For the audience of 460 delegates at the EuroFinance Asia 2013 conference, two-thirds of which are from corporates, Carolyn Meier, EuroFinance’s managing director had some key welcoming words that she wanted to stress, explaining that as treasurers look around the world there are three words that they should remember when structuring their operations.
“The one word for Europe is risk; the one word for the Americas is recovery; while the single word for Asia is a far more optimistic growth.”
Not to deny the trinity of priorities outlined by Meier, the opening speaker HSBC’s group regional head of corporate banking, Noel Quinn, said that he saw only two worlds. One is the world we can predict, plan for and manage, with its fundamentals in economics and eternal cash management duties. The second world is a more unpredictable one where political instability and social unrest is prevalent – with southern Europe being a prime example at the moment. While treasury and cash management professionals have refined the model of the first world, he said, they also need to learn how to deal with the more difficult, risky second world.
The others theme outlined by Quinn was regulation, which affects corporates and banks alike. Important changes are underway in the fields of the global payment, supply chain management and liquidity, under the impact of the Basel III capital adequacy rules and other such stipulations. It is not a new topic for treasurers, however, with his third theme of growth likely to be of much more interest.
More positively, there is a huge opportunity for growth amid the increasing expansion of Asian wealth and businesses. While economic advancement in Europe will continue to be slow, Quinn said, there are exciting opportunities for expansion and for intra-Asia and South-South growth in the trade arena. All of these will demand treasury expertise and operations to get the full benefits.
Economic Predictions Continue: Asia Slowdown?
The opening deluge of economic predictions continued at EuroFinance Asia 2013 when Frederic Neumann, HSBC’s co-head of economic research, gave a broad regional overview. While doubts about growth may have crept in recently in Asia, he admitted, the region is still in an upward trajectory. An economic slowdown in Asia is therefore evident, but overall growth is still relatively healthy.
Meanwhile, in the US after the collapse in industrial production post-crash in 2008, a recovery is underway but the country is still not back to its pre-crisis peak. The eurozone had even faster growth pre-crash, and a deeper fall since. European output is still 13% below its peak before the crisis, explained Neumann.
Asia is vastly different, in that the global financial crisis barely registered and output today is nearly 50% above its previous peak. This shows a form of decoupling is occurring, said Neumann. Furthermore, Asian growth is not so dependent on exports to the West anymore, but is linked to financial markets. Asia will continue to grow for at least two years because monetary easing will continue in the US and Europe.
China Collapse is Just Noise But Risks Are Evident
Concerns about economic data and exports in China turning downward, were mostly “just noise” according to HSBC’s Neumann. While growth and output are likely to slow, local production continues to soar and there has been a pickup in consumer spending so growth will accelerate in China. Falling commodity prices will actually help to lift consumer spending in Asia generally as well. Domestically there is no sign of a slowdown in Asia. One of the key drivers is infrastructure spending, which could add 1.5 percentage points to gross domestic product (GDP) growth, and a record amount of liquidity has also been injected into the Chinese economy.
Risks do, however, face the Chinese economy that treasurers should be aware of, concluded Neumann, citing credit-to-GDP ratio as a key risk indicator. In 1990, the ratio for Asia was about 80%. After a decrease to 75% in 2001 during the Asian meltdown, the ratio has been increasing ever since driven on by large amounts of liquidity and low interest rates. The ratio is now above 100%, and will continue rising for quite a while longer. Reaching 130% is about two years away, and Neumann said that level may not be the end of the process, as Western banks continue to pump in liquidity.
Credit-to-GDP ratios is one risk indictor that treasurers should continue to monitor. Higher global interest rates, local inflation and a financial scandal that undermines confidence – such as another European bank getting into trouble – could all trigger problems in Asia and demand a response from risk-averse treasurers.
Reckitt Benckiser FD Shares Growth Factors
Ashish Gupta, finance director for East Asia at healthcare and consumables group, Reckitt Benckiser Thailand, was the next speaker at EuroFinance Asia 2013 to discuss risk, emphasising that “ambiguity and volatility are here to stay”.
Gupta shared seven principles for companies to grow, even in uncertain times:
- Size does matter, and “big is best”: Large companies enjoy greater volumes and revenues, higher profits, higher market share, the ability to be a market leader and economies-of-scale savings, making things easier for treasurers – if not necessarily more interesting. Companies should identify fewer opportunities, of greater scale, which enable them to become bigger and better, advised Gupta.
- Understand the global market: Companies should have a clear strategy for Europe and the Americas, and in emerging markets they should go beyond China and India to look at markets like Vietnam, Myanmar and the Philippines. The next growth cycle will be in Africa.
- Finance for growth: There are three main sources of financing handled by treasuries – borrowing, share issuance, and looking internally to fund growth. Most companies that have been successful have looked in their balance sheet and generated surplus profit to fund growth.
- Actively manage your currency and hedging programmes: Gupta advocated that treasurers should do this, but warned that views on currency should drive tactical decisions, and not policy decisions.
- Analyse data to achieve success: The ‘big data’ deluge is inevitable, and beneficial. Corporates that analyse data will win.
- Crisis management is real management: Every crisis, Gupta said, is an opportunity for de-layering and for restructuring.
- Globalisation cannot be achieved without localisation: Gupta advised businesses to look at growing the local treasury and managerial talent in Asia and to grow local knowledge to achieve success.
Treasury Polling and eBay Treasurer
EuroFinance Asia conference chair, Richard Blair, led a real-time survey of attendees during day one of the show that produced some surprising results. eBay’s Singapore director for Asia-Pacific treasury, Tim Smallow, joined JP Morgan’s head of MNC sales, Lillian Sim, to discuss the polling results.
Compared with last year, 54% of show participants said they felt the same about their businesses’ prospects in the next year, while 28% said their confidence is worse. Only 18% said prospects were better, somewhat contradicting the earlier optimism. Smallow commented that he sees cross-border business expanding as emerging markets gear up, and especially in Asia Pacific there is still corporate ability to expand.
For the year ahead 36% of show attendees felt more confident about global economic prospects in the next year, while 35% felt less confident and 29% felt the same as they did last year. JP Morgan’s Sim said this year has seen a bumpy road with volatility resulting from the eurozone crisis and other shocks, though things are still looking positive for Asia.
Turning to China, 35% felt less confident about that country’s economic prospects in the year ahead and 35% felt the same as last year, while the remaining 30% were more confident. eBay’s Smallow said that people see growth slowing, though JP Morgan’s Sim noted that China is still one of the power engines of growth and a lot of investment will go in.
Bank Diversification Acts as Risk Mitigation
At a time when a number of corporates are decreasing their number of bank relationships, 49% of the polling respondents at EuroFinance Asia said they actually expect their number of bank relationships to increase. This is due to Asian growth and a desire to spread bank risk and increase cash inputs. 38% of the treasury audience expected their number of banks to stay the same, while the same number expect to cut their number of bank relationships.
Funding was a surprisingly large problem for many Asian corporates. 71% said they expect to have problems accessing longer-term funding in the next 3-6 months, and most of the rest expect problems over 12-24 months. Just 1% do not see any problem accessing longer-term funding in the foreseeable future. Conference chair, Blair, commented that this trend is different to other markets and a new phenomenon for Asia. Additionally, 47% said that Basel III or Dodd Frank regulations will harm their access to funding.
Only 40% of Asian treasurers are happy with the level of cash visibility in their organisation at present, which Blair observed is also different from other regions.
Renminbi (RMB) and Trade Finance
Fewer than one in four of the polling respondents (23%) are using renminbi (RMB) for trade settlement at the moment, according to the EuroFinance Asia polls. Another 33% expect to use RMB within five years, and 23% expect to use RMB at some time in the future. Just 21% said RMB is not relevant for their organisation for trade settlement.
Supply chain finance was important to the treasury function for 21% of participants, while 20% said it is not important and, surprisingly, 59% said it is not applicable.
Even more surprisingly, at least in comparison to the US and Europe, only 11% of Asian treasury attendees at the show said they were investigating alternatives to using banks for payments. 58% said they are not looking for alternatives, while 32% said alternatives are not applicable to them.
In regard to moving treasury management systems (TMS) to the cloud only 15% of poll respondents thought it was a good idea, while 58% did not, with the rest abstaining.
A number of other polls then followed with the single euro payments area (SEPA) even cropping up. While it might seem like SEPA is a European issue, 54% of show attendees at EuroFinance Asia 2013 said they were ready for it. JP Morgan’s Sim commented that although more of the compliance burden is naturally being done by Europeans, some treasuries out of Singapore – particularly at multinational corporations (MNC) – are ready.
Treasurers certainly need to get ready for a world where compliance and regulation increasingly affects them, even if it is sometimes second hand via bank regulations like Basel III. But the primary focus for Asian treasurers must be on the eternal fundamentals of assessing risk and reward – return and liquidity, call it what you will – in an era of volatility.
- To read about some of thelatest treasury projects and Asian case studies presented during the afternoon of day one at the EuroFinance Asia 2013 show please click HERE.
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