Adaptability and resilience in times of conflict

Over the summer, HSBC Bank Middle East hosted a breakfast roundtable of CFOs and corporate treasurers in Dubai under the theme of rerouting trade and FX volatility.

Overall, there was continued positivity among the experts in the room as the geopolitical situation seems to be improving. However, they were divided on when the region would return to normal operations. Some expected at least six to 18 months, while others expected a quicker bounce back.

“With the UAE’s support and its visionary outlook, I am confident that our clients will be able to thrive and achieve their growth ambitions”, continues Abid Mukhi.

Skilfully navigating the range of challenges takes knowhow, and several roundtable participants talked about dusting off their Covid-19 playbooks to remind themselves of their quick-fire actions during the pandemic-induced crisis.

“We pulled out our Covid strategy straight away. It’s about being agile and seeing this as an opportunity,” said a restaurant chain CFO. “Within three months of coming out of the pandemic, we’d signed 15 new sites in the region. Already, we’ve signed six across the UAE and Saudi.” They were confident that residents and tourists are returning, which is helping to accelerate the recovery.

Trade and supply chains

For many companies, the geopolitical turmoil has presented an opportunity to explore new trading partners, trading corridors and logistic routes.

Unsurprisingly, supply chain resiliency was a top priority for goods importers, who having been dealing with stranded products in different countries and the rising cost of insurance, while renegotiating import terms with shipping companies.

There was general consensus on the importance of acting quickly to get supply chains back to normal to help quicken the recovery. However, many operating costs have increased, particularly insurance. Companies should be working with manufacturers to share the burden of rising costs and ensure a steady supply to fulfil customer needs.

One manufacturing company had imports stuck at ports in Sri Lanka, India and Pakistan. With 120 days of inventory, the business was covered until end of May but faced hurdles replenishing inventory in June. “The difficulty is that we may have everything except a small part to finish off the entire process,” said the group CFO. The company has moved forward with alternate suppliers and is seeing good results, partly because local demand hasn’t fallen.

Even if goods are moving, they are taking longer with uncertain timelines. Many companies are building optionality in to where they warehouse goods, according to Rohini Kamath, Director, UAE Global Trade Solutions, HSBC Middle East. “Companies are building optionality around logistics, warehousing but also how they use finance to manage working capital requirements,” she said. “This allows companies to accelerate procurement and capture pent up demand when times are better while conserving liquidity when needed.”

Companies that had already established diversified supply chains have been able to capitalise on manufacturing and warehousing operations outside the region, including South Africa for one conglomerate. Those in the service sector reported little impact, highlighting the UAE government’s continuing support for, and investment in, the technology sector and AI, for example.

Liquidity and working capital

While experiencing short-term disruption, many corporates are looking toward opportunities in the long term. One CFO reported sitting on more cash now than at the start of the year. It acted quickly to preserve its balance sheet, for example, by extending payment terms with its distributors.

The company was planning various M&A deals and investments, but has put its plans on hold until opportunities begin to emerge once the situation looks more positive. This has given it time to restructure after three or four years of robust growth, which the CFO believes has strengthened the business.

Likewise, a consumer packaged goods (CPG) company at the roundtable is cash generative, so didn’t face financing issues. The CFO reported searching for opportunities to maximise its cash at a time when the business was a little softer than anticipated.

Such crises push companies to be more agile and creative. The CPG business was among the first to request a refund of the Trump administration’s duties and tariffs that were deemed unconstitutional by the Supreme Court. It has received USD4 million by the start of the summer.

“It’s not that we needed the cash, but it made us think about being more resilient, more creative and pushing ourselves beyond normal boundaries. Usually, we would have waited for others to make the first move,” according to the CFO. “This also educated us for the second refund round.” The company expects to receive a full refund.

Interestingly, as business continuity was a priority, the CPG company decided to experiment with an alternative headquarters in London, trialling it for 45 days. After a successful test, it’s now exploring other locations where it could potentially establish a mirror headquarters during similar situations.

Not all companies are cash-rich and some require financing for flexibility in times of crisis. One participant stressed the need to have access to cash to support working capital requirements. The company works with international banks, such as HSBC, to ensure a facility arrangement when needed.

The construction industry faces a specific problem: fixed-price contracts force contractors to bear the costs of materials, such as fuel, rebar and concrete, which have all become more expensive. Construction companies need excess working capital to avoid delays in delivery, which is where banks play an important role. The contractors can assure the banks that the cash will come in; but, as an interim measure, banks need to offer them the required liquidity to ensure project continuity.

One fitness market company CFO reported having “incredibly good” historic working capital terms from its suppliers, but now they are requesting earlier orders as well as earlier payment.

Coping with market volatility

Many of the roundtable participants expect rising inflation to impact such areas as raw materials, oil prices, and VAT.

While the market has essentially priced out the worst-case war premium, the physical market is still extremely tight, according to Karan Khanna, Head of Global Markets Corporate Sales, MENAT, HSBC, who also pointed to other risk factors such as interest rate and FX volatility. “It’s difficult for corporate treasurers and C-suite to mitigate against the resulting volatility,” he said, adding that they need to have the right data and flexibility in their treasury policy to adapt. According to a recent HSBC Markets Pulse Survey, 51% of corporates expect to increase their overall hedging ratios for FX and interest rate exposures.

The CPG company is being quite conservative on hedging, according to its CFO, and looking for natural hedges. Currencies are typically hedged against the dollar for another company operating solely in the GCC. However, it is preparing to incur more currency exposure risk as it expands into Southeast Asia.

Interestingly, as an AI-forward business, the fitness company’s CFO is looking at building its own ERP system with AI, which will help from a hedging perspective because it will no longer be paying for software-as-a-service systems in dollars.

Another participant talked about putting hedging in place when the whole situation started, as they were able to hedge at quite good rates. They regretted not having hedged more given the market change, but indicated that it remains a relatively good time to hedge if a top-up is required.

As illustrated by the roundtable discussion, each corporate is dealing with slightly different risks and challenges depending on the type of business, industry size and complexity of the business operation. Yet their solutions also have much in common in a world where disruption is the baseline.