Treasury Today Country Profiles in association with Citi

Treasury in emerging markets: focus on MENA

Birth of butterflies from cocoons

While there may be short-term challenges on the horizon for the Middle East and North Africa (MENA) region, investment in infrastructure and international business expansion look set to provide treasurers with a number of interesting long-term opportunities. We look at the hurdles that foreign MNCs might face when moving into the region, whilst examining key market trends and ambitions.

Social and political change in the MENA region has dominated the headlines since late 2010. This has brought with it challenges for companies operating in the area. Treasurers, in particular those working in the markets where uprisings took place, are still having to deal with nervousness, tightened credit and an increased cost of borrowing.

But in many ways, this is prompting companies to become more creative with their cash management and to adopt global best practice. Supply chain disruptions due to the turmoil have also ‘forced the hand’ of many corporates in the region, encouraging them to look at solutions such as supply chain financing. Moreover, the importance of watertight corporate governance policies and well-formed contingency plans has been highlighted.

This progressive mind-set did not purely arise from the Arab Spring, however. Indeed the MENA treasury market has grown increasingly sophisticated over the last decade. But how does this level of sophistication compare to Western markets? What can a foreign company looking to open up a regional office expect?

MENA from Mars, Westerners are from Venus?

When companies used to ‘Western’ business practices first enter new markets, especially emerging ones, the differences between Iocal and international practices can seem vast. This can also ring true for employees who move to that country, only to find that what they know and recognise as best-in-class is merely a pipe dream for their new colleagues.

According to Alastair Fiddes, Head of Financial Risk Management at Mubadala Development Company (and a UK expat), “The understanding of treasury and risk is slightly different in the MENA market, as I am sure they are in other emerging markets. A number of businesses in the Middle East still operate on legacy working practices that are now considered ‘behind the curve’ when compared to best practice in the Western markets.”

“Financial governance and transparency is progressing but it is fair to say that it is operating from a lower base. The ongoing development of the capital markets will act as a very good catalyst,” continues Fiddes.

But as his company aptly demonstrated with their Adam Smith Award win for Effective Risk Management in 2011, the fact that certain tenets of Western risk philosophy may not be as obvious in Middle Eastern business culture does not mean that there is no desire to embrace them.

Indeed, for 30% of respondents to Treasury Today’s Middle East Benchmarking Study 2011, sponsored by J.P. Morgan, risk management, compliance and regulations were top priorities that senior treasury personnel would be focusing on over the year ahead.

Clearing and payments

While putting in place robust risk management practices may be one challenge, embracing the intricacies of the local market is quite another. “The banking infrastructure is improving but behind other markets and this hampers other developments taking place,” continues Fiddes. “For example, universal SWIFT messaging and the feeding of information into treasury management systems is limited.”

Several of the MENA markets have no low-value ACH capabilities; direct debits are also in the process of being launched in many of the key markets. In other words, there is still a significant amount of progress to be made. Steve Donovan, Head of Global Transaction Services for Middle-East, Citi says: “Paper instruments still dominate a lot of the flows in a number of these markets, but we sense that slowly but surely the regulatory framework is moving in the right direction.” For example, says Donovan, “We have recently seen the introduction of IBAN in the UAE, Saudi Arabia and Kuwait. Elsewhere, countries such as Egypt, Lebanon and Bahrain are very close to launching direct debits.”

Corporates – both foreign and local – are also doing their part to enhance the current offering. “We are seeing some strong positive moves by a number of companies adopting TMS’s and technology add-ons such as trading platforms, electronic trading and linkage to EBSs. This has many operational and risk related benefits such as greater access to quality data, ability to capture risks and ultimately better informed decision making,” says Fiddes.

Cash and liquidity

Banking infrastructure aside, how a company manages its cash in the MENA region largely depends on the countries it is operating in and what legal set-up it has, as well as its treasury structure and location.

The UAE, one of the GCC (Gulf Co-operation Council) countries, is by far the most popular destination for foreign MNCs to set up their treasury operation. This is in part due to the ability to establish a free zone entity – over which the foreign company can have 100% legal ownership (outside of these zones the maximum stake a foreign institutional investor can take is 49%).

These ‘free zones’ were established after the UAE joined the WTO in 2005 and the emirates signed up to a free enterprise agenda. They are also a very effective way of attracting overseas investment. In fact, Dubai, the UAE’s leading financial centre, attracted 77 foreign businesses to open a regional office there in 2011.

During those 12 months, the emirate was the recipient of over \m in foreign direct investment. Benefits for foreign corporates include that these free zones exempt the businesses operating in them from corporate tax and reduce the tariffs on their imports and exports. Some of the better known free zones in the UAE are JAFZA (Jebel Ali Free Zone), DIFC (Dubai International Financial Centre), DMCC (Dubai Multi Commodities Centre) and DHCC (Dubai Healthcare City).

In addition, since the UAE is a member of many international bodies, its legal and regulatory framework broadly resembles that of many Western countries. This makes it one of the easier places to run a treasury operation from. For example:

  • Domestic and cross-border cash concentration is permissible in the UAE.

  • Cash pooling is offered on both a domestic and cross-border basis by most international banks.

  • Interest is paid on call accounts but the majority of current accounts in the UAE are subject to local restrictions on interest. (Where paid, local interest rates are comparable to US dollar rates, which results in many multinational companies centralising cash.)

  • Other short-term investment options available in the UAE include time deposits in AED or foreign currency with tenors of one, two, three, six, nine or 12 months, certificates of deposit, repos and government issued bills, notes and bonds. Overdraft facilities are available for UAE companies.

In addition, as Sanjay Sethi, Head of Treasury and Trade Solutions/Cash Management in the Middle-East, Citi explains: “Looking at the GCC region, exchange control restrictions are fairly minimal and business friendly, and upstreaming funds to a global treasury centre is relatively straightforward. That makes the region a favourable destination for multinationals to set up a regional office. As we start to go out of that region, it becomes harder to do, as there are stricter exchange controls in place.” Of course, this is not to say that other locations in the MENA region are not suitable for foreign treasury operations.

Indeed, foreign MNCs have been seen to open SSCs in various locations across the region – and its surroundings – in the last three to five years. Ernst & Young for example actually runs its MENA SSC out of India. However, the GCC countries, and notably the UAE, are the most popular choice for most foreign multinationals.

In addition to the growing number of SSCs (also among local corporates) in the region, there are a number of noteworthy trends taking place in the MENA treasury market. One such trend is the adoption of more sophisticated treasury technology in the drive towards automation and centralisation.

Asif Raza, Head of J.P. Morgan Treasury and Securities Services in the Middle East and North Africa explains the drivers behind this: “Although we have seen great leaps forward in the last few years, the level of technology adoption in the Middle East has been slightly slower than in Europe or the US. Connectivity, for example with ERP systems, is also not quite as advanced. That said, as MENA corporates become more global in their activities, they are adopting international best practices.”

So, globalisation is introducing international treasury technologies to the MENA market. These include TMS and ERP systems. Fiddes’ team for example recently implemented four core treasury and risk management systems – including Numerix, Quantum, QRisk and Bloomberg – which provide them with efficient in-house pricing capabilities and the ability to execute large derivative transactions, effectively acting as an in-house bank.

Although e-banking is relatively developed and widely used in the region, there is also growing interest in multi-bank portals and solutions such as eBAM.

Mobile technology is also of growing interest to MENA corporates, as Donovan explains: “We’re piloting CitiDirect® Banking Evolution Mobile across several of the geographies in this region. Through this, corporates can initiate, view and authorise transactions on their mobile device in a secure environment. We are also looking to introduce this into our supply chain proposition. These kind of technologies are very innovative in this region and we are seeing a great deal of client interest as a result.

Citi really is at the forefront of driving these markets forward and that is helped by our extensive experience in rolling these solutions out across other global markets.”

Sethi adds that, “Despite some of the challenges that were hampering the widespread adoption of mobile technology in the treasury space, we are actively working with the regulators and our customers to roll out safe and secure transaction technologies (with CitiDirect® BE Mobile) in the corporate space, and working towards higher acceptability and rapid uptake.”

Looking at additional areas of focus for MENA treasurers, Raza believes that access to funding will be a key priority in the year ahead. “The region is somewhat insulated from the economic challenges in other regions and liquidity remains accessible but despite this, treasurers in the Middle East are taking measures to ensure adequate access to funding in 2012.”

“Traditionally, Middle Eastern companies have relied on short-term borrowing but going forward I would recommend that treasurers ensure that they have bi-lateral facilities in place with their banks as well as credit facilities. They should also consider structured financing solutions, which can provide longer-dated funding on favourable economic terms.”

Elsewhere, treasurers operating in the MENA region also need to be aware of the shifting trade landscape. The fact that MENA trade volumes are expected to grow by nearly 85% by 2025, according to a recent report from HSBC, is testament to the fact that the region is rapidly emerging as a major trade hub for Asia, Africa and Europe.

This is great news for treasurers as the banks operating in the region – both international and domestic – will have to focus more on offering appropriate trade and supply chain finance solutions.

According to J.P. Morgan research, supply chain finance is already experiencing fast-growth in the Middle East as both large corporates and multinationals look to provide better and cheaper access to finance for their counterparties based on their own credit ratings.

Nice to know

Another important consideration to take on board in the MENA marketplace is the mix of local and international banks. There are many strategic partnerships in place between the foreign and domestic institutions, but nevertheless the majority of MNCs will use a mix of banks to ensure they get the best possible service and price.

But Fiddes has observed inconsistencies in the pricing of risk by local and international banks alike. “European banks have to contend with Basel III, EMIR and MiFID 2 regulatory requirements and the impact is felt on lower rated counterparties, uncollateralised counterparties and higher exposed derivatives. While local banks may not be pricing risk at this level consistently, we are definitely seeing encouraging signs that the larger local banks are moving in the right direction.”

Naturally the local banks have ther definite advantages over their global counterparts in the regional market. A particular forte of the local banks is Islamic finance.

According to Raza, “Islamic banking will continue to be the fastest-growing sector of the financial marketplace, driven largely by the new wealth of the Middle East and the demand for Islamic financial products.”

“However, the proportion of financial assets that are currently Sharia-compliant is still relatively low globally and in the Middle East. The market is really starting to develop and grow as we see more and more Sharia-compliant investment funds becoming available.”

This point around Sharia compliance should also demonstrate to companies thinking of entering the MENA market that having local treasury talent on board is a must. Yes, local employees may require some education around international best practice, but the right local talent will bring invaluable knowledge of regional business and cultural intricacies.

A bright future

Fiddes actually sees this employee training aspect as a major incentive for companies and individuals moving into the region. “There’s a huge desire from the local nationals to learn about treasury and risk and they are now recognising that this is a core skillset required in order to hold prominent positions in organisations.” This means that investment is being made not only directly into the economy, but also into the business culture.

Raza is also positive about the role of his organisation within the region’s development: “Government-sponsored infrastructure transactions and long-term financing are major features of the landscape in the Middle East. Ambitious programmes abound for building affordable housing, upgrading transport and expanding the domestic industrial base of countries, particularly for downstream businesses that benefit from the region’s oil and gas reserves,” he explains.

“Global banks can support this with their powerhouse capabilities for fund raising, both in debt and equity, and leveraging their global footprint. These banks also support export credit agency (ECA) transactions within major global programmes, which is a non-traditional and often good alternative source of long-term, big ticket financing.” Equally excited about the region’s prospects, Donovan says:

“The Middle East marketplace progresses extremely quickly and I am very bullish that the regulatory framework will become increasingly client-friendly.”

To order a copy of the findings of Treasury Today’s Middle East Corporate Treasury Benchmarking Study 2011, in association with J.P. Morgan, please contact subscriberservices@treasurytoday.com

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