EuroFinance Day 1: Risk, Opportunity and Centralisation in Asia

The first day started with a high-level look at economic and risk issues facing corporates around the region, then delved down to focus on specific tactics and practices.

Asia in the Global Context

Kicking off the first session, HSBC co-head of Asian Economic Research, Frederic Neumann, focused on the economic outlook for Asia, amid global change. While markets are extremely volatile, he said, growth is continuing at a reasonable pace and there is tremendous resilience across the region. And whereas industrial output in the US is only 0.2% above the previous peak in 2008 and Europe is still 11% below the previous peak, output in Asia is 55% above the previous peak. Asia achieved this growth despite the absence of western demand, so it actually achieved decoupling.

However, Asian growth was partly obtained through an increase in debt, and there has been an increase in leverage to more than 100% of GDP. Since increasing leverage is not sustainable forever and GDP growth is credit-dependent, Neumann said, when interest rates do go up – most likely after another two years, since central banks usually only start to tighten when output is 20% above the previous peak – Asia will have a problem because the increase in debt will no longer be sustainable. What is really needed is productivity growth, because, that is what sustains economic prosperity.

As an interesting sidelight, he noted that Japanese banks reserves as a share of total assets have grown from 3% in 2004 to more than 10% of assets today, and since they are drowning in liquidity, funds have started to flow into the rest of Asia and Japanese bank lending to ASEAN is near record highs.

Risk and Opportunity in Asia

Focusing on how risk links to the potential for economic growth, Maplecroft CEO Alyson Worhurst said she sees the legal and regulatory environment in Asia looking good and starting to stabilise. However, she still sees risk in Asia in three key areas.

First, the political risk environment is challenging, to the extent that there is a risk of societally-induced regime change in markets such as Cambodia, Vietnam and Thailand. Second, human rights are getting much worse in Asia because there is repression of societal dissent and increased vulnerability in migrant workers. And third, there is much more tension relating to agro-commodity investments as well as oil and gas. “You see society protesting, and government suppressing them, which can lead to regime change.

Even with these risks, Worhurst said “What we’re seeing is great growth potential, along with legal and regulatory improvement, reform taking place, sanctions being reduced, and foreign direct investment going in.”

Putting it all together, she said the 10 key findings from her research are:

  1. Uncertainty over reforms harm the business environment
  2. The pace of democratic reform is critical
  3. The key countries to monitor are the Philippines, China and Thailand
  4. Reputational risks will remain considerable
  5. The rise of the global middle class will provide growth and raise expectations
  6. There will be increasing resource nationalism, especially in Indonesia and Myanmar
  7. Corruption is a serious detriment to improvement in the business environment
  8. Nationalist sentiment is rising sharply in countries antagonistic to China
  9. There are decreasing levels of political violence in South Asia
  10. There will be significant improvement in the rule of law index

The implication for treasury, she said is it has to monitor political and societal risk so that supply chains, operations and investments can flourish.

Letting Go and Keeping Control – The Right Amount of Centralisation

Sessions then turned to looking at practices treasury can use to enhance performance. One of the key issues that many companies are grappling is whether to centralise treasury, and Essar group treasurer, Aashish Pitale, gave a view of both sides of the debate.

To illustrate the options, he started with case studies of two other companies. On the one hand, Proctor & Gamble has a central treasury in Cincinnati and smaller centres across the global that deal with local nuance. They centralised both because decision are based on better control for senior management and also because uniformity from central treasury across aligned businesses means there are economies of scale. Tata Group, on the other hand, decentralised to regional treasury centres (RTCs) around the world as well as a foreign exchange centres and a payments factory. “One thing that sets it apart is the high level of M&A,” he said, which makes it difficult to be centralised. Moreover, “decentralised treasury means credit quality in one entity will not affect the other, and decision-making is easier.”

Essar, which has more than 70,000 people in more than 25 countries and operates in oil & gas, steel, telecoms has complex financial transactions and more than 60 banking relationships. “We decided to go for centralisation,” he said, because “there are multiple business verticals, wide geographic spread, and a complex holding structure.”

The main advantages of a centralised treasury, he said, are centralised control and decision-making, the ability to get the company’s cash position more quickly, the flexibility of moving cash, and having just one set of people who have treasury expertise. Disadvantages, he admitted, include slow communications, a time-consuming flow of information, slow response times, and having to identify a decision-maker in each market to interact with local regulators

When he set up centralised treasury the first step was setting up the infrastructure – IT, risk management, risk management policies. Other key steps included setting up a risk management committee, standard operating procedures, automation of risk reports, and controls with proper checks and balances.

The Role of the Regional Treasury Centre to Underpin Global Growth

Looking at centralisation options from a different perspective, Standard Chartered Bank director of Transaction Banking, Nikhil Ratnam, said a key reason for setting up RTCs is that as the complexity of managing regulatory compliance increases, companies want to get treasury closer to the action so they can align to the business requirements, and they use localisation, standardisation, regulation, services and a business model to drive the change. The key challenges are to identify the business justification, find the expertise, and hire the right resources.

While some companies have a cost-focused objective and want to drive down costs and have global standardised processes, he said, many ASEAN corporates are in a growth mode, so considerations are different and they focus more on how treasury can enable the corporate to grow in an aggressive manner and structure for growth.

Ernest & Young partner Amarjeet Singh looked at RTCs from a tax angle. The basic model, he said, is where the RTC is the central financier and borrows or lends intra-company as well as borrows from the banks. Even though one of the drivers for the RTC is to reduce cost, he said, “From the tax side, having the RTC in the middle actually does create another new element of tax.” The RTC can be required to charge interest, so there is interest expense and income. “On the one side we look at saving cost, and on the other we have tax costs coming out of the centralisation,” he said. Given these considerations, corporates need to evaluate the impact of an RTC very carefully.

Global Liquidity Strategy

CLSA treasurer, Brendan McGraw, discussed how his firm decided assessed using notional pooling or physical pooling as it looked at its global liquidity strategy. “The decision for CLSA was notional pooling,” he said. “There was a sustainable pool of balances, so it made sense, and because the balances stayed in the company, it would be easy to do.”

While there are four basic pooling structures – single currency with one country pooling, single currency cross-border pooling, multicurrency one country pooling and multi-currency cross border, pooling, CLSA chose two solutions and used one single-country and one multi-country option.

In making the decision, CLSA started by evaluating the basic interest compensations and how to allocate the benefit. After getting buy-in from the top, they developed a detailed plan, set up an implementation team and produced detailed project plan.

The benefits have been significant. CLSA reduced its core funding needs, had a much better match of its internal surplus to internal funding needs, was able to use external lines to deal with funding short-term spikes, and had more flexibility for entities to have a quick return of capital. Moreover, total treasury transactions were reduced by 60%, so staff spend time targeting areas outside the pool and making sure they get a better deal on FX, custody or other services rather than getting rates and booking entries.

Conclusion

The conference’s first day offered a look at the big-picture economic outlook and risk profiles, as well as specific insights on key practices that treasurers can use in mapping their own strategy. gtnews will be back on Day 2 to bring you the key discussion points.

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