For Byrne, everything is about to change. He says Westpac believes companies’ liquidity risk profiles are likely to change over the next 12 months “as we move closer to the Reserve Bank’s withdrawal from the committed liquidity facility (CLF).”
The CLF was introduced in 2015 by the Reserve Bank to provide funds to local banks during times of liquidity crunch and, at the moment, that doesn’t appear to be a problem with the price of debt so low.
With that in mind, Byrne says banks will need to reshape their balance sheets over the next 12 months as inflation risks increase and the CLF is removed, which could lead to an increase in the cost of bank funding.
It’s time to rethink
For local businesses, this means they will have to “think more critically about how their balance sheets are funded and how efficiently they use any excess cash,” Byrne explains.
Some of the most important macroeconomic factors playing in the economy that have been exacerbated by the global pandemic and continued lockdowns across the country are also contributing to the increase in liquidity risk. While our new freedoms seem like good news on one level, as pent-up demand spreads through the economy and consumers dip into their savings or home equity for a spending spree, there is has a downside.
The flip side is that high pressure on asset prices, low interest rates and rising household spending are fueling inflation at a time when rising demand will not be matched on the side. of the offer. For example, global supply chains have been affected by the pandemic – reflected in rising shipping costs, prices and the lack of available goods – as has the local labor market.
Westpac Chief Economist Bill Evans also highlights “the problems of global energy supply, because in some countries fossil fuel sources have been depleted faster than we have been able to increase the use of renewables. at a time when demand is exploding ”.
On the labor front, Evans says border closures have obviously contributed to the shortages, which will lead to record unemployment and mounting wage pressures.
He suggests that these inflationary pressures will not turn into the kind of problems Australia faced in the 1970s, as the structure of the economy has changed dramatically, especially wages indexed to one-time price shocks. What he sees are interest rates rising in early 2023, rather than the Reserve Bank’s preference for 2024, which will see the current housing boom subside from mid-2022 and end. correct in 2023. The Australian economy is never coping well with falling house prices. .
What does all of this mean for businesses and their current big piles of cash? Interestingly, this should lead to more investment right now, but, says Evans, “companies are still cautious, and despite a positive short-term outlook for demand and generous tax breaks, we can’t be sure. that will change “.
“While investments in factories and equipment increased by 8% between the end of 2019 and June of this year, they are dominated by motor vehicles, agricultural machinery and, to a lesser extent, equipment like forklifts. forklift to support the great storage boom brought about by online sales. Sales. What we haven’t seen yet is a substantial widening of the plant and equipment investment cycle, ”says Evans.
Significant investment need
According to Evans, companies need to invest more in factories and equipment – especially in labor-saving devices – to tackle persistent labor shortages, evolving labor market conditions. digital economy and the restructuring of supply chains. The problem is that companies can remain cautious about new investments. This is in part based on the lingering aftermath of a long-tail event like the GFC, and now the pandemic.
Frankly speaking, two black swan events in 13 years.
Evans says companies are always focused on minimizing costs and their shareholders typically have short investment returns on their investment decisions, which makes it difficult to think long-term. Add to that the uncertainty surrounding the future of energy, digital disruptions, supply chain disruptions, and the government’s evolving response to climate change and businesses have good reason to remain risk averse. investments are now lower as a share of GDP than they were before the GFC, ”says Evans.
Either way, business investment will still explode in some sectors, such as renewable energy and public infrastructure. Other sectors of the economy such as education and health will also continue to grow strongly, but they are “not really capital intensive”.
“When it comes to a big increase in capital goods to save labor and build capacity, I remain cautious, especially when you see the obvious preference for Mr.&A new investment that is too genuine, ”says Evans.
So what does all of this mean for corporate treasurers and CFOs trying to make smart investment decisions?
Byrne of Westpac says this is going to be difficult, especially as consumer demand intensifies and more competition enters the market from more mature offshore players as well as new disruptors in certain industries.
“The risk of disruption is going to increase quite dramatically, especially for companies with greater exposure to technology and the digital delivery of their services,” Byrne said.
“With this in mind, the role of treasury and finance in managing disruption risk will intensify. This means that they will have a big role to play in examining the sophistication of how they manage their cash flow and the rigor with which they manage cash flow to maximize investment.
Centralized liquidity structure
“They will play a pivotal role in reviewing the automation of all finance and treasury processes – anything that can be done to streamline their organization’s overhead costs – as they compete with the new ones. players in their industry, with lower overheads, built on technology platforms and, in general, much leaner operations, ”says Byrne.
In addition, Byrne asserts that managing this risk well and making the right investments will benefit from treasury services operating with a centralized liquidity structure, rather than a distributed or decentralized structure.
The reason is that “if you have all of your money in one place, the pluses and minuses and forecast buffers that are submitted by branches of a larger organization tend to override each other, so you need to less money in the bank than you would otherwise. a decentralized model ”.
“At Westpac, we believe this will become even more relevant over the next two years, if the cost of debt begins to rise and the imperative to hold your cash flow more closely increases with it,” Byrne said.
He says what we’re seeing right now is that the more sophisticated treasuries, which have real control over their cash and capital in a centralized structure, are doing exceptionally well. They are the ones who are ready to invest in their own business, as well as to consider merger and acquisition opportunities.
And the key to this sophistication has been the adoption of technology and a hardware investment in digitization. In addition, by integrating their own technology with that of their banks.
“State-of-the-art digitized businesses, even in the most mature industries, are doing very well,” says Byrne. “So the question every business should be asking is, how integrated are your finance and treasury platforms into your bank, and how does the information you receive help you make day-to-day decisions? “.
“There are a lot of things banks can do to help businesses simplify the way they manage their cash flow, automate and reduce the risk of financial transactions, and most definitely get more value from some really big investments than they do. have done in software and systems, ”Byrne says.
And, most importantly, to manage liquidity risk and corporate investments more fluidly and transparently in a changing digital economy.