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Davos, interest rates and secular stagnation
| 08-02-2018 | Lionel Pavey |
Two weeks ago there was the annual meeting of more than 2,000 politicians, business people, economists etc. at the World Economic Forum. For 4 days the most pressing and urgent topics facing the world were discussed. Sifting through all the speeches and press statements, I saw a lot of articles relating to a rather old theme of secular stagnation.
What is it?
It is a theory dating back to the 1930s stating that developed countries can suffer from a period of too small investment and too large savings. This can be the result not only of an economic recession but, more importantly, as the result of changes in the underlying demographics within a country. This would in turn imply that growth would be low to negligible within the economy. As growth slows down, so demand for investment would also slow down, leading to more savings etc.
Normal theory would demand a reduction in interest rates (the cost of money) leading to an increase in long term investments by companies, a comparative feeling of wealth amongst the people and a kick start to the economy.
Since the crisis of 2008, we have experienced an extended period of low interest rates and low inflation. The expected increase in investment, leading to improved production processes and new goods does not appear to have materialised. Furthermore, the effect that the crisis has had on individual people – job losses, house repossessions, insecurity – has made them reticent to indulge in large bouts of consumer spending.
Even with negative interest rates there has been no rush to invest in productivity. Instead funds are invested in financial assets – shares, bonds etc. Whilst offering goods returns, such investments do not add to potential economic productivity and growth in the industries that provide it.
Furthermore, when consumers tighten their belts – restricting spending and increasing savings – they are not actually directly providing funds for investment. Banks operate as intermediaries and extend credit – individual investors do not in the present system.
The economy is growing – GDP forecasts are all up among the major developed countries and inflation appears to be restrained. So have we broken the long existing chain of recognised monetary theory – could we see a prolonged period of steady growth, backed by low interest rates and low inflation?
At this stage of the proceedings an added element was thrown into the debates – demographics.
Europe is experiencing a period of shifting demographics. The long term replacement fertility rate is 2.1 children per woman. There has been a steep decline of this rate within Europe, with the rate in Germany being as low as 1.4 children. At the same time people are living longer, which means they are retired for longer. In 2006 there were 4 active workers for every retiree – by 2050 this could be down to only 2. The median age in Europe is expected to rise from 37 to 52 by 2050. EU studies have forecast that by 2050 there will be a reduction of 48 million in the working age population and an increase of 58 million in the retirees.
At the same time other studies suggest there will be a 14% decrease in working population against a 7% decrease in total population. All these projections are based on the current situation and that the trend continues.
If this was to continue, then there would be significant challenges for Europe. The expectation of governments to be able to finance the existing outstanding debt by increases in national GDP will stall. Increased burdens will be placed on the state to provide the necessary facilities to an ageing population whilst the pool of available workers is shrinking, leading to lower productivity per capita. Within the last 10 years the distribution of wealth has been skewed – there is more inequality with the super rich having proportionally even more of the total wealth than before the crisis.
New technology has the ability to change the existing concept of productivity. However, if this could be more than enough to offset the expected developments caused by an ageing population is unclear. It could mean that we are entering a prolonged period of low interest rates, low inflation and low growth. If so, all the economic models – even within companies – will need to be reappraised and a new long term policy initiated.
Lionel Pavey
Cash Management and Treasury Specialist
The strength of the EUR or the weakness of the USD
| 07-02-2018 | treasuryXL |
It is fairly well known that the Fed could be looking to increase interest rates in 2018 – consensus is for 3 small rises throughout 2018. As EUR interest rates are negative, initially one would expect a large movement out of EUR and into USD. But it looks as if the economies are aligned in the same way and any rise in USD rates could later be followed by a rise in EUR rates.
A lot will depend on the announcements by the ECB to taper off its QE programme. Long term EUR yields are rising in possible anticipation, but are still far behind USD yields. There is a 2 per cent yield pickup in 10 year USD treasuries over Germany who act as the benchmark for the EUR.
The posturing of the US administration and the words of President Trump appear to be having a negative impact on the value of the USD. Statements from Washington about a weaker USD being good for the US trade have impacted on the market. Trump has been very critical about trade relationships with other countries. The words being uttered by the administration are certainly having a reaction on the markets.
The Dow Jones saw a sell off on Friday – it lost more than 650 points. The job report that was published showed that the US had added 200,000 jobs in January but, despite this good news, fear is growing that this will put upward pressure on inflation, leading to further rises in treasury bond yields.
However, there are potential hazards in the future for the EUR. General elections in Italy are due to take place on the 4th March 2018. Current sentiment within Italy shows a growing negative appreciation of the EU. The trials and tribulations concerning Brexit could also seriously undermine the strength of the EUR.
Whilst it appears that the USD is weak at present, any adverse news from with the EU could lead to a swift reversal in fortunes. The underlying sentiment would imply a weaker dollar, but fundamental changes in economic policy on both sides of the Atlantic could lead to rapid changes in sentiment.
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Bank fee monitoring – more than just “penny pinching”
| 06-02-2018 | TIPCO | Sponsored content |
Monitoring bank fees is not a task which is particularly popular in treasury departments. The idea of working through stacks of paper in the hope of understanding confusing bank fee nomenclature doesn’t usually generate much enthusiasm. This onerous task is often delegated, or statements are just blindly signed off on by the accounts department. That’s a shame. Why? Because the systematic analysis of bank fees can not only save considerable sums of money but can also lead to real improvements in treasury processes.
Evil intentions are not the only reason behind incorrectly charged items. Banks claim that updates of their fee calculation systems are sometimes responsible for standard fees being charged rather than those which have been specially negotiated with certain clients. Simply on the grounds of human error, there is a need to regularly check whether agreed fees are always taken into account by the software that banks use.
What do you need to do to retain an overview?
First of all, you need a bank which is capable of providing you with electronic statements in either the TWIST BSB or camt.086 formats. The gentle pressure that major corporates have put on their banks in recent years has paid off. Banks are increasingly responding positively to relevant customer requests. We will be happy to provide a list of those banks which can already provide these statements and in which countries.
On the other hand, your systems need to be able to read and process these formats. While you can open the statements relatively easily in Excel, special system support is necessary in order to perform in-depth analyses. Many corporates use web-based and TMS-independent platforms for this which have specially developed to monitor bank fees. Bespoke interfaces guarantee integration into your existing system landscape. A good example of such a system is the treasury information platform TIP, which is already in use at corporates such as Deutsche Post DHL Group or Lufthansa.
How will you benefit from regular checks?
The first benefit comes from checking that agreed fees are actually charged in practice. The press of a button is all it should take to highlight all discrepancies and provide a basis for demanding reimbursement from the bank. But this is just the beginning. Once transparency has been established about the services and fees charged, it doesn’t take long to draw conclusions about suboptimal payment processes. For example, if your analysis frequently highlights expensive “non-STP” or “repair” fees, you would be well advised to take a closer look at your payment processes. Perhaps there is simply a need to update incorrect master data. On the other hand, it might be necessary to brief your personnel on correct payment processes.
A further example: document-based payment methods. If your Canadian subsidiary in-structs a bank by fax to perform 800 transfers a month, this is not only a problem for your internal audit team but generally also extremely expensive. Here is another case relevant in the context of compliance which can be highlighted by bank fee monitoring: Cash withdrawals from company accounts at a bank branch may be above board in certain cases but should certainly be queried.
Another positive side effect of a transparent overview of bank fees is a comparison between different subsidiaries: Do all your subsidiaries in a particular country pay the same fee for the same service, and if not, why not?
Another situation: Imagine that you asked the general manager of your Spanish subsidiary three months ago to close two unnecessary EUR accounts, but the account management fee keep appearing on the statements. Electronic statements can therefore help you to insist on compliance with your cash management policy.
However, this issue is not only suitable as a means of slapping the wrists of banks and in-ternal troublemakers. The systematic processing of bank statements also provides you with exactly the data you need for your next payment service RFP: The relevant products you use and volumes are presented on a silver platter; meaning that you don’t need to painstakingly collect these data from your subsidiaries. Besides the quantitative factors, the analysis of bank fees also provides you with a better impression of the quality of the services provided by your banks. Armed with these data, you are far better prepared for bank negotiations.
What will the future bring?
What might still sound far-fetched today may soon become reality: Work is already ongoing in some pilot projects to directly book fee-based information from electronic account statements in ERP systems. This is based on statements prepared using the ZUGFeRD format, a standard developed by the Forum for Electronic Invoicing Germany (FeRD), which will make it possible to send invoices in a defined PDF format which can then be automatically read and processed.
Parallel to this, the German Association of Corporate Treasurers (vdt) has formed a working group to establish an XML format proposal which meets the minimum requirements necessary for bank fees to be VAT deductible. And, in the near future, electronic statements may also include all of the key elements of banks’ year-end summaries.
Efforts to introduce electronic bank fee statements are also being intensified internationally: The Common Global Implementation (CGI) initiative, investigating the standardisation of payment formats, has set up a working group to further develop camt.086, the ISO standard for cash management statements. Numerous other initiatives in Germany, Austria and France are also regularly bringing banks, corporates and system providers together for meetings. Increasing numbers of medium and large corporates are starting relevant projects and sharing their experiences at fairs such as those of the Association of Financial Profes-sionals (AFP) in Denver and at the Finance Symposium organised by Schwabe, Ley & Greiner. This issue is also being addressed in academia, highlighted by the numerous dis-sertations and theses focussing on how theory and practice should be combined. Last but not least, system providers are increasingly integrating bank fee monitoring into their solutions.
How can you help?
Rising demand from corporates is ensuring that this issue remains firmly at the top of credit institution agendas. While banks of course are keen to pass on the necessary investment costs to their customers, don’t let yourself get caught up in any discussions on this issue. After all, you don’t pay other suppliers to send you electronic invoices that you can understand.
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