For Byrne, this is all about to change. He says Westpac believes corporate liquidity risk profiles are likely to shift over the next 12 months “as we get closer to the Reserve Bank withdrawing the Committed Liquidity Facility (CLF)“.

The CLF was introduced in 2015 by the Reserve Bank to provide funds to local banks at times of liquidity stress and, right now, that doesn’t look like a problem with the price of debt so low.

Bearing this in mind, Byrne says banks will need to reshape their balance sheets over the next 12 months as inflation risks grow and the CLF is removed, which may see the cost of bank funding start to rise.

Time for a rethink

For local corporates this means they will have to “think more critically about the way in which their balance sheets are funded and how efficiently they’re using any surplus cash,” Byrne says.

Further contributing to increasing liquidity risk are some of the larger macro factors playing out in the economy that have been exacerbated by the global pandemic and rolling lockdowns around the nation. While our newfound freedoms look like good news on one level, as pent-up demand rolls through the economy and consumers tap into their savings, or equity in their homes for a spending binge, there is a downside.

The downside is the pressure high asset prices, low interest rates and increased household spending put on inflation at a time when surging demand won’t be equalled on the supply side. For example, global supply chains have been adversely affected by the pandemic – which is reflected in rising shipping costs, prices and lack of goods available – as has the local labour market.

Westpac Chief Economist, Bill Evans, also points to “global energy supply issues, as in some countries fossil fuel sources have been run down faster than we’ve been able to run up the use of renewables at a time when demand is exploding”.

On the labour front, Evans says border closures have obviously contributed to shortages, which are going to lead to record low unemployment and rising wage pressures.

He suggests these inflationary pressures won’t transform into the sorts of problems Australia confronted in the 1970s, because the structure of the economy has substantially changed, particularly wages being indexed to one-off price shocks. What he does see is interest rates rising in early 2023, rather than the Reserve Bank’s preference for 2024, which will see the current housing boom taper off from mid-2022 and correct in 2023. The Australian economy never copes well when house prices are falling.

What does this all mean for corporates and their current large piles of cash? Interestingly, it should lead to more investment right now but, Evans says, “businesses are still cautious, and despite a positive near-term outlook for demand and generous tax benefits, we cannot be certain that will change.”

“While plant and equipment investment has lifted by eight per cent between the end of 2019 and June this year, it is dominated by motor vehicles, agricultural machinery and, to a lesser extent, equipment like forklifts to support the big storage boom driven by online sales. What we haven’t seen yet is a substantial broadening of the plant and equipment investment cycle,” Evans says.

Need for major investment

According to Evans, business needs to invest more in plant and equipment – especially in labour-saving devices – to combat the continued labour shortages, the evolution of the digital economy and restructuring supply chains. The problem is businesses may remain cautious about new investment. This is partly based on the continuing after-effects of a long-tail event like the GFC, and now the pandemic.

Put bluntly, two black swan events in 13 years.

Evans says businesses are still focused on cost minimisation and their shareholders generally have short paybacks on their investment decisions, making it difficult to think long-term. Throw into the mix the uncertainty around the future of energy, digital disruption, supply chain disruptions and the government’s evolving response to climate change and business has good grounds for remaining risk averse “investment is now lower as a proportion of GDP than it was before the GFC”, Evans says.

Be that as it may, business investment will still boom in some sectors, like renewable energy and public infrastructure. Other parts of the economy such as education and health will also continue to grow strongly, but they are “not really that capital-intensive”.

“As for a big surge in genuine labour-saving, capacity-enhancing, capital equipment, I’m still cautious, especially when you see the obvious preference for M&A over genuine new investment,” Evans says.

So what does this all mean for corporate treasurers and Chief Financial Officers trying to make sound investment decisions?

Westpac’s Byrne says it’s going to be tough, especially as consumer demand escalates and more competition comes into the market from more mature offshore players as well as newer disruptors in certain sectors.

“The risk of disruption is going to increase quite dramatically, particularly for companies exposed more to technology and digital delivery of their services,” Byrne says.

“Bearing this in mind, the role of treasury and finance in managing the risk of disruption is going to escalate. This means they will have a big role to play in looking at the sophistication of the way they run their treasury and how tightly they manage cash to maximise investment.

Centralised liquidity structure

“They will play a critical role in looking at the automation of all processes in finance and treasury – anything that can be done to rationalise the overheads of their organisation – as they compete with newer players in their sector, with lower overheads, built on newer technology platforms and, in general, much leaner operations,” Byrne says.

Furthermore, Byrne says managing this risk well and making the right investments will benefit from treasury departments running with a centralised liquidity structure, rather than a distributed or decentralised structure.

The reason being, “if you have all your cash in one place, the ‘overs and unders’ and forecasting buffers that are submitted by subsidiaries of a bigger organisation tend to neutralise, so you need less cash in the bank than you otherwise would in a decentralised model”.

“At Westpac, we believe this will become even more relevant over the next year or two, if the cost of debt starts to rise and the imperative of more tightly holding your cash rises with it,” Byrne says.

He says what we’re seeing right now is that the more sophisticated treasuries, who have real control of their cash and capital position in a centralised structure, are doing exceptionally well. They’re the ones who are ready to invest in their own businesses, as well as examine merger and acquisition opportunities.

And the key to that sophistication has been an embrace of technology and making a material investment in digitisation. Moreover, integrating their own technology with their banks’.

“Digitised tech-savvy companies, even in more mature industries, are doing really well,” Byrne says. “So the question every company should be asking is ‘to what extent are your finance and treasury platforms integrated with your bank, and how does the information you receive help you make decisions every day?’.

“There are many things banks can do in order to help corporates simplify the way in which they manage their treasury, automate and lower the risk of financial operations, and most certainly get more value from some very large investments they’ve made in software and systems,” Byrne says.

And, importantly, manage liquidity risk and business investment more seamlessly and transparently in an evolving digital economy.