With share prices dropping in unison with plummeting oil prices, foreign exchange rates bouncing and financial technology companies (fintechs) experiencing a new reality in valuations, what has often been a traditional lull between the calendar and lunar new year holidays in Asia has instead kept treasury and cash management professionals busier than they probably ever expected this month.
China kicked off the year by surprising markets in fixing the yuan (CNY) lower during the first week of January. The move immediately raised fears that the country’s economy was slowing further and that the government would use currency devaluation to prop up growth.
At the World Economic Forum (WEF) forum in Davos, held from 20 to 23 January, policymakers indeed confirmed that that China is now managing the CNY against a basket of global currencies rather than just against the US dollar (USD). As Goldman Sachs’ chief operating officer (COO) Gary Cohn told Dow Jones, however, the combination of “China moving toward a freer market and its inability to communicate freely” generates market volatility.
Many other currencies dropped in tandem with the CNY in other markets around Asia and the Hong Kong dollar (HKD) peg came under pressure; however in contrast the Japanese yen (JPY) was viewed by investors as a safe haven and rose to the highest level in recent months.
The renewed bout of volatility suggests that effective hedging strategies may become even more important for Asia-Pacific’s corporates and their treasury departments this year than ever before.
The impact of cheap oil
While the continuing drop in oil prices might seem positive for countries in Asia – most of which are net oil importers – the fall is fast becoming a double-edged sword in some markets. Countries in the Middle East employ large numbers of labourers from Asia and may respond by sending many home as budget deficits increase; leading to a drop in remittances that are vital to countries. Remittances total about US$26bn in an economy of just US$390bn in the Philippines, for example and represent nearly a fifth of gross domestic product (GDP) in Nepal.
As Bank of the Philippine Islands economist Jun Neri told Philippine news site The Inquirer, the country would be a net beneficiary if oil prices managed to maintain a level of US$40 to US$50 per barrel. “If it falls to US$20 per barrel,” he said, “we think the downside is bigger than the upside because of Middle East remittances.” Other Asian countries, including Pakistan, Sri Lanka and Myanmar – which also receive significant remittances – could be similarly hard hit.
Corporates will need to work hard to figure out the impact and maintain growth amid these unexpected headwinds, particularly if predictions that prices will not start trending again for some time prove correct.
While valuations of financial technology (fintech) firms may have dropped, they continue to roll out new products and services for banks and corporates alike. Financial services is thus becoming “modular” – as management consultancy Oliver Wyman described it – with new digital distribution platforms and product providers as well as alternative sources of capital reshaping the industry. The net result could be a shift of 10% or more in banking industry revenues.
Corporate treasurers who take advantage of the shift could benefit from significant cost savings, while banks may need to develop new models for service delivery quickly to preserve their turf.
Treasury centres in Asia
Amidst the volatility from currencies and oil as well as a multitude of other factors, the rivalry between Hong Kong and Singapore to lure treasury centres continues unabated.
In his 2016 policy address on January 12, Hong Kong chief executive (CEO) Leung Chun Ying said that the city plans to continue to create a more favourable tax environment, proposed interest deductions for corporate intra-group financing and the halving of the income tax on qualifying treasury activities. He added that Hong Kong plans to sign more free trade agreements (FTAs) in order to reduce taxes for companies that locate there.
Look for Singapore to respond vigorously when the city state’s finance minister, Tharman Shanmugaratnam, makes his maiden budget speech in March.
While developments may well slow over the coming weeks in Asia around the lunar new year on 8 February, look for a challenging year ahead as changes in trade, oil, rates and more create opportunities as well as pitfalls.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?