Payments and Notional Pooling in Central and Eastern Europe

Introduction

Central and eastern European (CEE) countries have become increasingly attractive to foreign investors since the shift to democracy and capitalism in the past 15-20 years. Low labour costs and high skill levels have made the region popular as a base for manufacturers and, more recently, for outsourcing financial services such as shared service centres (SSCs). Financial reforms and the harmonisation of financial services with European standards has also lead more companies to start considering the CEE countries as lucrative locations for acquisition and growth. Bulgaria, Hungary, Slovakia, Slovenia, the Czech Republic, Poland, Romania and the Baltic States are all now European Union members and, while the Ukraine is not part of the EU, or even a candidate country for EU accession, it is looking increasingly towards the European model for its financial restructuring.

The three Baltic States – Estonia, Lithuania and Latvia – are at the fore when it comes to attracting foreign investment, according to Ed Parker, head of emerging Europe sovereigns at Fitch Ratings. They have reformed and improved their financial infrastructure and services, and the Baltic banking industry is now dominated by Scandinavian banks such as Nordea and SEB. In his article, Risks Rising in the Baltic States, Parker says: “The Baltic states have enjoyed years of strong and sustained growth which has raised per capita income, hastening convergence with average EU levels. They have been among the four fastest-growing EU countries since 2001: each country’s real GDP growth rate averaged 8-9% over the five years to 2006.”

Payments

Regulations on payments and collections across the CEE countries vary widely, with central bank reporting on cross-border payments or payments between residents and non-residents relatively common. However, most of the CEE countries have already become EU members and they are therefore harmonising their payments infrastructure as much as possible with the European standards. The single euro payments area (SEPA) regulations will come into effect from January 2008 and many of the countries that have not yet adopted the euro, but who aim to do so in the next five to 10 years, are already aligning their payments systems with the SEPA standards.

According to Pal Jozsef Vida, treasury manager at Hungary’s state-owned postal service, Magyar Posta, the company is using international bank account numbers (IBANs) and bank identity codes (BICs) for their international payments, which are done through the SWIFT network. The company is able to use both IBANs as well as the local bank account numbers concurrently. Vida says that most of Magyar Posta’s banking partners are able to handle both local bank account numbers and IBANs. Real-time payments were introduced in Hungary two to three years ago, although Vida adds that “execution time could be improved.”

Due to the fragmented regulatory environment in CEE, many corporates are using shared service centres (SSCs) and payment factories in the region to achieve greater efficiencies in their payments. Part 6 of Citi’s Guide What Now? What Next? Looks specifically at this topic and examines the main regulatory challenges that corporates face in setting up a SSC in CEE. According to the guide, it is necessary to establish different agreements with each country or at least some country-specific addendums.

According to Citi’s cash management head for CEE, Karin Flinspach, “You need to have very clear work processes set out before incorporating additional countries into the SSC because, if processes are moved without being standardised beforehand, this can create problems.” Read more on this topic in: Shared Service Centres in Central and Eastern Europe

Cash Concentration

The complex regulatory environment in CEE means that not all jurisdictions support the cash pooling structure. Many countries consider transactions made as part of a physical cash pool to be inter-company loans and they are therefore liable to some form of taxation or stamp duty. Poland is one country where it is difficult to set up a cash pool due to the Civil Law Activities Tax (CLAT). In his article, Cash Management in Central and Eastern Europe, Andreas Luessman, senior cash management specialist at UniCredit Group, examines what is possible and looks at the regulations governing cash pooling in Poland. He says: “Before implementing an automated cash pooling structure in Poland all individual basic conditions have to be checked and the structure has to be approved by the Polish tax authority.”

Gtnews spoke to one corporate treasurer based in Vilnius, Lithuania, who is in the process of negotiating a cash pool to manage the liquidity of its eight subsidiaries based across the Baltic region. The treasurer said that they would have to think carefully about the structure of the pool, because cross-border pooling is not easy in the Baltic States due to tax and legal reasons. The pool would initially be a domestic pool in order to avoid issues such as withholding tax and the Lithuanian central bank reporting requirements on loans to foreign business units.

Notional Pooling

An increasing number of corporates are now demanding notional pools from their banks. Another corporate treasury analyst based in central Europe told gtnews this week that she believes that the decentralised nature of many companies operating and trading in CEE means that implementing a cash pool of some sort is quite essential to optimise liquidity, but that the regulations mean that a notional pool is often the most attractive option open to them. Many corporates need to find out more about this cash concentration method.

This is reflected in the article on cash management in Ukraine by Vladislav Mayer, relationship manager at ING in the Ukraine, in which he also states that cash pooling structures are particularly in demand from MNCs. He adds that, in Ukraine, some banks offer notional cash pooling. He states in the article: “The notional cash pooling structure is allocated as a back-to-back solution under the lending facility available to the legal entities and takes the value of the hryvnia daily closing balances of each of the company’s entities. Interest is paid on all positive balances based on a rate pre-arranged between the entity and the bank.” Read more on cash management and payments in Ukraine in Mayer’s article Ukraine: Moving Towards the European Banking Model

In their article on cash pooling in CEE, Citi also concurs that having a notional cash pooling structure is an increasingly important cash management tool for corporates in CEE, in light of some of the regulatory obstacles to physical cash pooling. “Cross-border notional pooling is possible if pools are aggregated across different jurisdictions, although banks usually only offer this product if they wish to be very competitive. In Romania, local institutions cannot participate in a cross-border notional pool.” For more detail on this subject, read .#gtnArticle(7007)#

Corporates need to do thorough research before setting up a notional cash pool. It is not possible, or at least difficult, in some countries. In Bulgaria, for example, cross-border notional cash pooling is not commonly available. For more information on notional cash pooling, read the answers given by experts from Citi and ING in response to questions sent in by gtnews readers: Treasury Management in Central and Eastern Europe.

Conclusion

The payments and cash management landscape in CEE is rapidly changing and corporates need to seek up-to-date advice from their banks and advisors with regards to taxation, stamp duty, central bank reporting and the regulatory environment. While it is difficult to summarise everything that a treasurer needs to know about each country in CEE, gtnews’s archive contains a range of articles on cash management and payments in the following countries:

Romania – Payments and Cash Management in Romania

Russia – Payments in Russia: Current Trends and Future Developments

Poland – 

Czech Republic and Slovakia – #gtnArticle(6743)#

Bulgaria – Bulgaria’s Evolving National Payment System

Hungary – Cash Management in Hungary

Baltic States – Cash Management in the Baltic States

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