How treasury is managed in a period of currency crisis

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By Olawale Hamed

Traditionally, the role of the treasurer is liquidity management. This could be a straight forward though not so easy function. However, in times of currency crisis, like what we have currently across Africa where many countries are seeing depreciation in the value of their currencies, the treasurer’s role gets quite complicated.

 

Many African country currencies have come under intense pressure since late 2014 and early 2015 as commodity prices drop, putting a downward pressure on their dollar or foreign exchange revenues and consequently on the value of their various currencies.

 

Nigeria’s Naira, Ghana’s Cedi, Zambia’s Kwacha, Kenya’s and Uganda’s Shilling, South Africa’s Rand have all come under significant pressure in the last few months following a drop in commodity prices. For example, a report by Reuters notes that the Ghanaian Cedi lost 27% of its value in 2014, Nigeria’s naira lost 13.5% of its value while the South Africa Rand lost about 10% of its value. Most of these losses have continued in 2015 as commodity prices continue to be under pressure from dwindling demand and over supply in the international markets.

 

Fallen currencies negatively affect many Africans because many countries on the continent are import-dependent. This means the depreciation of the currency comes with adverse economic implications, which include rising inflation and erosion of consumer and corporate wealth from a macroeconomic perspective.

 

The Bank’s Treasury division is usually at the heart of managing the various interests that arises in a period of currency crisis. Treasury must ensure that the bank remains liquid at all times while also ensuring that customer’s need for foreign exchange is adequately met.

In periods of currency crisis like what we have currently, there is usually an intense clash of interests. Buyers of foreign currencies tend to panic and seek to front-load their bids (i.e. take advantage of present rates to buy dollars before further devaluation makes it more expensive).

 

Importers of goods are usually the most likely to do this as they bring forward their raw material and product needs to save on cost of importing at a later date when the currency value drops further.

Speculators also smell blood and aggravate the currency crisis with speculative demand aimed at profiting from the temporary arbitrage opportunities that abound within the volatile markets.

 

Regulators become more active with policy pronouncements, enforcements and reviews. Foreign investors seek to exit their investments and take early profits or cut their losses if need be. This situation is usually seen in the stock market as foreign investors sell down their position in stocks in a bid to lock in their profits and take out their funds before the depreciating currency wipes out whatever gains they may have made in the market.

 

In this scenario, a treasurer is often caught between three masters: the shareholders, customers and the regulators all with diverse and most of the time competing interests. Whilst treasury must seek to take advantage of temporary arbitrage opportunities that may occur within its scope of legality in the short term in other to please the shareholders, it must also show responsibility by cooperating with regulators to save the economy, while also ensuring that the customer’s legitimate foreign currency needs are met at all times.

 

It is in managing this crisis which arises in a period of currency volatility that tests the treasurer’s mettle. The treasurer must ensure that there is 100% compliance to regulatory pronouncements. All sanctions must be avoided and the bank’s franchise must be protected at all times without sacrificing customer satisfaction while at the same time seeking to maximize the bank’s profits.

 

To do this, the treasurer must ensure that there is prompt gathering and dissemination of market information to all stakeholders including executive management, the asset and liability management committee (GALCO) and customers. Information dissemination in this period is critical to ensuring a smooth and profitable management of the crisis.

 

Also, in a period of crisis, “Cash is King.” So the treasurer ensures that there is adequate liquidity of both foreign and local currency to meet customer demands at all times. The treasury division must achieve this while ensuring that there is adequate pricing of the bank’s forex products as any mispricing can have significant opportunity costs to the bank.

 

Treasury management in a period of crisis usually involves making high wire but accurate decisions. The margin for error is usually very thin and can cost the bank heavily if not properly managed.

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