Treasury terra nova - the growing importance of treasurers to international trade flows

Feature | 14 September 2016

The position occupied by treasurers is too significant for them not to take a greater role in steering trade flow - they have a duty to rise to the global trade facilitation challenge,
reports Peter Williams

Treasurers across the globe are playing their part in keeping global trade moving. Using their skills and knowledge in areas such as risk management, foreign exchange, payment systems and trade instruments, they are making business happen.

But according to the World Trade Organization (WTO), treasurers and their companies have an uphill battle. In a report issued in July 2016, the WTO warned that countries should avoid erecting trade barriers and need to get trade moving again in order to address slow economic growth.

"In the current environment, a rise in trade restrictions is the last thing the global economy needs. This increase could have a further chilling effect on trade flows, with knock-on effects for economic growth and job creation," said WTO director general, Roberto Azevêdo, as the trade policy body's latest trade-related developments report was published.1

World trade prospects for 2016 remain uncertain according to the WTO. The most recent forecast suggested a volume growth of 2.8% in 2016, a rate unchanged from 2015, while according to the WTO, "the global economic environment remains challenging." Worries over world trade are focussed on unsettled global financial markets which prompted sharp movements in commodity prices and exchange rates.

Gary Slawther, corporate treasurer for Oman-based OCTAL Petrochemicals, says treasury professionals need to have awareness of the global economic moves and policies that have dominated over the last few years, as background to their corporations' risk management and their part in overall trade flows. "You have to look at issues such as globalisation; growth in the capacity of countries like China; how the West imports goods cheaply; debt; low interest rate policy; low productivity growth; labour market regulations; and how that fits into trade issues and funding issues that corporates face," he says.

FX, commodity and finance worries

For treasurers, warnings about global trade risks focus their work on foreign exchange policy, commodity risk management and sourcing the best deals on trade finance. This is especially true for emerging markets that are making up a larger share of revenue for many corporates. With larger revenues come greater risks, and these markets often have restricted or controlled currencies, meaning that emerging market volatility has a greater impact on results than before.

Peter Charles, an interim CFO and turnaround expert who has managed treasury operations for a range of businesses, including quoted international media companies, says that treasurers who add the most value have a strategic view as well as a highly functional one.

He explained, "Working cross border - whether that's in mergers and acquisitions or in driving operational business - always requires a multi-team approach. CFOs expect the treasury department to do the day-to-day work well, which is taken for granted. In an increasingly globalised world where companies are operating, treasurers should be adding more facilitating the trade deals so the CFO and board can be confident the transactions are efficiently executed."

Efficient execution is a must in making progress in cross border trade, given the political uncertainty and lack of confidence prompted by shocks to the world trade system, such as the vote by the UK to leave the European Union. A report in July 2016 by independent trade monitor, Global Trade Alert,2 reported: "Since January 2015 world trade volumes have plateaued, which is unusual as pauses in trade growth are typically associated with global recessions. A global trade plateau is a major source of concern as it is likely to add to the temptation of governments to engage in zero-sum commercial policies that seek to steal market share from foreign rivals."

However, the evidence on the ground from treasurers and bankers is more positive. The International Chamber of Commerce (ICC) Banking Commission 2015 global survey3 on trade found that 63% of respondents reported an overall increase in trade finance activity, with 61% of banks saying they had increased their trade finance capacity.

International investments are complex and rich. The CBI recently highlighted the multi-faceted nature of trade flows when it pointed out how the UK is the single largest investor in the US,4 supporting over one million jobs across the country. And trade hit new highs in 2015 as American services exports to the UK rose to US$66.9bn (from US$63.2bn in 2014), while US imports of British services climbed to US$53bn (rising from US$50bn in 2014).

Internal adviser on limiting exposure

But even the strongest and most enduring relationships need close care and attention.
As the CBI's international director, Ben Digby, who lobbies on trade and investment issues, observes, "Following the UK's decision to leave the European Union, and with the US heading to the polls to elect a new president, we need to do everything we can to make it easier to trade, invest and drive prosperity on both sides of the Atlantic."

And that theme of taking nothing for granted was reinforced when the Swedish banking group, Nordea, talked to 60 treasurers and CFOs to assess what the treasury function might look like in 2017.5 Trade finance had an average ranking of 1.7 on a scale of importance for treasurers, compared with the top rating of 3.7 given to cash and liquidity (the scale had a maximum rating of four, which no area of responsibility achieved).

The message from the treasurers was significant wariness of stability of the world's capital markets; a concern that feeds into many treasury priorities, such as liquidity, hedging of risk and bank relationships. With these key concerns top of the mind in the treasury, many businesses Nordea spoke to were looking to their treasury departments to act as internal advisers and provide strategic input on funding requirements and how best to limit exposure.

Trade and payments are fertile ground
for treasurers offering that sought-after input. Treasurers can contribute more if they are working closely with the business. Ad van der Poel, senior vice president, financing services at Basware, a provider of e-invoicing and purchase-to-pay solutions, sees from his work, treasurers becoming more involved in the business.

For instance, they are interacting with heads of procurement to increase the visibility and effectiveness of payments systems. With interest rates on the floor, cash rich corporates can gain a return on their liquidity by offering discounts in return for early payment, cutting costs which go straight to the bottom line and gaining a return which corporates will not find through bank deposits or money markets.

Working strategically on procurement and accounts payable by optimising cashflows and processes, treasurers can help improve the way companies trade, and give visibility over supply chain information which is still too often invisible behind a myriad of legacy enterprise resource planning systems. Van der Poel says, "We talk to treasurers of multi-nationals and they are still dealing with many ERP systems and no shared service centres. If they can bring visibility - which is still key - they gain control. They have data through the payments."

Treasurers need to exercise skills in payments, risk management and FX to ensure that their company can carry on trade in different territories with increasing confidence. Corporate Treasury Insights, a report written by The Boston Consulting Group,6 in conjunction with BNP Paribas, found that corporate treasurers continue to see export and import letters of credit as the predominant choice for international trade despite the emergence of new digital payment instruments.

Low risk, but…

Treasurers and CFOs can reassure their companies and their bankers that financing trade is a low risk activity. And they have the facts to prove it. Now in its fifth year, ICC publishes its Trade Register.7 Covering 13 million transactions from 2007-2014 and encompassing a total exposure of US$7.6trn, it highlights the low risk nature of trade finance.

It shows short term (ST) trade finance has default rates that only reach, on average, one fifth of comparable Moody's default rates. Across investment grade between 2008-2014, Moody's default rate was 0.11%. By comparison, the Trade Register shows that the exposure weighted default rate for export letters of credit (LCs) was 0.02% over the same period, and the transaction default rate for export LCs was as low as 0.01%. Even the default rate for ST loans for import/export, which is the highest across any of the products, was 0.06%.

The default rate for medium to long term (MLT) trade finance is less than 50% of the default rate of comparable Moody's corporate credit portfolio, and the coverage that companies get from their countries' export credit agency adds weight to the argument that trade finance is worthwhile for corporates wanting to increase revenues across the globe. Alexander R. Malaket, deputy head of the executive committee, ICC Banking Commission, said: "The Trade Register highlights the strong recovery rates for trade finance, with the median result for ST and trade finance included in the Register close to 100% recovery for all products."

Global regulation

This is a crucial discussion, especially for companies wanting to sell in developing countries as trade finance helps the transaction by plugging the trade cycle funding gap, and removes payment and supply risk. Nearly a decade may have passed since the global financial crisis but the discussion on the optimal balance between encouraging global growth and implementing reasonable regulations on trade finance instruments, trundles on. Trade is becoming tougher as global banks withdraw from emerging markets.

One reason is the high cost of compliance and the due diligence needed. Another is global regulation; step forward Basel III, which imposes capital requirements that reduce the amount of lending a bank can offer at each level of capital reserves.

Gary Slawther of OCTAL Petrochemicals does not agree with the direction of the regulations. "Trade finance instruments have the lowest level of default, yet putting capital weighting onto the instruments makes them much more expensive. It is a disincentive to trade. It was not letters of credit and cash against documents that caused the financial crisis."

The pattern of trade

Treasurers and the instruments they use have stood up well to the changing patterns of trade which reflect growth in the world economy over the decades. These changing patterns include the rise of regional trading blocs - notably the European Union and NAFTA (North America Free Trade Agreement) - deindustrialisation of many advanced economies, and the emergence of economic stars such as the BRIC countries (Brazil, Russia, India and China).

China's emergence in particular is dramatic and its impact global. A 2014 HSBC global trade report showed China accounted for 36.5% of high-tech goods exported in 2013, followed by Hong Kong at 13%. The US was in third place at 9.6%. In 2000, the US was the world's biggest tech exporter with a market share of 29.2%. HSBC forecast that by 2030, China would account for more than half the global trade in high-tech goods. Hong Kong and the US would remain in second and third place, although with a lower market share, and Korea would displace Singapore as the fourth-biggest exporter of high-tech goods.

Although subject to short term fluctuations as a result of the economic cycle, the value of trade has continued to grow, reflecting the increased significance of globalisation. As a percentage of global GDP, trade increased from 40% in 1990 to 60% in 2014, although the financial crisis and subsequent recession caused world trade to fall as a percentage of GDP between 2008 and 2010.

More disruption ahead?

And that disquiet continues today, stirred by political events such as Brexit. But trading patterns could be facing another source of disruption; namely, another technological revolution. Daniel Schmand, head of trade finance and cash management corporates EMEA (Europe, the Middle East and Africa), Deutsche Bank, observes: "Much has been made in previous years of south-south trade flows, the rise of the BRICs and so on, and it is true that trade patterns continue to shift and proliferate. But the digital revolution is lowering barriers to trade - in conjunction with increasing standardisation - and making the world a smaller place. As such, we will witness many more dynamic developments in global trade over the coming years."

One example of international business relying on treasury and funding to develop across borders is Eduniversal SA. Headquartered in Courbevoie, France, Eduniversal is a global ranking and rating agency specialising in higher education. It recently announced it was raising €1m through a tap issue of the company's 2% notes convertible into new ordinary shares - proceeds designed to fund future growth strategy. Martial Guiette, chairman of Eduniversal, commented, "We are very excited about the developments Eduniversal has experienced these past few years and this tap will contribute to the continued expansion of our platform internationally."

Eduniversal needed to diversify its investor bases to build awareness in the international investor community and build a stepping stone in its ongoing capital markets strategy. Guiette added, "As we continue to develop our commercial offering abroad, we anticipate increasing complexity in managing currency flows, invoicing and payment monitoring globally. We are addressing these new challenges with a centralised financial and treasury function which we are in the process of building further."

Trade and funding challenges faced by companies such as Eduniversal are described by Deutsche Bank's Schmand. He notes, "Treasurers and FDs are facing a spectrum of issues as complex and diverse as their trading environment. Many continue to enter new and unfamiliar markets - making deep local and counterparty knowledge crucial for success - and are negotiating developing and varying regulatory environments for cross-border and inter-regional trade as well.

"Geopolitical and FX volatility add further risk and forecasting requirements, and on the other hand liquidity - essential for lubricating the daily mechanisations of trade - has undergone a paradigm shift due to banking regulations distinguishing between different kinds of cash and negative interest rates."

For interim CFO Peter Charles, the key is that treasurers have to help with trade by remembering to speak the language of the business. He says, "Treasurers look at risk on areas like commodities and currency and have to be able to tell the business what that means in terms of the key performance indicators (KPIs) that they [the business] can relate to.

"What treasurers do is necessarily complex and arcane so they need to find a way of articulating those complexities in a way that facilitates sensible decision making. You cannot eliminate risk but treasurers can help the business understand the balances required when conducting trade."

As Charles notes, treasurers continue to be as well placed as anyone to deal with the risks from paradigm shifts within global trade. They should ensure that in their companies, they are seen as leaders willing to step up to the mark and are capable of finding innovative answers that will keep goods and services, and the money that follows, continually flowing across the trade routes of the world.

Peter Williams is a freelance financial journalist and former editor of The Treasurer

  1. See the WTO's report on trade-related developments:

  2. Global Trade Alert report, 'Global Trade Plateaus':

  3. ICC Global Survey on Trade Finance 2015:

  4. See CBI article, 'UK tops out as largest foreign investor in USA at $449billion':

  5. Nordea report, 'The future of the corporate treasury':

  6. Report from The Boston Consulting Group and BNP Paribas, 'Corporate Treasury Insights 2016':

  7. ICC Trade Register:

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