Under the current volatile market conditions, it becomes critical for corporate treasurers to identify the appropriate liquidity and risk management strategies to generate maximum value in the long term, according to some experts in the industry.
These thoughts were discussed at a seminar on ‘Challenges in Treasury Management in Volatile Market conditions’ in Colombo recently. “The world is going through one of the biggest economic revolutions in history, as economic power shifts from the developed world to emerging markets. As the developing economies throw in less to global growth, emerging economies have been rising as the key driver behind global trade and expansion,” Rajiv Rajendra, an international specialist in Treasury Management, speaking on “Applying Global Best Practices to the Sri Lanka environment: evolving and refining tools and approaches”, said at this seminar.
He said that operations in emerging markets need to be assessed carefully bearing in mind the multiple challenges and the various profit opportunities identified. “Move away from complex products to combat interest rate risks," he said, adding that interest rate swaps are very common to manage these risks.
‘Never do anything you cannot price’ was another point Mr. Rajendra noted. Duration swaps to match tenors of balance sheet items and interest rate swaps to make use of market interest rates and to have more certainly around cash flows were what he advised.
He noted that people are the most critical element in risk management. “People run the processes and manage the business. Improving Risk Management processes and controls is not effective without adequately trained and empowered employees,” he said, adding that training is key.
Speaking on ‘Risk Management: the way forward’, Udayasri Kariyawasam, Chairman Industrial Development Board noted that factors to focus on risk management are two fold. "One is the private sector and the other is the public sector. In the private sector inconsistent macro-economic policies where planning becomes impossible is an issue. In the public sector the agency problem is there acutely because there’s no ownership. Nobody cares. There’s also political interference and inconsistent macro-economic policies," he said.
Noting the differences between accounting systems and risk management systems, he said that accounting systems look backward and that future uncertainties are not measured whereas the risk management systems look forward and they identify off balance sheet activities.
He added that in risk management, audit is extended beyond financial data. "The public sector needs proactive approach in auditing," he added. Highlighting the human factor risk, he said that it is a special form of operational risk and that abuse of power with inherent limitations in internal control is evident.
Mr. Kariyawasam noted that fraud is a common problem which calls for revisiting ones recruiting policies and conducting background checks. “Occupational fraud is a global problem.
Though some of our findings differ slightly from region to region, most of the trends in fraud schemes, perpetrator characteristics and anti-fraud controls are similar regardless of where the fraud occurred,” he said.
He added that audits are clearly important and can have a strong preventative effect on fraudulent behavior, but they should not be relied upon exclusively for fraud detection. “Employee education is the foundation of preventing and detecting occupational fraud. Individuals in powerful positions were exposing the company to significant risk," he said.
Emerging ‘Risks’ (what if scenarios), Mr. Kariyawasam noted were to do with pre-planning and that in the current context; the Expropriation Law was one.