Regional Focus

Asian treasury flexes its strategic muscles

Published: Jan 2023

Geopolitics and the macroeconomic environment in Asia will continue to be challenging in 2023, but this new normal of uncertainty and unpredictability – as well as a greater need for effective working capital and supply chain management – gives regional treasurers in Asia an opportunity to demonstrate their strategic and advisory skills.

The overarching themes that affect regional treasurers in Asia are expected to continue into 2023, and as the macroeconomic environment throws new challenges their way, treasurers are well positioned to show off their strategic and advisory skills.

Jasmine Tan, Head of Asia Pacific Treasury Advisory at J.P. Morgan, comments on the unprecedented macroeconomic landscape that treasurers are having to contend with. “In 2022, just as we expected Asia’s markets to bounce back from the impact of Covid, markets were then faced with new adverse shocks in the form of production shortages and supply chain disruptions, the war in Ukraine, soaring inflation, interest rate hikes by central banks, ongoing US-China geopolitical tensions, as well as recessionary risks in 2023,” she tells Treasury Today Asia.

That’s quite a list of issues to grapple with, and many eyes are looking to China as a barometer of the economic prospects for the whole region. Sandip Patil, Asia Pacific Head of Liquidity Management Services, Treasury and Trade Solutions, Citi says, “Our clients have big businesses on the ground [in Greater China] and they ask where they should focus. We advise our clients to focus on their core business – such as manufacturing – and to focus on managing their supply chain and working capital, and ensure they are comfortable with their cash levels.”

Given the global market factors, such as geopolitical tensions, inflationary pressures and rising interest rates, Ankur Kanwar, Head of Cash Products, Singapore and ASEAN and Global Head of Structured Solutions Development, Cash Management, Standard Chartered, expects that market volatility will remain throughout 2023. He comments that 2023 will likely be the first full year that the region has Covid behind it. “This will be the time that treasury management practices adopted during Covid are put to test. In the new year, treasury teams could get an opportunity to showcase massive efficiency resulting from new technology tools and dynamic balance sheet management, further elevating their role as a key strategic partner to the business,” says Kanwar.

One area that all treasurers and transaction bankers agree needs effective solutions is working capital. Tan comments that the lack of external funding is providing a greater need for effective working capital management that taps into alternative and cheaper internal sources of capital to unlock and consolidate trapped liquidity. Tan cites J.P. Morgan’s Working Capital Index China report that estimates over US$330bn in liquidity in China could be released from supply chains if corporates undertook working capital optimisation measures.

This is in line with the view of Patil at Citi, who comments on how the current environment has also impacted the working capital cycle for corporations. “Cash inflows are reducing while cash outflows have not changed; this means that there is a need for increasing cash to run the same business,” says Patil. With the rising cost of capital and funding, corporates now have even more incentive to be efficient. Also, while it is taking longer for companies to get paid, they want to pay their suppliers quicker – and so, they are using cash faster, bringing the need for effective working capital to the fore, says Patil.

Patil notes that ESG [environment, social and governance] continues to be a major theme for corporates as they need to ensure their supply chains are sustainable, and that their treasury centres are participating in a sustainable future. There are also working capital implications of ESG; if a company is unable to find a supplier who is green, for example, it will end up costing them more.

This points to the wider trend of ESG being embedded into all aspects of treasury, and not as a standalone issue. Tan comments that ESG is no longer optional for businesses, which are re-evaluating their business models, operations and supply chains. “Treasurers and finance teams are increasingly embedding ESG when making decisions across various treasury linked activities such as investments, procurement and financing, as the framework is expected to become increasingly critical in driving the long-term sustainability and growth of businesses,” says Tan.

Tan continues, “Treasury sits at the nexus of corporate activities and can therefore integrate ESG into multiple workstreams and influence stakeholders across funding, cash management, working capital management, capital allocation and cybersecurity, as well as the selection of banking and other service providers.” She illustrates with some examples, such as ESG-linked rapid credit facilities where ESG key performance indicators are embedded into the financing costs of the facilities. And in cash management, for example, green deposits are becoming popular where the use of proceeds of excess cash is ring-fenced for sustainability initiatives of the bank.

ESG issues have come to the fore when it comes to managing a sustainable supply chain. There are other considerations aside from ESG, however, that are also important for supply chain management. Recent global events, including the fallout from the Covid pandemic, have disrupted supply chains and have pushed companies to reconsider how they manage them.

Another trend that Citi’s Patil notes – in light of the pandemic’s supply chain disruption – is that many corporates are looking to diversify their manufacturing bases instead of having it concentrated in one or two locations. “While in Asia, ASEAN [Association of South East Asian Nations] and India look to be benefitting from this expansion, we are also seeing corporates reshoring back to their home country; with US companies moving back to the US, for instance,” says Patil. And with this kind of move, “Everything also shifts with the billings and the collections,” he notes.

On the supply chain disruption Kanwar at Standard Chartered comments, “Many corporates have had to adjust their inventory levels and move towards a ‘iust-in-case’ approach instead of ‘just-in-time’ for inventory management.”

Another consequence of Covid has been the acceleration towards digitalisation. Patil at Citi says he expects digital innovation to be even more prominent in Asia this year than it was in 2022. “The pandemic helped with digitalisation, but Asia was already on an aggressive path anyway,” says Patil, who estimates that half of global e-commerce happens in Asia. “Also, we now have greater access to smart tools, the financial ecosystem and associated technology such as APIs, virtual accounts and cloud computing – which have enabled people to interact and transact online, more than ever. For treasurers, they need to be ahead of these digital developments. If your systems are not digital, if your cash management policies or bank access are not digital, you will lag behind,” says Patil. This digital world also brings other challenges. “The predictability is not there – the cash flow becomes more unpredictable even though the outflows are the same,” he notes.

This is in line with Tan at J.P. Morgan’s views. “Technology is evolving faster than ever, and companies are increasingly having to transform themselves as they adapt to new consumer expectations and new business models. With these business realities, treasurers are faced with the need to embrace innovation to best support their businesses,” says Tan.

Tan also notes another trend of treasurers embarking on ERP [enterprise resource planning] projects. “We have seen treasury teams embarking on multi-year ERP and technology transformation initiatives,” she says. These range from introducing real-time visibility of data, to adopting forward-looking treasury structures such as in-house banks or payment factories, and payments technology that uses artificial intelligence and machine-learning, or blockchain and smart contracts, or programmable payments, she explains.

At Standard Chartered, Kanwar also notes that ERP upgrades and consolidation will become more important in 2023. “Many corporates are going through ERP upgrades to newer versions like S/4HANA. Others are implementing consolidation projects to simplify their technology infrastructure through the use of fewer systems. As these are significant projects, it is important that treasury teams evaluate how best they can leverage their ERP to make their operations more efficient as well as support business growth,” says Kanwar. And the newer ERP versions can leverage the APIs, he adds. “This has made it possible for businesses to deliver real-time information to their customers and corporate clients. Given the evolving demand for more innovative solutions, an increasing number of proof of concepts on the usage of distributed ledgers and digital assets is a key trend that will likely pick up momentum in 2023,” says Kanwar.

And with the pandemic shaking up how digital services are delivered, this also has other implications for corporates that have adjusted their business models: tax. Much like many of the other themes, the tax rules are a continuation of what has occurred before, but some issues will take on a new importance in the year ahead. From a tax perspective, Alan Lau, Partner and Head of Financial Services, Tax, KPMG in Singapore, says there are a few significant developments that treasurers need to be aware of.

The first major tax issue that will affect corporates in the coming months is BEPS 2.0 [base erosion and profit shifting], which aims to prevent corporations artificially moving their profits to low-tax jurisdictions to benefit from the arbitrage between the regimes in different countries. Lau explains that even more far reaching than the first version and has two pillars: Pillar One, which is focused on rules for where tax should be paid, and Pillar Two, which applies a global minimum tax rate to corporates.

Lau illustrates how the first pillar would work in practice. For example, companies that target large foreign consumer markets and sell into those countries, but don’t typically have tax liabilities in those countries, will now be affected by Pillar One. Under the new regime, the tax rates will not just affect the seller’s home country, but also the market they’re selling to – even if they’re only delivering digital services from a distance and don’t have a physical presence there. This pillar, however, is limited in its reach as it only applies the largest corporations ie those with an annual turnover of over €20bn.

With Pillar Two, the threshold is a revenue of €750m. “More people are concerned about Pillar Two,” says Lau. The rules work with a global minimum tax rate of 15% and if a company is paying less in a lower-tax jurisdiction, then they will have to pay the differential in their home country. “That is well understood [by most corporations], but there are unintended consequences,” says Lau. “The devil is always in the detail.”

Lau explains that many markets in Asia, such as Singapore, Vietnam, Thailand and the Philippines have offered lower tax rates as an incentive to attract multinational corporations. “Now with this 15% [global minimum tax rate] it renders those incentives ineffective,” says Lau. Corporates are finding that the markets they moved to are now incurring an unexpected tax bill. “Those once attractive locations are no longer attractive,” comments Lau.

And for MNCs that have their operations in markets like the UK or US where the tax rate is above the global minimum, it would be wrong to assume they won’t be affected by the rules. Lau says those corporates should be very careful and enlist the advice of tax experts because the rules are so complex. “There are some cracks and gaps even for MNCs in high tax jurisdictions and they could find themselves in the peculiar situation where they can fall through the cracks and into the top-up tax. These companies have to do their impact analysis early,” says Lau. Also, it is not just tax advice they need to get; they also need to get accounting expertise involved because a lot of the rules have been written using global accounting standards.

And companies that went more digital during the pandemic may now find they are being impacted by changes to value-added tax (VAT) and goods and services tax (GST) rules in the region. Lau comments that the rules are not new, but they have gone through some developments. For example, in Singapore the scope of the digital services rules have broadened so that more companies have to apply for Overseas Vendor Registration (OVR) if they are providing services to Singapore from another jurisdiction. Now the rules apply to ‘remote’ services, which essentially means digital and non-digital services. This could include, for example, telemedicine which is provided from overseas to individuals in Singapore. Likewise, the VAT rules in China have gone through some changes and while it doesn’t have a digital services tax, explains Lau, if the recipient of the services is in China, then the VAT has to be applied.

These are just some of the developments that treasurers need to be on top of as they press ahead in their roles for the coming year. For those who are well-informed of these developments, this provides them with an opportunity to flex their strategic and advisory muscles and demonstrate the value that treasury can bring to the business.

Kanwar at Standard Chartered gives some examples of how treasurers can show the strategic nature of their role: “From evaluating the impact of Basel IV [rules on capital requirements] on the company to enabling new sales channels for faster growth, treasury functions have become core to strategic decision making in any company,” he says. He gives some specific examples of when and how this could come into play: “While M&A [merger and acquisition] activity slowed in the first half of 2022, attractive valuations could lead to a spike in M&A activity in 2023 despite risks of a looming recession. When that happens, treasury teams have an opportunity to consider what the new corporate structure would look like and how they can help improve valuations of the company post the M&A,” he says.

Another scenario where treasurers can flex their strategic muscles is with business continuity planning. “Various disruptions, including Covid and geopolitical concerns, over the past three years have made business continuity planning a key priority within every large corporate. Treasury teams are in a critical position to ensure that financial systems are operating at all times, supply chain disruptions are well managed and corporates have thought through all the potential implications of various geopolitical and economic scenarios,” Kanwar comments.

One thing is for certain and that is uncertainty will continue for the year ahead. As treasurers become accustomed to unpredictability in the geopolitical environment, as well as the challenging macroeconomic situation, it means that more than ever they can flex their strategic muscles and turn any crisis into an opportunity.

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