burden and mitigates the risk of fraud.

Maher picks up the story from here. “For collections, an open API enables customers to pay direct from their bank account – with any bank, not just NatWest. Within Payit™, there is also a seamless refund solution that doesn’t require the corporate to know or store customer account information.”

He continues: “This is just one example in a world where the payments space is arguably evolving faster than ever before. But to negate the risk of being left behind, or being bogged down by inefficient, costly processes that are also open to fraud, treasurers should make time in their busy agendas to evaluate which payment rails could best support their future focus, and ultimately deliver the greatest value for the company and the best experience for customers.”

4. Maintaining margins and embracing ESG

As the cost of global goods and services increases, treasury and the wider finance team have an opportunity to help the organisation maintain its margins. Skrzypczak elaborates: “If there is no hedging room in your margin, it can be tempting to push price increases through to customers in order to maintain that margin. But this is a short-sighted strategy and has it limits. I would therefore expect to see treasurers working with the business to identify more creative ways to maintain margins.”

The starting point here is, of course, to have a firm handle on the margin itself in light of price increases, and identify the headroom with precision. Then, it is time to consider value-added factors that customers increasingly deem important – one of which is ESG. “Behavioural economics are starting to play a significant role in society, especially since the pandemic,” she explains. “More and more consumers, and even businesses, are making conscious choices that are not necessarily entirely price-related, but also ESG-driven. They want to buy from brands that care about the future of people and the planet, not just profits.”

With this emerging dynamic, Skrzypczak believes treasurers now have the latitude to think about USPs linked to sustainability. “This could relate to where and how products are sourced, and could involve an SCF [supply chain finance] programme that offers financial incentives to suppliers that meet certain sustainability criteria, for example.” Close collaboration with both procurement, sales, and relationship banks, can help to bring such a programme to fruition, and ensure it answers the needs of buyers, suppliers, and the company itself.

That’s not to say this is an easy task, she cautions. Supply chains are complex. It can take time to untangle them, especially from an ESG perspective. “But if your company doesn’t do this, one of your rivals will get there first and reap the benefits – this is not the time to sit back and wait. Agility is essential, especially where sustainability is concerned,” she suggests.

And for those who are still sceptical about ESG, she sounds a word of warning: “At NatWest, we see sustainability as a cornerstone of our future – it’s a massively important part of our future vision. Corporates that do not share similar values will find their access to cost-effective finance is reduced in the coming years, across the entire financial industry. In 2022, ESG is not optional, it’s an essential part of modern business.”

5. Preparing for the future of work

Just as buying behaviours have changed as a result of the pandemic, so too have working habits and desires. As Maher observes: “The Great Resignation has seen significant voluntary withdrawal from the workforce, as people rethink their own work/life priorities and balance. Technology is also influencing how people work – not just through Zoom and so on, but in terms of the evolving skill set required to bring value in a business world that is dogged by complexity.”

As a result, treasury leaders may wish to start thinking about the capabilities that their teams need now and those they need to build in to reflect the requirements of the future. “While many of the fundamental capabilities will persist, the ability to leverage intelligent technologies to model scenarios and present meaningful information to the board will be vital,” believes Maher. Treasurers also need to have a mindset that is open to change, he says, being curious about everything from APIs to DLT and the metaverse.

“Ultimately, as a treasury leader, it is about being ready to put your company in a position of strength by embracing the digital world – and that requires much more than a strong balance sheet,” Maher observes.

6. Securing additional value from partnerships

In 2022, it is clear (see points 2 and 4) that internal collaboration will be an everyday part of the treasurer’s role, with silos being broken down left, right and centre. External partnerships will also be increasingly important in securing the extra mile of value to enable the organisation to stand out from the crowd, says Skrzypczak.

“In the world of finance, collaboration within the ecosystem is a basic ingredient of driving progress. Take the introduction of Apple Pay as an example. It’s a fantastic invention in its own right, but it wouldn’t have worked without the banks and merchants adopting it. No one would want to use it if it could be used only in an Apple shop! NatWest was the first bank in the UK to offer Apple Pay and that opened up an innovative payment/collections channel that enabled our clients to offer something special to their end customers,” she explains.

Close co-operation between corporates and banks can also result in faster adoption of innovations through sharing of expertise and sector specialisms from projects with other corporates, or indeed other banks and fintechs, believes Maher. “Broadening our collective thinking and knowledge is how we move the industry forward in ways that benefit everyone.”

Indeed, he encourages treasurers to challenge their banks to be more collaborative and innovative in 2022 and beyond. “Don’t just settle for what’s on offer – seek to push the boundaries of the possible. While all of this global change and macro instability is not the treasurer’s friend in terms of planning, it is an opportunity for the treasury team to really demonstrate its worth to the organisation.”