Treasury Today Country Profiles in association with Citi

APAC treasury in 2015: all change?

Famous tick bridge in Myanmar

Over the next 12 months, what will be the defining themes and projects for treasurers operating in the APAC region? Will we see treasury departments across the region increase in sophistication and utilise new technology and structures to reap benefits, for example? Or will regulation and the tough economic environment continue to stunt innovation? We talk to a handful of industry experts to get their take on these issues and reveal what your peers truly consider to be top priorities for the year ahead.

The start of a new calendar year always comes with a wave of optimism and enthusiasm. In recent years, however, this has often been quickly extinguished as the reality of global conditions strikes home and corporates are faced with new and increasingly difficult challenges. Indeed, 2014 was full of economic, infrastructural and political developments that stretched the patience of treasurers in APAC.

One of the big stories was the slowdown in economic growth across many of the region’s key economies, not least China and India. In China for example, the forecasted 7.4% growth rate, while still impressive, has raised certain questions around the reform agenda and its continued trajectory. With a geopolitical environment that looks increasingly uncertain, it’s not difficult to imagine treasurers, ever watchful for signs of heightened volatility in financial markets, heading into 2015 with a slight sense of trepidation.

“I think the macroeconomic issues are the ones that most treasurers will wake up thinking about on 1st January,” says Paul Taylor, Regional Sales Head, GTS EMEA at Bank of America Merrill Lynch. “We’ve heard talk in recent weeks about a cooling in the global economy; we’ve seen what’s happened to the price of oil and what that has done to currencies globally, which has in turn had a knock-on impact upon currency valuations. I don’t think anybody can ignore what is happening on that level at the moment.”

Another topic that treasurers will no doubt be focused on as we head in to 2015 is the negative impact that regulation might have on their operations – and ultimately, on the company’s bottom line. In APAC, the headache of regulation is of course exacerbated by the non-uniform approach across the region. There is hope, however, that plans to create an integrated ASEAN Economic Community (AEC) by the end of 2015 will solve this issue for a large portion of the region.

The creation of the AEC should also provide new impetus to trade among and with ASEAN communities, which can only be a positive development in what is proving to be a rather sluggish time for global trade (read more about this in our trade article where we look in depth at the new trade paradigm in ASEAN.)

What matters to you?

Away from the macro view, treasurers will naturally be focused on making their day-to-day operations run as smoothly as possible. Nowhere is this more evident than in the results of the latest Treasury Today Asia Pacific Corporate Treasury Benchmarking Study, where treasurers in the region were asked to rank their treasury department priorities for 2015, with 1 being the most important (see Table 1).

Table 1

Rank Treasury department priorities 2013 Treasury department priorities 2014
1 Cash management/cash pooling structure. Bank relationships and banking group organisation.
2 Working capital management. Funding/credit lines.
3 Balance sheet optimisation. Cash management/cash pooling structures.
4 Funding/credit lines. Working capital management.
5 Foreign exchange risk management. Improving cash flow forecasting.
6 Improving cash flow forecasting. Balance sheet optimisation.
7 Compliance and regulations. Foreign exchange risk management.
8 Banking relationships and banking group organisation. Security and fraud.
9 Technology and systems. Compliance and regulations.
10 Establishing a shared services centre (SSC). Counterparty risk.

Source: Treasury Today Asia Pacific Corporate Treasury Benchmarking Study 2014

Cash and liquidity concerns

Although the top issues remain largely the same as the previous year’s results, with an inevitable focus on working capital, funding and cash management, there are a number of nuances worth highlighting. For instance, does the fact that ‘cash management/cash pooling structures’ have dropped from being the top priority in the 2013 study to the third priority in the 2014 study reflect the fact that regulators in the region – notably China – have made significant moves to improve cross-border liquidity and therefore this will not be such an issue in 2015?

According to the experts, the answer is ‘yes and no’. First of all, “It is important to note that any regulatory changes that have taken place at the end of 2014 in China will not truly be actioned by corporates until 2015,” says Mahesh Kini, Asia Pacific Head of Cash Management Corporates at Deutsche Bank. “The move to allow cross-border RMB sweeping is a good example: all of the activity around designing and implementing solutions on the back of this will continue into 2015. In fact, the majority of the pipeline will be Q1 and Q2 2015, so this will be a large area of focus.”

And as Amol Gupte, Region Head, Asia Pacific, Citi Transaction Services, adds: “When it comes to trapped cash, much progress has certainly been made by the regulators in China, but there is still a lot more that needs to happen before cash can flow freely across borders. For example, CNY and CNH are different currencies with different rates and yield curves, and the extent to which corporates can borrow offshore to name a few, these need to be standardised before we can truly see the end of trapped cash.”

Banking on change

Elsewhere, it is interesting to see that ‘bank relationships’ has jumped from being the eighth concern in 2013 to the top priority in 2014 – even above ‘funding/credit lines’. This suggests that corporates in the region are now starting to be more strategic about their bank relationships, and having more open conversations around wallet share. In fact, 40% of respondents to the 2014 study said that their lead cash management bank receives between 30-50% of their total cash management wallet.

That said, we cannot ignore the impact – whether direct or indirect – of regulation on banking relationships. According to a speech at a recent conference by Alan Verschoyle-King, Executive Vice President and Global Head of Sales and Client Management for BNY Mellon’s Treasury Services, “Global regulatory reform continues to be the largest driver of change and concern within Asia’s banking industry, with many banks struggling to understand the impact of and meet the new requirements.”

Moreover, it is not just APAC-specific regulations that matter. “Given the size and global reach of the US economy, US regulations, in particular OFAC (The Office of Foreign Assets Control), Dodd-Frank and FATCA (The Foreign Account Tax Compliance Act), have the most substantial direct impact on Asian bank operations, business development and their working relationship with partnership banks,” he said.

Top seven barriers to growth impacting Asia’s banking sector in 2015

  1. Information management and reporting challenges under new US regulations.

  2. Regional market fragmentation.

  3. Insufficient resources to meet client demand.

  4. Balance sheet size of local banks.

  5. Political tension within Asia.

  6. Pace of global economic recovery.

  7. Continuing concerns about China’s outlook.

Source: Verschoyle-King, BNY Mellon Treasury Services

So how is this impacting the treasurer? Well, “To meet the new standards, banks are building higher capital and liquidity buffers, as well as re-evaluating their business models with many institutions choosing to focus on their core strengths and key markets. Others are under intense pressure to consolidate and streamline to position for future growth and, in some cases, survive. Whilst consolidation presents opportunities for stronger regional banks to emerge, the reality is many local banks within Asia Pacific remain too small to effectively compete on a local, regional or global scale.”

In short, treasurers are having to carefully re-think their bank allegiances in light of a number of banks retrenching because of regulatory pressures. Domestic and regional legacy relationships are also being reviewed as these might not represent the optimal long-term play in the new regulatory environment, although this largely depends on each company’s situation of course.

Containing risk, leveraging technology

Going back to the treasury priorities list, the increased focus on risk is also worthy of note. Counterparty risk did not even feature in the 2013 list, nor did security and fraud. Both have risen up the corporate agenda, thanks to headline-hitting scandals. Furthermore, there is a growing global trend for both regulators and consumers to hold corporates accountable for the actions of the third parties that they choose to interact with – whether these be customers, suppliers, banks, or vendors.

In addition to introducing stricter due diligence processes and internal controls, many companies are revisiting their technology infrastructure – not only to plug any potential security gaps but also to leverage the benefits of straight through processing, analytical programmes, best execution platforms and trends such as big data.

“We believe that ongoing technological innovation and digitisation will be essential to help clients better adapt their operating models to the current trends and shifting market demands. The focus will be on developing treasury management e-solutions that deliver impactful results – making our products simpler, more convenient and flexible, and allowing companies to have improved visibility over their treasury flows in ways that were not previously possible,” notes Citi’s Gupte.

It’s about enabling treasurers to become much more efficient and getting instant access to information, as well as how to get better insights of data analytics to make better informed decisions, he explains.

Table 2

Rank Technology issues 2014
1 Cash flow forecasting solutions.
2 Improving visibility over the company’s cash.
3 Choosing a Treasury Management System (TMS)/Corporate to bank connectivity/cash management portals.
4 FX portals.
5 Bank portals.
6 Migration from spreadsheets.
7 Choosing an Enterprise Resource Planning (ERP) system.
8 eBAM.
9 Bank dashboards.
10 Standards and formats.
11 Mobile banking.
12 Supply chain finance portals.
13 Big data.
14 Cloud technology.
15 Software-as-a-service (SaaS).

Source: Treasury Today Asia Pacific Corporate Treasury Benchmarking Study 2014

It is not only treasurers who are taking advantage of evolving technology though – regional payments authorities and governments are too. “On the subject of technology, the region is migrating from paper to electronic payments,” says Kini. “Corporates are increasingly transitioning their payment ecosystem to ‘pay electronic’ – even in countries that tend to use cheques. This is riding on the back of the new payments infrastructure that countries are introducing.”

Patricia Lim, Head of Cash Management, Asia Pacific RBS, is slightly more conservative in her outlook, although she too sees that governments are being more proactive around e-payments: “Many APAC countries are still predominantly cash and cheque-focused – India, Indonesia and Thailand are prime examples here. As we stand today, electronic payments and collections can only be carried out effectively in countries such as Japan, Singapore and Hong Kong. This is because the government in these countries promote e-payments and have spent a lot of money developing their e- payments systems. For example in Singapore, the Association of Banks in Singapore has launched a new electronic funds transfer service, known as FAST (Fast And Secure Transfers).

For treasurers, the benefits of this innovation will be far-reaching. As Kini notes: “The systems can now carry information that helps to identify who is paying, which then helps to reconcile at an invoice level. We believe that e-invoicing will therefore be an increasing priority for the finance function in 2015 and beyond. On the back of this, we are likely to see more 24/7 real-time clearing systems being built too.”

Shared service centre shifts

Another key trend in 2015 will be the continued march towards centralisation – and the establishment of shared service centres (SSCs) says Gupte. “Centralisation remains a key priority for corporates in the APAC region. As we see it, there are four stages to centralisation: operations; standardisation; balance sheet centralisation (funding centrally/pooling) and finally, the in-house bank. The majority of our clients are at the ‘centralising balance sheet’ stage and are looking to implement regional pooling structures and SSCs,” he comments.

And some interesting geographical dynamics are happening in that SSC space. “With ASEAN Economic Community 2015 plans coming into effect, corporates will be looking for opportunities in the region, such as the relaxation of the rules around the movement of liquidity. We will also likely see certain ASEAN countries position themselves as sophisticated hubs to host treasury centres – such as Malaysia– or even to host cross-border structures, something that Hong Kong and Singapore have traditionally dominated,” Kini notes.

“The Philippines is one place to watch,” he adds. “It is an investment grade country, with a young, skilled population. It will increasingly develop into a business process outsourcing (BPO) location and we will see more and more corporates use it as an ASEAN hub.”

Lim, on the other hand, highlights a trend towards near-shoring of SSCs by European and US MNCs. "A number of multinational companies are now looking to move their shared service centre (SSC) or treasury centre back to Europe or the US from China. Labour and the cost of living used to be cheap in China, but this is no longer the case in the central and south region.” she explains

Embracing change

All of this gives treasurers much food for thought throughout the next 12 months but, unlike previous years, the tone heading into 2015 is largely positive. While the year ahead of us will undoubtedly challenge the profession at one point or another, the collaborative and more transparent environment that we are now operating in promotes proactivity.

So, rather than simply doing the minimum to meet necessary compliance project deadlines, or to ensure your data is secure, why not use such triggers as an incentive to review and improve existing practices, processes and policies instead. After all, being open to change is the best way to stay ahead.

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