July 26, 2012
The NeuGroup Advisory Board weighs in out what the challenges are for the second half of 2012.
On a recent set of conference calls with our Advisory Board, we asked them to identify the key issues they were confronting that would likely be of interest to our member network and readers. They covered a range of topics, most of which resonated with other advisors on the call. All are consistent with topics that came up over the course of NeuGroup meetings in the first half of the year and that are likely to emerge again in our meetings over the second half. Here are some highlights:
- Managing human capital. There are three principal elements to this: 1) time management—working through continual crisis and the day-to-day tasks of finance practitioner mean that people don’t have time to manage all their demands; 2) talent management—it is simply getting harder and harder to find and retain good talent; and 3) shifting to a growth focus—so much attention gets paid to reducing costs and other austerity measures in response to the global economic downturn that firms are forgetting that finance is also about helping businesses grow; plus, focusing on growth is more exciting and motivating.
- Anti-growth measures being imposed in developing markets. Growing the business is all the more challenging and needs additional resources thanks to policy changes in countries like Argentina, where parallel-to-official currency rates are surpassing those of Venezuela (and CDS spreads are higher too), and India, where the RBI is forcing in-bound investors to convert to rupees so that they stand little chance of getting their money out. Indeed, capital and FX controls are starting to creep into the picture in more and more places, from African nations like Angola to perhaps even developed countries in the eurozone.
- Trading and coverage models need to adjust. In response to both growth and the challenges of MNCs confront in developing markets, more of them are rethinking their “trading models” for how they conduct business globally. Physical as well as financial supply chains, along with legal entity and tax structures that go with them need to be substantially revamped to promote greater efficiency in what are no longer remote corners—and, from a treasury perspective, mitigate trapped cash.
- Inflation as a global concern. While central banks have pumped the financial system full of liquidity to avoid deflation in the face of crisis, several advisors fear that inflation is the only foreseeable way for heavily-indebted governments to get out from under their obligations. Other advisors were less inclined to think central banks will give up their core inflation-fighting mandate; however, the unprecedented levels of money in the system may make it difficult, if not impossible for central bankers to reign in the inflationary forces set forth by their unprecedented, expansionary monetary policy. As one of our advisors noted, data found on the St. Louis Fed’s website shows that M1 (the Fed’s narrowest measure of money supply, includes only the most liquid forms of money, consisting of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written) has doubled since 2000 and the increase in M1 from then to now has been as much as the entire supply history of the US dollar, from 1792. Inflation fears along with the general crisis concerns lead to a sense of urgency to do now what you can (e.g., renew a credit facility) and don’t wait.
- Mounting compliance costs for banks. Along with Dodd-Frank, Basel III and related capital and liquidity rules, banks will be forced to comply with the Foreign Account Tax Compliance Act (FATCA), which is the US Treasury’s effort to ensure US taxpayers aren’t using offshore accounts to avoid paying tax. Under FATCA, banks will have to report directly to the IRS on accounts held by US taxpayers. The systems costs required to comply by January 2014 run in the hundreds of millions of dollars. The costs of these marginal compliance issues, following KYC and other Anti-Money Laundering rules, which ultimately will be followed by additional capital and liquidity requirements, will all be passed on to customers eventually.
- Translating regulatory costs into bank relationship management. Advisors on the practitioner side are increasingly factoring these costs in when evaluating banks in their credit facility and how new rules will be impacting the activities that make up their share wallet with each one. Incorporating things like Basel III and its impact their bank scorecards is not a simple task, but it is best to get started now.
- Private equity and VC funds holding back. While better than the worst of the post-crisis doldrums, private capital is still showing a reluctance to commit in many areas of the market, which makes it difficult for private firms to get deals done and for sellers to see fair value on their transactions. The Facebook IPO also has discouraged many, if not most of the IPOs in the pipeline to pull out.
- Risk management as a treasury constant. With risk management an ever-growing portion of treasury’s brief, starting with managing the counterparty risk at the banks (a fresh issue again with the Moody’s downgrades) and ending with the risk to business profits due to capital and currency controls, treasurers should step back and see what role their departments should ideally play in the more integrated and constant risk management approach that MNCs today require.
- CCP exemption for corporate end-users of OTC derivatives no certainty. The political calculation currently holding sway with Democrats is that they should run on having implemented Dodd-Frank without compromises. This will make it extremely difficult for corporates lobbying for exemption legislation to win the bi-partisan support needed to pass the bills that have been proposed. Meanwhile, a study sponsored by the CME shows that in the FX space, which presumably will be exempt from clearing, there has been a tilt in recent years toward CME FX futures as opposed to OTC FX forwards. This suggests that even if given an exemption, market participants may choose to transact via a centralized clearing counterparty because of counterparty risk concerns dealing with OTC dealers directly.
- What impact will the US election have? There is a sense that some of the issues concerning treasurers, like inflation, are likely to happen regardless of who wins the election in November. However, a second Obama term is more likely to adversely affect international tax reform, which is all-important from the perspective of most US MNC treasurers who see cash building up offshore. Next up – rather than a repatriation tax holiday – might be further curbs to the ability to utilize foreign tax credits and the extension of the sub-part F income regime to transfers using payments on intellectual property from high-tax to low-tax jurisdictions. The IRS has typically lost in tax court when it has sought to challenge the transfer pricing on intercompany IP, so with a sympathetic administration the White House it will move to just change the rules.