The Lion King | 15
Managing Treasury in a
period of currency crisis
By Olawale Hamed
T
raditionally, 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’ currencies are depreciating,
the treasurer’s role gets quite
complicated.
African 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.
Fallen currencies negatively affect
many Africans because many countries
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 and
also ensure 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 order 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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