David Green: Surveying the TMS landscape
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David Green, Arlingclose
Now that last year’s accounts have been audited, thoughts will be turning to the detail of next year’s budget, and for treasury managers, that includes writing the treasury management strategy.
It would be nice to wait for a few things to happen first, though. This week the Bank of England will release its latest inflation report, and possibly cut its base rate again. Even if its leaves interest rates unchanged, the report will give us a good idea of where it thinks they are heading in 2017–18, which will be a key input into the strategy.
The US presidential election on November 8th has the potential to shock the global economy. Markets are assuming that the opinion polls have got it right and that Clinton will win. But maybe the Trump supporters, just like the Tory voters and the Brexiteers, are not quite that easy to poll accurately.
A win for the Republican Party, or even a rerun of the “hanging chad” fiasco from 2000, is likely to deter the Federal Reserve from its expected December 14th interest rate hike, with a consequent impact on the UK.
Back on this side of the pond, November 23rd will see chancellor Hammond’s debut appearance in a piece of parliamentary theatre. The playbill has already advertised a loosening of the fiscal chains – could this include a cut in PWLB rates to stimulate local authority infrastructure spending? Do you want to finalise your annual strategy before knowing what Hammond has up his sleeve?
December will be a big month for the eurozone’s Mario brothers, with Draghi expected to extend the European Central Bank’s quantitative easing programme on the 8th, and Renzi threatening to resign if Italy’s constitutional reform referendum doesn’t go his way on the 4th. That date coincides with a re-run of the Austrian presidential election. The EU will still be our biggest trading partner after Brexit and ongoing weakness in their economy will do us no favours.
The uncertainty will drag into 2017, with general elections in France, Germany, the Netherlands and maybe Italy, all countries where anti-establishment and anti-immigration parties have been buoyed by the recent support for Trump and Brexit. And how will our negotiations to leave the EU go? What will the Scottish government do if it doesn’t like the result? How will all these factors affect banks’ creditworthiness and interest rates? The answer of course is that no-one knows for certain.
You can never wait for all the unknowns to be resolved before setting out your plans for next year. Treasury management strategies must therefore recognise that the future is inherently uncertain.
So, we need to consider that despite our spending departments’ best laid plans, cash balances may actually increase over the year (again), rather than fall, delaying our need to borrow. After all, fewer staff can mean less capacity to deliver capital projects.
We need to consider that long-term interest rates may actually keep falling and might not be higher next year, despite what forecasters keep telling us, so that borrowing in advance doesn’t work.
We need to consider that short-term rates might be even be negative in 2017/18, so that we would be guaranteed to receive back less than we originally invested and how does that square with our definition of security.
And we need to consider that a weakening domestic economy will likely lead to more personal bankruptcies and company insolvencies, maybe threatening the health of banks still recovering from the last recession.
A robust treasury management strategy will set out these uncertainties and leave the treasury manager with enough flexibility to adapt their tactical decisions to meet the challenges of this ever-changing world.
David Green is Client Director at Arlingclose Limited. This is the writer’s personal opinion and does not constitute investment advice.
