After nearly a decade of dizzying growth, Asia Pacific economies are now entering a challenging phase. Although growth rates in the region remain at relatively strong levels, events like the ongoing normalisation of US monetary policy, real estate concerns in China and an anaemic recovery in much of the developed world are now weighing heavily on the region’s prospects.
Much of the Asia region is also in a state of political flux. In just the past year, the political backdrop has changed considerably with new governments elected in India and Indonesia, a radical set of fiscal and monetary policies known as ‘Abenomics’ introduced in Japan and, perhaps most significant of all, a programme of economic liberalisation continuing to gather pace in China.
The big picture
Against this uncertain political and economic backdrop, corporates in Asia have become increasingly focused on achieving better control and visibility over liquidity. Here, treasurers are looking for the means to overcome ‘trapped cash’ issues so they can move liquidity more seamlessly between Asia’s tightly regulated markets and the other markets they operate within globally.
This is particularly true of multinationals in China where treasurers have long aspired to be able to manage liquidity there in the same way that they do in other parts of the world. Thanks to a raft of recent reforms from the PBoC and SAFE, they are now close to realising that ambition. Today, firms operating in the country are increasingly able to release their trapped cash by using a range of new schemes that give them the ability to integrate renminbi into their regional or global cash pools.
“I think that the pace of regulatory change has begun to accelerate over the past few months,” says Munir Nanji, Asia Pacific Sales Head, Treasury and Trade Solutions at Citi. “There is certainly a lot more transparency now than a year ago. Now our clients in China who have substantial revenues in the local currency are able to mobilise their previously trapped liquidity and use it across the world, as and when they need it.”
China is the largest, most significant market to embark upon a programme of financial deregulation, but it is by far from being the only one. “We see the same thing in a host of other countries,” says Nanji. “Whether it is India, Vietnam or Indonesia, treasurers are asking us how they can centralise cash management and achieve better control over the money that is sitting in their various accounts. Essentially, it is about improving the way liquidity is collected globally and overcoming trapped cash issues first and, secondly, accessing structures that optimise the way in which money is distributed within countries.”
These are the broad, overarching trends that Citi is seeing at the regional level in Asia. If one looks more closely at the different business sectors within the region, however, each presents their own unique challenges and opportunities which the treasurer must understand and embrace. Help is at hand, however. As this article details, whatever sector your company operates in, Citi has both specialist advice and a range of innovative, tailored solutions that treasurers can draw upon to help them address the challenges they face and, ultimately, build a more efficient treasury.
Over the course of the past decade commodity prices have sky-rocketed. Companies operating in the industrial sector saw their business costs rising, and they responded by looking at ways to improve operational and liquidity efficiency within their organisations.
Today, most analysts agree that the commodity super cycle is nearing – or has perhaps even passed – its peak. But the focus on liquidity from companies in the sector is not letting up, says Jason Batman, Asia Pacific Industrials and Energy, Petroleum and Chemicals (EPC) Sales Head, Treasury and Trade Solution at Citi. In fact it is, if anything, growing stronger. “In this sector, the treasury function is really taking control of liquidity across the region and, wherever possible, making sure that subsidiaries are borrowing from an internal source, rather than an external banking source,” he says.
What are treasurers in the industrials sector doing to realise this objective? Batman says he is seeing an increasing number of businesses in this sector working to establish optimal regional treasury models or in-house banking structures to manage and take control of their working capital and internal funding requirements across the region. Of course, with the restricted nature of some Asian markets, in-house banks may not enjoy full access to liquidity in every instance. But whatever the regulatory nuances of certain markets, Citi offers clients a liquidity management platform that is globally consistent and locally compliant – whether it is physical zero or target balancing, notional pooling, or delivering liquidity flows to the in-house bank. For example, the automobile industry is a diversified multi-layered financial and operational ecosystem. Deep and diverse supply chains combined with complex distribution structures means that any changes in process and systems can have huge business repercussions in the supply chain. One insight borne from our analysis across the auto sector is the potential for treasury to support delivery of subsidiary funding. Subsidiaries in the enterprise operate very distinctly, and have varying working capital cycles from each other, and therefore traditionally have been managed separately. Today with treasury advancement and use of information and technology – coupled with Citi’s liquidity platforms – treasurers are well equipped to meet their liquidity efficiency goals.
Technology and telecommunications
“The business model in the telecoms sector is evolving,” says Manash Dasgupta, Asia Pacific Consumer and Healthcare, and Technology, Media and Telecom Sales Head, Treasury and Trade Solutions at Citi. In Asia, as in other parts of the world, the sector has gone through significant consolidation in each market. The companies remaining therefore tend to dominate their domestic markets, and as a result are limited in their options when it comes to expanding the core business. The solution is to explore innovative ideas to provide value added services to their consumers in established markets as well as look for investments in newer emerging markets. That might mean moving into new products and services such as mobile wallets for consumers or facilitating B2B payments worldwide. “Telecom companies have evolved to becoming providers of communications and connectivity infrastructure for their clients around the world in addition to providing mobility and fixed line services in their home markets,” notes Dasgupta.
As a partner bank for the largest technology companies globally, Citi is well placed to respond to changing business needs in this sector. Risk management is one of the key areas where technology companies have found this expertise particularly valuable. As companies expand their range of products, markets and services, trading partners naturally expand in tandem. But new trading partners will mean new counterparty credit risks to manage. The evolution of business models in this sector has therefore brought about a steady growth in demand for trade related services that help to mitigate risks, support trade flows as well as provide financing as required. Citi has invested significantly in technology that helps to digitise the process for trade services such as export letters of credits, document preparation outsourcing, and issuance of standby letters of credit. Digitisation has supported the growth in volumes as well as provided the required scale that companies need as they expand operations. In addition to large well established brands, there are many new emerging market entrants in the technology segment who have partnered with Citi as they aspire to expand globally. “Without the established brand, the global presence or the marketing muscle, new entrants need financing to bring on board distributors who will sell their products,” says Dasgupta. “So there is a real need, not only for Citi clients to be adequately resourced, but also for the customers of our clients to be adequately financed to support growth strategies”.
Competitive pressures have significantly impacted margins across the technology ecosystem. Citi has partnered with their large customers to support and finance the supply chain to ensure sustainability and margin protection. These initiatives been particularly helpful for smaller suppliers who are often challenged by credit squeeze and seasonal liquidity challenges. Most large businesses, says Dasgupta, make an effort to ensure that payments terms are such that their key suppliers are able to continue operating profitably. A significant number still end up being squeezed, however.
The role of public sector organisations is changing. Globally, there are a multitude of financial challenges for governments, not too dissimilar to those that we see confronting private businesses. In the wake of the financial crisis, governments in Asia – and across the world – recognised the need for economic stimulus to help the rebuilding of their recession hit economies. This has led to a double-edged sword for government departments who are seeing taxpayers demanding greater value from their public services yet are hamstrung by budgetary pressures intensifying as governments look to reallocate financial resources elsewhere. Damian Macinante, Asia Pacific Public Sector and Non-Bank Financial Institutions Sales Head at Citi, explains that these pressures are encouraging public sector organisations to look for ways to drive down costs by improving the efficiency of financial management.
Best practices in the private sector, where corporates have proven success in delivering efficiency gains in treasury, cash and liquidity management, have provided an example that banks like Citi are encouraging the public sector to follow. “Today the public sector in Asia is looking closely at liquidity management efficiencies, and supply chain financing to extract greater value from their budgetary allocations,” says Macinante. Securing sustainable improvements in these areas does, however, require far reaching changes from within. As such, Citi advises its public sector clients not only to look at the liquidity management and SCF solutions that are being deployed to great effect by their corporate clients, but to also work on improving the operational processes behind them. “We see a lot of governments assessing what they can do around automating their purchase order and invoice approval processes because historically that has been very manual and paper-based,” says Macinante. The value creation can then be accelerated with group procurement and logistics, shared service centres and actively managing the cash flow.
The benefits can be substantial and are often felt in every area of treasury operations but you have to start with the basics. “That is also key to implementing some of these other services as well,” Macinante adds. “After all, it’s pointless having a SCF programme in place if your terms are 60 days and it takes you 55 days to approve an invoice.”
Correspondent banking sector
“We operate in a world of growing complexity. More than ever the rate of regulatory change, globalisation and digitisation is requiring banks in Asia to re-evaluate the way in which they price and deliver services to their consumer and institutional client base alike,” says David Cavanagh, Asia Pacific Correspondent Banking Sales Head, Treasury and Trade Solutions at Citi.
Access to global networks is critical in meeting the demands of a customer base with growing cross border requirements. Keeping pace with the rapidly changing environment means many banks simply cannot afford to ‘go it alone’. More and more, leveraging off a partner bank’s infrastructure rather than building “in-house” is viewed as a more efficient option.
Cavanagh adds, “Banks still compete aggressively for client wallet, but there is a growing acceptance that opportunities to partner together can deliver superior outcomes for themselves and most importantly the clients they serve. Citi assumes a leading role within this ecosystem. We work with our financial institution (FI) clients by making available our network in the support of cross-border trade flows as well as facilitating the execution of payments to beneficiaries globally. This in itself is critical in supporting our FI clients, however it is no longer all, or even the most critical value we provide them. Banks in Asia are looking for correspondents that don’t just process their flows. Ever greater value is now placed on a partner bank’s ability to provide training and the transfer of best practices. This can include new product training, benchmarking services and more and more often, regulatory guidance.”
As a global provider of correspondent banking services to financial institutions in over a 160 countries, Citi brings a depth of experience and expertise obtained over decades of commitment to these markets. It is this scale, network and experience that allow our clients to build operational efficiency, extract incremental value out of transactional flows, and deliver a differentiated client experience to their customers.
The right benchmarks
“The depth of sector knowledge and expertise at Citi is one of the qualities that really sets the bank apart from its competitors. Understanding all the trends within different industries is important since it helps the bank to better help its clients,” explains Nanji.
“There is a lot of deep sector knowledge that we can take from one customer in a sector to another in the same sector,” he says. Clients who use Citi’s Innovation Lab, for example, are able to access data analytics that can show them what solutions and products worked for other businesses in the same industry. “We can benchmark clients across an industry and show them how their peer group is operating. This is something we find our clients really value. If you show treasurers how the best-in-class are bringing down cash conversion cycles, for example, very often the next question they ask is how they can do that. That’s why we spend a lot of time talking about best practices at a sector level.”
Next frontiers in sector expertise
The global rise of Asian companies and the expansion of Western multinationals into the region have accelerated the development of sophisticated and innovative digital solutions, reflecting the transnational nature of their treasury and finance demands. Enhanced client experience, advanced data analytics and interactive tools will be the next frontiers for treasury management. Nanji says, “This is already happening at Citi as we help clients stay ahead of competition and augment their strategic treasury management capabilities.” As an example, leveraging big data analytics, Citi’s Trade Financing Interactive Solution – the first of its kind in the market – enables companies to visualise their supply chain, benchmark working capital metrics against competitors, and quantify the financial benefit of their Supply Chain Financing programme.
A business unit of Citi’s Institutional Clients Group, Treasury and Trade Solutions provides integrated cash management and trade finance services to multinational corporations, financial institutions and public sector organisations across the globe, including sixteen countries in Asia Pacific.
Asia Pacific Sales Head Treasury and Trade Solutions, Citi