Report: Treasurers assessing macros during Great Lockdown

Economists and treasury professionals debate whether injecting cash into the economy will save businesses from the largest economic depression since the 1930s – and whether cash forecasting can still take place

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April 29, 2020 Categories

The economy has faced an unprecedented battering in 2020 as coronavirus forced the majority of the developed world into some form of shutdown.

At the corporate level, the shock has dried up cash flow, piled up outstanding debts, and plunged many businesses into doubt.

“Whatever was the norm in terms of invoicing, cash flow and working capital has changed and potentially will have changed in the way treasury looks at it forever,” says Bill Wrest, senior strategist for cash management solutions at Gresham.

“The Great Lockdown” will see the global economy contract by three percent in 2020 – which would create the worst decline since the Great Depression, with the outbreak is estimated to knock $9trn (£7.2trn) off global gross domestic product (GDP) for the next two years.

The 2008-09 financial crisis saw real GDP fall by 0.1 percent, according to the IMF.

“What it took in the Great Recession to happen in 20 months has occurred in three weeks,” says macroeconomist David Blanchflower. “We’ve never seen the speed of this kind of change, so this is unprecedented.”

Many businesses have already taken action to minimise overhead costs and trim budgets to find cash, but the financial forecasting a company does will have a long-term impact on the company’s survival in 2020 and beyond. However, predictions are complex at the moment.

Business owners and economists have warned that pre-coronavirus normalcy may not return for several industries, particularly those relying on consumers travelling, eating, and purchasing non-essential goods.

Blanchflower says consumer behaviours will likely shift based on unemployment and the health of the economy, which will be difficult to predict until the world is freed from lockdown. For businesses struggling to manage cash flow, this creates a plethora of problems, says Gabriel A Giménez Roche, an assistant professor of economics at NEOMA Business School.

“We have to take a break, take a look at the cash buffer, and how long they can hold without any cash inflows,” he says, noting that already-walloped industries may have already blown through their cash reserves.

In these instances, alongside taking advantage of government assistance and tax breaks, firms may need to seek out capital injection options to free up cash – knowing that further economic battering could be around the corner.

Preparing for the unprecedented

The National Bureau of Economic Research defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months,” which also has an impact on production, employment, income and GDP. Four months into 2020, many economists suggest quickly approaching a full-fledged depression.

To put coronavirus into context with other major financial events, the Great Depression saw extreme deflation within the US, and mild deflation followed the 2008-09 financial crisis.

With the US experiencing a dramatic consumer price index fall between March and April, economists have warned that deflation is already becoming a problem.

To counter this, several governments and international bodies have injected trillions of dollars into local and global economies. However, the state of the world is too uncertain to determine whether these measures will be enough both at the macro- and micro-level, Blanchflower says.

“I think that fortunately, this time around, policymakers got it very quickly, unlike in 2007-08, and unlike really, from 2009 to 2019—they realised that this is absolutely disastrous, and so they responded,” Blanchflower explains.

However, Giménez Roche says that even with these stimulus packages, the path to business recovery is uncertain.

“After 2008, corporate net worth in the US only recovered in 2018,” he says. “When we look at corporate balance sheets, what we find is that the network was only recovering all these years.

“Only after 2018, in the US, is it beginning to increase more than the level it obtained before the 2008 crisis. In continental Europe, talking about the Eurozone, that area recovered in 2015, so it also took some time.”

Shouldering the burden of recovery

Looking ahead to potential recovery, restructuring professionals have said that businesses need to have plans in place for multiple financial scenarios, signed off ahead of time, and know when to act.

Already, some government-funded business loans are taking months to be disbursed, contributing to a downturn in company growth prospects.

To mitigate this, departments need to look at ways to free up essential funds, whether that is by trimming the budget to reallocate cash or eliminating anything non-essential to keeping the business afloat, says Gresham’s Bill Wrest.

While some insolvency practitioners have warned against making knee-jerk reactions, making these calls now – alongside multiple long-term strategies – might be the path for survival, depending on the industry.

The current coronavirus scenario, created by the Office for Budget Responsibility  (OBR), is based on a model in which the UK undergoes three months of lockdown and a subsequent three months of ‘normal’ activity.

This scenario shows that while real GDP could fall by 35 percent in the second quarter, it would quickly recover while unemployment slowly declines. However, the future of the economy ultimately depends on when coronavirus is contained and how long restrictions continue to impact daily life.

“Unprecedented monetary and fiscal policy action, especially in the US, can set the scene for an economic recovery as lockdowns end and people return to work,” said Neil Mackinnon, a global macro strategist at VTB Capital, via email.

“The growth trajectory might look like a ‘Nike whoosh’ rather than a pronounced V-shape. Consumers will maintain ‘social distancing’ that will affect different types of spending and business while consumers might want to build savings should there be another economic shock in the pipeline.”

As the overall economy recovers, Wrest suggests that cash forecasting will be ‘nearly impossible’, particularly if consumers fundamentally change their behaviours. He suggests that reconciliation needs to move to an ‘end of day’ or ‘few days later’ process.

“It’s down to treasurers more than ever before to look at the supply chain model, look at not just the vendor supplies on the one side, but also on the other side of it – their customers on the end of their invoices and the cash flow, and to manage that cash flow and working capital and protect the company,” Wrest says.

He adds that the phrase ‘strive and thrive’ has been batted around boardrooms lately, but it is exactly what companies need to do to survive this crisis.

“The organisations that really push themselves throughout all of this and take those hard decisions and don’t batten down the hatches will come out of this stronger,” Wrest says.

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