The paper explores the tensions and trade wars that have caused instabilities in most financial markets in a number of countries. It also discusses challenges that could affect the treasury management of banks and financial institutions in the world. It also explains different policy actions used by various governments to curb down these headwinds. The paper finally ends with a conclusion.
There have been geo- political tensions and trade wars across the world mostly between countries of US, china and Russia. For example, in the very recent years, the geo-political tensions have been seen as the United States put sanctions on Russia over its missiles against Syria. The many problems that seem to be growing in Syria, have caused political tensions in the global economy (Cgma.org, 2017). Elsewhere, in Africa for example Egypt has also experienced problems of leadership which have also resulted into geo-political tensions. These lasted over a long period which led to bloodshed of some citizens. These political tensions have a negative impact on both the domestic and foreign economy. For example, there are increasing tensions in Syria by the Russian government over the nation’s oil infrastructure which have greatly increased oil prices to 7.0% and above in the recent year(Dickinson, 2012).
The increase has a direct effect onto the economy’s status as demand for goods decrease ( Claessens and Ariccia, 2010). The government of Syria made an attack on its own citizens which resulted into the closure of US markets. The government of United Kingdom, France and United States responded by launching a missile to particular areas of Syria (Claessens and Ariccia, 2010).In addition, there have been reports about tensions in the recent year about aluminum and steel tariffs. These tensions could affect the many sectors in a nation such as businesses and firms that majorly use such metals and the economy could be damaged.
In all over the world, economic problems and hardships have increased as a result of trade wars which have raised geo-political tensions (Hooper, 2018). Many nations have experienced such tensions in the act of trying to overcome the depression period. For instance, in around 1929 to 1930, trade tariffs were imposed by the government of US but instead obtained the negative effects of it. Many Governments were left separated. So, they decided to come up with programs against these tensions as the global trade wars increased in all countries. It later resulted into a decrease in production which also reduced the world global market. It finally made the world depression to continue and this resulted into the World War 2 (Deniz, Igan., Luc, Laeven., and Hui, Tong, 2012).
Additionally, scholars have reportedly indicated that trade wars have long existed between US and China. They have greatly impacted and affected onto smaller nations than they would onto themselves. Trade war is a conflict which is economic in nature as a result of one country protecting and imposing tariffs on it goods and in response the other country retaliates by doing the same.
It should be noted that the there is a plan by china to devaluate the Yuan renmimbi. In the month of July this year there was 6.596 parity against the US dollar set by the central bank of china. Further, as compared to the previous day levels, there was an additional 391 points cut. The above strategy is aimed at enhancing the Chinese foreign trade. It is also aimed at preventing possibilities of further tension on trade tariffs with the United States of America and at the same difference and improve the total exports of china(Dickinson, 2012). Therefore the above strategies not only threaten the economies of other countries but also increase the possibilities of geo political tensions all over the universe. When protectionism increases, the output of the nation is seen to be self-sufficient. Many scholars argue that some of these economic protectionisms might be more expensive compared to others since they can easily bring about trade wars. For instance, if the tariffs were raised by one country, the other party would retaliate similarly by raising the same tariffs (Cgma.org, 2017). However, it is difficult for a foreign nation to be retaliated against when subsidies have been increased. Many scholars have come up and reported that the major cause of economic crisis like the great depression is majorly contributed by the presence of protectionism and trade wars (Dickinson, 2012).
Similarly, trade wars come in when one country puts trade tariffs on its imports then the other foreign nation by retaliating uses the same forms of protectionism. According to Tong (2012) trade wars reduce the demand for both imports and exports of a nation thus reducing the international trade between countries. He argues that in an attempt by the country in protecting its domestic firms so as to create more hob opportunities for its citizens, would result in a trade war. Looking at it from the short run perspective, the idea would work effectively.
However, as time goes on, economic growth is depressed for all the nations involved. In 1929, a tremendous trade war occurred which saw tariffs on imports increased to around 900.0 tones. Tong (2012) reported that prices for food increased for consumers in United states. It made other nations to retaliate using their own trade tariffs. It then contributed to the increase in depression and the fall of the world trade hence the rise of the world war 2.
Many bank treasuries have encountered challenges as a result of trade wars and geo-political tensions across the world. It is believed that these tensions have an impact on the market stock which is affected by the depression. In this case, bank treasuries will be forced to always revise and change where necessary the growth forecasts for their banks. Similarly, trade wars create a high risk between countries which affects the transaction process. There is increased volatility of the currencies and globalization. With this, bank treasuries consider liquidity and cash risks as their major challenge (Deniz, Igan., Luc, Laeven., and Hui, Tong, 2012). They also face a challenge of management risks, cash forecasting and cash management caused by volatilities in the world’s currencies. Variations in these currencies bring about difficulties in management of money.
Also, a survey conducted in China indicated that about 66.00% of the bank treasury respondents have a challenge of their scope growing to the new areas like insurance and goods. Additionally, tensions from the geopolitical perspective bring about inefficiency of money supply in the economy. For example, the bank treasuries encountered a challenge of lack of enough budget as also a major road block for their performance (DeCambre and Sunny, 2018).
Additionally, bank treasuries have encountered a challenge of competition from other nations that are free from volatilities. In countries where is no such headwinds, they are extremely doing good in terms of their banking sector system.Tong (2012) argued that treasuries have encountered a challenge of currency volatilities both domestic and foreign. He argues that these currencies are not always stable especially during such circumstances. Similarly, there has been a problem of increase in the liquidity trap of money. Both foreign and domestic individuals tend to keep money with themselves (Tong, 2012). The process leads to decline in money circulation which means little money for the bank treasuries. Finally, both domestic and foreign inflation might result and cause the currency loses the value.
Bank treasuries have encountered different consequences and impacts as a result of these volatilities in both domestic and foreign currencies. For example, they would need to adjust to the changing of regulations and the raising of the strategic importance within their business firms. They have also encountered a consequence of new upcoming problems of inflation hitting the countries (Lobachevski, 2018).
On the other hand, the geo-political tensions have impacted the treasuries into the integrated decision making which has become more important in taking decisions. More so, there has been a changing life of the innovations daily (Watts, 2018). These have also affected the performance of bank treasuries. Following the current volatilities in the financial markets, there are high chances that market conditions will have changed by the end of 2019(Watts, 2018).There will be also changes in the portfolios of the bonds by the treasuries.
The treasuries have also encountered an increase in the interest rates as another consequence by the federal states (Watts, 2018). They would also face a challenge of how to manage the foreign exchange risks (Watts, 2018). Volatilities within the exchange rates across the world continue to put pressure on treasuries over the geo-political tensions.
There are some discouragements by some individual groups from selling and buying in the future markets due to requirement margins on the stock market. Price fluctuations caused by the volatilities in the stock and financial markets increase the chances of currency depreciation. Which becomes a very big problem to the treasuries since it is hard for them to balance their books of accounts (Levy, Sebastien., Marie, Hellene., and Catherine, Lobachevski, 2018).Volatilities in financial markets create disturbances during money transfer by different banks. Treasuries would not be in positions to send and receive money in their exact amount as expected. This is due to variations in the foreign exchange rates (Laeven and Valencia, 2012).
From the year of 1979 to 1990, many nations came up with solutions and steps in facilitating the cross boarder and domestic trades in the financial markets. In same year, integration in financial stock markets increased following the developments and improvements in the financial techniques and technology. The allocation in the global financial capital has tremendously increased due to these changes (Mercy and Kuo, 2018). On the other hand, scholars have reported that there has been an increase in the financial volatility assets.
According to Trans-pacific view (2018) many countries have reacted and responded to the volatilities in financial markets in an appropriate manner (Okafor and Shaibu, 2016). It has been seen that most of them have cut main of their policy rates to around 325.0 points from the year of 1980. The new reduced interest rate is now at 1.00% whichhas been their lowest level ever since the volatility in financial markets started (Roosmalen, 2018). This level was regarded to be appropriate since it takes puts the analyses and all the information into considerations. Scholars have reported a decline in the interest loan rates which are changed by the commercial banks and with a fall in the market money rates(Roosmalen, 2018). Okafor and Shaibu, (2016) stated that the monetary policy has already been felt in the economy since most of the changes had occurred. Similarly, some nations provided liquidity operations that was always needed urgently (Visco, 2017).
There were also decisions made so as the maturity ranges of the liquidity operations could be extended up to like twelve months from six (Levy, Sebastien., Marie, Hellene., and Catherine, Lobachevski, 2018). The decisions were made to improve the credit support of the economies through the banking system. These steps aim at reducing the declines in the market money rates. In doing so, the banking system is encouraged to expand and maintain the lending path to different customers within the nation. It will finally improve and increase the liquidity in markets. The conditions of funding the banking system and firm-enterprises will be generally be eased (Start, 2009).
These measures mentioned above brought about an increase in the bank treasuries’ balance sheets and other accounting books. The research reported an increase in the Gross Domestic Product to 19.0% from the initial of 10.0% from the period of 2008 to 2007(Start, 2009). However, a decline in the balance sheet was reported to be at 15.0% in the year of 2009 (Amadeo, 2018). As result of this decline, market money activity increased. The central bank has always stepped in to give a hand help incase liquidity was seen to be drying up. This was due to the reluctance in lending to one another by the market participants (Chaganty, 2018).
Turning onto the fiscal policy response to the volatility in the financial markets, the fiscal policy makers have extra ordinally put their emphasis to respond timely to these headwinds. Chaganty, (2018), argues that it is much more important to provide a distinctive difference between the policy measures that intend to support the way the banks are doing and the fiscal policy makers which aim at increasing the demand ( Valencia, 2011). Nations have supported the banking sector system and hence the financial market system has been stabilized.
Nonetheless, many of the fiscal policy costs have been incurred by the nations that have resulted into an increase in the credit risk. These measures were seen to have a relatively direct effect on the budget deficits of the nations. Similarly, the automatic stabilizer operations have been used in the process of lowering the revenues from the taxes. Additionally, by spending high on the unemployment allowances, the use of fiscal discretionary policy has mitigated the effect of on the world’s economy. Nevertheless, fiscal policy makers need temporary measures remain constant so as to ensure its stability. The economic growth therefore will be recovered (Laeven and Valencia, 2012).
As per the Report of the county Treasurer (2018) many nations have quickly responded to the volatilities in financial markets by use of either monetary or fiscal policies (Chaganty, 2018). For example, during the pressures of inflationary receding’s and financial risks, most governments like the United States used the monetary policy to resolve the problem (Rapoza, 2018). It implies that, the Federal Reserve took the responsibility to reduce the supply of money so as to cut down the inflationary challenges (Rapoza, 2018). It was used as a policy action which helped to curb down the inflation rate in 1980 to 1990 from 35.0% to 10%(Rapoza, 2018). While other nations reduced the interest rates as a policy action, inflationary pressures also reduced. Other developing countries provided liquidity support to nations that needed help(Wyman, 2014. It helped those nations as they were able to maintain their flow of credit. Elsewhere, countries have credibly committed to use fiscal policy consolidation during their volatility in the financial markets with the help of the central bank(Wyman, 2014).
Treasury management plays a vital role towards business success. Therefore a solid treasury management tactic and strategy is vital in facilitating cash flows and promoting the overall levels of liquidity. The proper understanding of risks associated with treasury management lays a good foundation while formulating proper treasury management strategies. Treasury risks usually emanate from three important factors and they include the following; fraudulent activity, unpredictability and volatility of financial markets and the volume of funds involved.
All strategies undertaken to ensure efficient treasury management should aim at maintaining capital security without compromising the availability of liquidity to undertake various ventures. Different policies are utilized to settle these headwinds but the most important question would be, how effective are the used policies in restoring the economy. Therefore, I would recommend the following strategies.
Further, quality assurance of information is very important in treasury management. Therefore, to enhance the quality and level of decision making in treasury management, it is important to improve on the quality of data and information provided by team in charge of treasury management. This will eliminate cases of inaccurate information which affects business success.
There is also need for more enhanced Fraud prevention strategies and tactics. The formulation of limitation on the access of and authorization of bank accounts and transfers will help in addressing this challenge. Also, the formulation of a clear and proper treasury management plan is important. Important to note is that the lack of a clear execution strategy makes it difficult for policies aimed at treasury management to be implemented (Prins, 2018).
Moreover, there is a need to put a process in place that will help in error prevention and reduction. Important to note is that the high levels and volumes of financial transactions makes it difficult to avoid errors, hence the formulation of a clear process will help in correcting information and thus eliminate errors by removing any inaccurate d information that may be in the system. Lastly there adoption and implementation of a clear treasury audit will aid in frequent external and internal audits. This will be vital in identifying which areas need improvement.
Further, for the effectiveness of the fiscal policy measures, there is always need to increase demand hence a reduction in taxes would apply (Wyman, 2014). I would also recommend the treasury management to have a take on different approach and use of incentives that appropriately adopted. I would also recommend the treasury management to always consolidate themselves in cases of such headwinds. It would help them to come up with combined better decisions. To note, quality assurance of information is very important in treasury management. Therefore to enhance the quality and level of decision making in treasury management, it is important to improve on the quality of data and information provided by team in charge of treasury management. This will eliminate cases of inaccurate information which affects business success. There is also need for more enhanced Fraud prevention strategies and tactics (Mercy and Kuo, 2018). The formulation of limitation on the access of and authorization of bank accounts and transfers will help in addressing this challenge.
Additionally, the formulation of a clear and proper treasury management plan is important. Important to note is that the lack of a clear execution strategy makes it difficult for policies aimed at treasury management to be implemented.
Moreover, there is need to put a process in place that will help in error prevention and reduction. Important to note is that the high levels and volumes of financial transactions makes it difficult to avoid errors, hence the formulation of a clear process will help in correcting information and thus eliminate errors by removing any inaccurate d information that may be in the system. Lastly there adoption and implementation of a clear treasury audit will aid in frequent external and internal audits. This will be vital in identifying which areas need improvement (Wyman, 2014).
Conclusion:
Treasury management is very important while undertaking decisions concerning economic crisis or any other headwind. However, the decisions may not always be effective and selective to the headwinds for a particular problem. So, this would call for more and reliable policies to be used. The central government is undoubtedly responsible for decisions vital in cases of such headwinds. However, the above opinion may be opposed since bank treasuries can also dictate the decision if there is a clear and appropriate procedure.
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