Cash management and the role of technology

El Homsi says that while different clients have different levels of maturity, a major focus on cash and liquidity management is a common theme. The use of cash pooling is not often maximised, with structures such as cross-border pooling and notional pooling relatively uncommon. Nevertheless, different companies will have different ways of centralising cash.

“For example, we’ve seen one enterprise that has a regional treasury centre in the Netherlands, and an operating company in Saudi Arabia,” he comments. “They include cash in the European cash pool by having that cash go to a local correspondent bank.”

With many companies focusing specifically on cash and liquidity management, El Homsi says the way that treasuries approach system enablement “is increasingly becoming modular. They prefer a cost-effective, building block approach, ramping up capabilities in tandem with business requirements, allowing them to simultaneously de-risk the project while also showing some tangible wins along the way.”

Indeed, there is a clear realisation that technology will drive significant gains, observes Rahul Daswani, founder of LHD Research in Dubai, who has previously held treasury roles at Microsoft and Nokia. “The challenge is being able to showcase the ROI, as currently budgets are being cut back due to conflict and the wider risk of geopolitical issues spilling over,” he adds.

Challenges and risks

Treasurers operating in the Middle East also need to navigate a number of obstacles. For one thing, the availability of trained resources continues to be a challenge for treasurers, notes Daswani. At the same time, he argues that the greater complexity of technology systems and the rapid pace of change “is making it very difficult to make longer-term decisions.”

Where financial risks are concerned, El Homsi says that foreign exchange (FX) risk management doesn’t tend to be a major consideration, as many companies in the region operate domestically. He notes that the focus tends to be on plain vanilla forward hedging, and not so much on the use of options or other structured products. “It is not uncommon for formal policies on financial counterparty risk management to be absent,” El Homsi adds, “while treasury involvement in managing commercial counterparty credit risk is a rarity.”

Meanwhile, geopolitical tensions have brought interest rate risk management to the forefront for some companies, “particularly more heavily levered entities, or entities that have ambitious expansion or capex plans.” But generally speaking, El Homsi says the decision to hedge interest rate risk is done on an ad hoc basis.

“For most companies, the typical approach is to have around 50-50 fixed to floating,” he comments. “If you were to dig down and see how they manage interest rate risk – for example, whether they do the required sensitivities, and look at the impact on debt servicing – these things might be done, but probably not as rigorously as one would want.” Likewise, he says that companies tend to focus on the impact of interest rates on debt, without placing much emphasis on the implications for commercial cash flows.

Growth vs efficiency

Despite the challenges presented by the region, Daswani notes that there is nevertheless a significant opportunity for growth. “Most companies are now busy with corporate governance, considering the strong growth seen in the last two years, and this requires them to organise the finance function and set up a dedicated treasury team that is equipped with systems and tools. This requires a lot of investment in treasury management systems (TMSs).”

Daswani says the addition of tax rules has made this even more important, “as intergroup financing now needs to be looked at from an arm’s length perspective, and thus in-house bank capabilities become critical.” But alongside the growth opportunity, Daswani notes that conflict in the Middle East is resulting in a significant sales impact for many consumer-facing companies, as spend has been pulled back.

“This has led to budgets being recalibrated, and 2024 is expected to be more of a year of efficiency vs growth,” he says. “Thus the corporate treasurer and CFO’s roles are becoming much harder, as they have to make tough decisions on investing.”