This issue’s question

“As we move into the final quarter of 2015, what should treasurers in the APAC region have on their ‘to do’ lists in 2016?”

Uncertainty continues to permeate the macroeconomic landscape as we move into 4Q15. The question on everyone’s mind: when will the Fed raise interest rates? However, beyond that, the areas of uncertainty extend quite extensively, particularly for treasurers in the APAC region. These include uncertainty over the direction of China’s growth and reforms, the challenges of RMB internationalisation, where we are in the commodities cycle, the outlook for large emerging economies like India and Indonesia, implications pertaining to ASEAN and the new Trans-Pacific Partnership trade agreement.

APAC treasurers planning for 2016 should prepare for uncertainty, build resiliency and maintain flexibility. The landscape is already fraught with multiple known ‘unknowns’ and this will continue with those understood less. Priorities centre around being prepared for bumps along the way. Some key items on the to do list include:

1. Cash (visibility) is king. This is crucial, especially for businesses spanning different countries and juggling multiple internal systems. Already a critical priority in business-as-usual times, visibility is of paramount importance when treasurers need to act quickly. Given that stress could emanate from a localised, country-specific cause or a macroeconomic development, treasurers should ensure visibility across the spectrum, be it at a country or market, regional or firm-wide level.
2. Test, test and test again. While this includes typical contingency planning around systems and business continuity plans, do not stop there. Think and plan for various scenarios and how treasurers could manage and lead through them. For example, if there is a cash-crunch, which projects could be stopped and in what time frame? Which initiatives could help bring in cash on short notice? Who are the stakeholders that need to be consulted today, rather than in the throes of a crisis?
3. Identify and, if need be, hedge exposures. Beyond identifying sensitivities to key external factors, proactively define and articulate the risk management philosophy within the treasury and firm. Drive this agenda together with the CFO and Chief Risk Officer. Be clear on potential exposure risks, as well as what could be done to mitigate them. Avoid being penny-wise and pound-foolish. Hedge if necessary.
4. Build up funding resiliency. This is less about securing funding before the end of the ultra-low rate environment and more about putting in place diverse sources of funding to reduce risk. Treasurers should ensure that diverse and resilient funding sources are in place.
5. Don’t forget the upside. Amidst planning for downside cases, treasurers would do well to ensure there is flexibility to be opportunistic. There could be a window to play offense, not just defence.

Greater clarity could yet come between now and the end of 2015. However, one suspects the only certainty for 2016 is uncertainty.

2016 is likely to be about value: what is the value treasury provides to the business? What is the value of the relationships with the banks? Essentially how to create value in a more volatile environment. The key aspects to creating value are: operational execution and relationships. Starting with operational execution, there are a couple of things happening in the business environment that will impact treasurers and their ability to deliver value to the organisation.

Due to regulatory pressures, banks’ appetite for short term non-operational cash is likely to reduce, potentially making it expensive to put this money on deposit for less than 30 days. This is because banks need to put aside capital to cover these highly liquid deposits in case of a sudden market incident. The key task for treasurers is to create a reliable forecast of their cash and funding needs. They need to be able to make informed decisions about how to best manage their excess cash, and when and where to best attract funding.

Markets have become a bit wobbly of late with the recent RMB devaluation and the US looking to pick the right time to raise the USD interest rates. These developments point to potential further increased FX and interest rate risk. Now would be a good time to review how prepared you are for increased volatility and discuss any required changes in policy settings (risk appetite and financial risk management approaches, for instance) with your board.

The coming year would also be a good time to consider the maturity of the treasury organisation. Are you able to achieve an efficient delivery on the demands placed on treasury? Do you have the right skills and people? Do you have the right tools? Do you have the right level of centralisation considering the business and regulatory environment? Should you be moving to a more integrated treasury model, such as an in-house bank?

This brings us to the second aspect: relationships. To be successful, a treasurer increasingly needs to be a business partner. Treasurers should be thinking about how to proactively engage the business and understand the organisation operationally so it is in a position to provide relevant and timely advice.

The benefits work two ways: treasury is a complex and highly specialised area, and isn’t always understood well by other parts of finance or the wider business. Engaging the business and articulating the value that treasury offers will create understanding and goodwill that can be drawn upon in tougher times.

Moreover, given that banks are increasingly constrained, now would be a great time to review bank relationships and opportunities to strengthen relationships with key banks ahead of the curve. Questions to ask are: which banks do you want to do business with – both on the cash management and funding side? How can you offer preferred banks a bigger share of wallet? How can you communicate this to banks to leverage this position as much as possible when it comes to them prioritising your business as well?

Many companies in the APAC region have been making significant revenue from China, and as the RMB has been appreciating over the last five years, there has been little interest in hedging. However the recent 3% drop in the RMB against the USD has caused many trading companies, which work on tight profit margins, as well as those active in commodities, to re-examine their hedging strategy for the Chinese market. There is likely to be new priorities as companies with RMB revenues and USD costs almost certainly seek better hedging strategies, better hedge accounting and better exposure visibility. Treasurers therefore should examine the benefits of early adopting IFRS 9 to achieve a better accounting outcome especially when hedging commodity risk, cross currency debt or using option strategies.

What’s more, APAC companies have been taking advantage of the lower USD interest rates and the appreciating RMB to borrow in USD. But now, corporates are starting to fund their operations onshore in China, which wasn’t the case before. Next year, APAC treasurers will need to look at the market to determine where it makes sense to locate their funding activities. Related to this, CFO’s will be demanding a reduction in interest expense. Treasurers should look at intercompany lending and evolving in-house bank techniques to better manage interest expense.

Elsewhere, we have already seen evidence of corporates moving their regional treasury centres to Shanghai, closer to the revenue source and as The Hong Kong government budget includes a plan to attract more regional treasury centres and as many Chinese corporates as possible, because of its tax efficiency, freely exchangeable currency, and less regulated market. Companies planning to create a centralised treasury next year will be seriously considering Hong Kong as an alternative to Singapore and even Shanghai.

In terms of liquidity and risk management considerations for the upcoming year, the current uncertainties about Chinese growth (2.5% versus 7% officially) will cause companies to take a close look at their liquidity resources, and to consider treasury technology to better identify FX exposures, improve cash forecasting, perform hedging operations and use hedge accounting to protect against greater P&L volatility. Improved risk management tools will be needed to deal with any crisis in China. These include simulations, what-if scenarios, sensitivity analysis and cash flow at risk. Better decisions will require analysis of complex situations, such as the relationship between commodity prices, the USD/RMB and other regional currencies such as AUD or JPY. Many organisations in the region are still cash rich (insurance companies, for instance), and low local interest rates and euro weakness may encourage M&A activity in Europe. Take Li Ka-shing, Asia’s richest man, for instance, who started to sell off his China assets last April due to his negative outlook on the China economy and property market and is now redeploying assets to Europe.

Finally, the drivers of TMS projects in APAC are presently liquidity and working capital management, and counterparty exposure management. The renewed volatility will see currency and interest rate risk management as drivers of treasury and risk management projects. As a consequence of organic growth and M&A activity, RFPs are asking for cloud platforms to support geographical growth as historical concerns in the region are now mitigated. Cloud solutions are increasingly seen to have an attractive price point, and add value because they outsource maintenance and disaster recovery, and do not require a big team for support. These factors are also enabling more and more mid-sized companies to seek cloud solutions for their treasury operations.