The seismic nature of the events of 2016 – such as the Brexit and Trump victories – and continued volatility in the global political environment has made emerging markets, including Asia, more vulnerable to changes in trade treaties as well as movements in rates and currencies.
This, together with ongoing domestic regulatory changes is placing pressure on treasurers and finance managers to transform their cash and liquidity management approaches and adopt new strategies to enable them to drive business growth while managing risk. What are the key considerations for charting a path towards sustainable and efficient treasury management in every market across Asia?
A melting pot of challenges
Market and political risk:
There are rapid changes in global regulatory environment including tackling base erosion and profit shifting (BEPS) tax avoidance strategies, the Basel III capital adequacy regime and the US Dodd Frank Act. In addition to changes in global regulations, regulators in emerging markets are pre-empting the effects of global volatility and stepping up their own regulations.
For example, exporters being subject to mandatory conversions of proceeds in Malaysia, rules on local currency invoicing in Indonesia, and the window guidance in China, all reflect a shift in regulatory policies with business and treasury implications for local as well multinational corporations (MNCs). Treasury and policy risks are further exacerbated with the growing protectionist mindset and increasingly sophisticated cyber threats that can lead to significant data or monetary loss, and disruption of business operations.
Sales demand predictability and supply chain disruptions:
Mitigating forecast errors and increasing visibility over cash positions remain critical key performance indicators (KPIs) for corporate treasurers. Increasing challenges such as supply chain disruption, low predictability of existing sales models, e-commerce disruptions, unpredictable sales and cash flows, create added complexities for treasurers in meeting their KPIs.
Balancing challenges with emerging market opportunities
Emerging markets (EMs) remain highly attractive, especially in Asia, where gross domestic product (GDP) will continue growing at 6% and discretionary consumption rising among a widening population base of 3.5bn people.
Digitisation stemming from e-commerce, ongoing payment landscape changes across several key markets in Asia, and demonetisation in India as examples, create huge new opportunities in EMs, with a growing young and connected consumer base.
In addition, many Asian markets are offering tax incentives to encourage corporates to establish centralised treasury activities. These not only include leading regional financial centres such as Hong Kong or Singapore, but also growing markets such as Thailand and Malaysia. The objective of these incentives is to promote Asia’s position as a regional and in some cases even a global treasury centre.
Flexible treasury policies to leverage growth while managing risk
A robust and flexible treasury framework, combined with consistent benchmarking of treasury practices, can go a long way in helping treasurers to promote growth and optimise cash while ensuring consistencies of global treasury policies.
Dynamic monitoring and managing risk metrics:
In an age of uncertainties, a clear priority for treasurers is the need to identify, monitor and manage risks within their treasury policy framework, and to establish consistent visibility and processes – locally, regionally and globally.
- Liquidity and funding risks are typically the most significant risks for most organisations. To manage them effectively, treasurers need visibility across their cash balances and the ability to accurately forecast flows, to reduce operating cash levels. This is particularly important in Ems, where cross border controls are in place and companies look to reduce the build-up of cash buffers.
- FX risks often involve a relatively flexible risk management approach. Treasurers need to be agile and adequately equipped with tools for scenario planning, enabling them to anticipate and counterplan for events such as increased currency controls, trade protections and similar market events that fuel market volatility.
- Counterparty risk should be considered in the context of sovereign risk and local market practices, as well as concentration and risk parameters appropriate to each instrument.
Other pertinent risks being reviewed by treasurers include business continuity risk, and technology and operational risk, particularly in an era of heightened cybersecurity threats.
Driving consistency and centralisation:
Centralisation has been a long-standing trend amongst treasury functions, whether regionally or globally. Often, however, EM corporations as well as regional operations of western multinationals, have less mature centralised structures than their western peers.
According to an internal survey conducted by Citi, which draws on data from more than 400 clients globally, while the large majority of western corporations have centralised treasury policies and governance, only 24% of companies from EMs have gone down the path. Similarly, treasury structures such as in-house banks (IHBs) have low penetration in EM companies, while these are prevalent among their western counterparts.
Given the current environment of uncertainty and volatility, the value of centralised treasury policies, shared services, a consistent approach to order-to-cash, purchase-to-pay, and central treasury and technology oversight is more important than ever. Treasurers can increase resilience, control and efficiency over their activities, manage risk more effectively and make better use of expert resources.
Supporting distribution and supply chain innovation:
We continue to see rapid emergence of new trading models and financing structures in Asia including regional treasury centres (RTCs), IHBs, re-invoicing centres, and netting centres. Treasurers play a vital role as corporations expand geographically and explore new sales and supply chain models by facilitating working capital, supporting innovative payment and collection methods and structuring financing solutions that meet the specific needs of the business.
This is even more important in an environment that EM businesses are going through as countries make their own BEPS adaptions and on the parallel make changes to their value-added tax (VAT) and goods and services tax (GST) policy. India, Malaysia and China have recently made substantive changes to their VAT and GST tax policies
Equipping the business
Cash flow forecasting:
Timely, accurate cash flow forecasting is key to balancing risk and opportunity, enabling treasurers to finance the business appropriately whilst minimising ‘trapped’ cash. Although virtually every treasurer and finance manager says they perform cash flow forecasting, many have sub-optimal forecasting processes.
Major inaccuracies are common, with inconsistent methodologies, insufficient root cause analysis, and ad-hoc forecasting routines across the business and geographies. This is often the case in EMs where companies have expanded quickly by acquiring new businesses, and consequently, may have very different enterprise resource planning (ERP) systems, decentralised operations and a very large number of bank accounts in each market.
Digitisation is a theme that applies to every part of the business, and treasury is no exception. In the EMs of Asia, we are seeing a step change in the level of treasury automation and efficiency. This extends further than companies leapfrogging their western peers with the latest treasury management systems or payment systems to a more profound shift in automation and sophistication of the financial supply chain as a whole, with a ‘step up’ in clearing systems, payment methods and the inter-operability of banking systems and logistics operations.
Treasury sits in the pivot of this, as it provides the connection between the company’s own operations and its external banking counterparties. As a result, treasury needs to review its digitisation agenda and benchmark its level of automation and analytics to ensure that it is equipped to support the current and future needs of the business effectively, particularly given the ongoing increase in the use of e-commerce channels.
Measuring success, achieving potential
Critical to successfully managing risk and leveraging opportunity is a close partnership between the corporate treasury function and its relationship banks that evolves over time, in line with the changing environment and changing business demands.
With the right policies in place, treasurers can then work with banks to design, develop and put in place solutions to support treasury’s risk, liquidity and digitisation objectives – both today and in the future.
In essence, the regulatory, markets and political uncertainty is here to stay and will continue to dominate the treasury agenda. It is imperative for treasurers and finance managers to adopt suitable changes and continue to lead their organisations on the path of sustainable growth in emerging markets.
Supply chain finance (SCF) at its surface can appear to disrupt supplier relations and the status quo. Thus, it’s critical for treasury to champion the value of SCF cross-functionally, and the strategic value it delivers in way of specific capital allocation commitments, EBITDA guidance, or free cash flow targets previously committed by the CFO.
For UK treasurers looking to manage financial risk within their organisation, recent news of an interest rate rise from 0.25% to 0.5% was a mixed blessing.
Despite their importance to the world economy, SMEs often face problems accessing credit when and where they need it. Their banking needs are often more complex than the usual retail banking customer and they don’t offer banks the revenue potential of larger corporations.
Whether responding to questions from other stakeholders or seeking to monitor the effectiveness of their risk management processes, treasurers and FX managers in growing companies with expanding foreign currency exposures need solid analytics to support their decision making.