In Search of a New Equilibrium: Insights and Strategies for Treasury
Changes in the global economy and unprecedented market volatility over the past few months have had a profound impact on companies and created significant challenges for treasurers. According to data from J.P. Morgan and Bloomberg,the U.S. dollar has climbed sharply against 90 per cent of the world's currencies while oil prices have slipped below US$30 a barrel - the lowest level in 12 years. This highlights the fragility of markets and their intricate linkages.Economic fundamentals are shifting,and the responses by corporates and investors to those changes continue to create volatility in areas ranging from commodity prices and currencies to interest rates.
While market developments will affect organizations differently based on their sector,location,and maturity,treasurers need to have a deep understanding of the key market themes shaping the external environment in which they operate,and use those insights to drive improvements in performance.
China's Growth Slowdown
According to IHS Global Insight,China is now close to being a US$11 trillion economy,fueled by the strong growth of its domestic sector. Its average nominal GDP growth was 14.3% from 2010 to 2014. Similar to how growth in the US in the 1990s drove expansion of the global economy,growth in China helped its neighbors and trading partners in the 2000s. In more recent years,however,slowing growth in China and decreasing fixed investments have had a significant impact on the global economy,which is the fundamental reason for market volatility around the world.
The New Normal in Commodity Prices
Despite the slowdown,China's push for greater global integration continues. According to a report from ecns.cn,the English language website of the official China News Service,China's "One Belt,One Road" initiative,which seeks to boost trade and investment ties with neighboring economies,has created opportunities for Chinese corporates and state-owned enterprises to expand overseas,and opportunities have also grown as the number of free trade zones increased. The renminbi has also been designated as a key trade currency that will be included in the International Monetary Fund's global reserve currencies basket,effective in October.
The slowdown in development of China's infrastructure has in turn led to decreasing demand for commodities. Commodity prices started to fall in 2011 and reached new lows in early 2016. Oil prices plunged from a peak of US$145 in 2008 to less than US$30 a barrel in January this year,and the price now hovers in the US$30 - US$50 range. Prices of other commodities have also declined,as slowing economic growth around the world translated into less demand for raw materials. The S&P commodity price index,which tracks commodity prices for everything from oil to cotton and cattle,is now about 50 per cent lower than it was five years ago.
Diverging Interest Rates
The global economy has also been affected by interest rate changes,especially in developed markets. The US made a first-in-a-decade rate tightening move in December 2015,signaling the relative strength of the US economy,though headwinds from China and commodities markets have complicated plans for further rises. On the other hand,Europe and Japan are still pushing towards easier money and expanding the balance sheets of their central banks,with the Bank of Japan introducing a zero interest rate on required reserves in February 2016,and charging negative rates for excess reserves over the 2015 average balances.
Depreciating Currencies and Lower Growth in Emerging Markets
The comparative strength of the US economy has pushed emerging market (EM) currencies down as much as 20-30 per cent against the US dollar,near their lowest levels since 2002. This drop has weighed heavily on emerging market returns,especially for investors who borrowed in US dollar-based instruments. However,while many forecasters expect EM currencies to continue to depreciate,a number of those markets have shown signs of stabilization and lower volatility in recent months.
Emerging market GDP growth rates have also continued to trend down,squeezing funding and constraining resources for corporates in emerging markets. According to IMF data,EM GDP growth slowed from 5.0 per cent in 2013 to 4.2 per cent in 2015 and the impact has been significant,considering that emerging markets now contribute a greater share of the global GDP. Foreign direct investment (FDI) into emerging markets has also slowed.
Limited growth at home has compelled companies in emerging markets to turn elsewhere for expansion. According to the data released by World Investment Report 2015,FDI outflow from emerging markets doubled from US$235 billion in 2009 to US$470 billion in 2014,in contrast to the slowing FDI outflow from developed markets.
E-commerce and Technologies Disrupt Entire Industries
Amidst low growth and volatility,the technology and e-commerce sectors have continued to expand. Globally,the growth rate of e-commerce businesses is expected to be 10 times that of brick-and-mortar stores. New channels and innovations also provide opportunities for corporates and the financial sector to reshape existing practices for doing business. Industries are being disrupted by new players with new business models,and existing p