“What will be the biggest regulatory challenges for you during 2019?”
Amit Grover, Assistant Vice President, Liquidity & Banking – APAC, GE Corporate Treasury Singapore:
There is a plethora of regulatory challenges to watch out for, however, I believe the two most predominant ones will be the extent of unilateral and protectionist measures undertaken by countries globally and the evolution of the regulatory framework for blockchain technology. These two will have wide-ranging implications for the growth of the world economy and more importantly on MNEs and their treasury function.
With regards to protectionism, the key risks for 2019 seem to be politically driven, with escalating protectionist sentiments and tensions among the nations and their political leaders. There are growing concerns over the increasing politicisation of international trade, coercive measures, sanctions, trade wars and barriers. The economic friction due to the trade war between US and China, which is likely to spill well into 2019, is putting at risk complicated supply chains and business relations. It will disrupt value chains and business models, affecting countries, MNEs and treasuries.
US tax reforms are another major issue for businesses, with the extensive changes having potentially significant implications from a strategic, operational and financial standpoint. Many MNEs are still in the process of reviewing the implications of these reforms, considering the approaching US 2020 elections. Such measures have a pervasive potential to affect everything from capital allocation, funding strategies and liquidity management practices. It may lead to repatriation movement by companies moving funds back to the US, which may have an impact on liquidity for corporate treasurers.
Going forwards, there is growing acceptance that such significant changes in the regulatory and trading environment will persist and that the key for treasurers will be to keep up with the rapid rate of change and try and stay ahead of the curve by paying close attention to all available intelligence.
There’s a renewed focus on innovation within finance and treasury and of all the new technologies, blockchain is the single most powerful concept to have emerged. Considering its potential, it is not surprising that blockchain has become a global phenomenon.
Looking at the level of investment made in blockchain technology over the past several years, and the advantages it promises, it is abundantly clear it is here to stay. Many banks and fintech companies have ventured into this technology to create more advanced solutions to cater to the needs of the financial sector, with a focus on cross-border payments, correspondent banking and trade finance.
While there is a lot of activity in this space, the solutions are arguably still at a nascent stage. The risks associated by blockchain are not fully understood yet, such as the lack of standards and governance, its impact on workforce due to automation, and exposure to cyber risk. The regulators are also catching up with the rapid growth in this space.
There is clearly a need for a unified regulatory framework to utilise the full potential of this new technology. It will be interesting to see how this regulatory framework for blockchain evolves in response to the growing importance and commercial application of the technology.
Benny Koh, Leader, Global Treasury Advisory Services, Deloitte Southeast Asia and Aida Mosira Mokhtar, Director, Global Treasury Advisory Services, Deloitte Malaysia:
Currency risk management is one of the biggest challenges for most companies and regulatory changes usually have both a direct and indirect impact on the currency market. Like several other currencies in the region, the Malaysian ringgit has weakened over recent months, driven by concerns on global interest rate increases and trade protectionism.
The Bank Negara Malaysia (BNM), Malaysia’s central bank, recently announced further enhancements to the forex exchange administration (FEA) rules. The measures built on regulations it announced in December 2016 that required exporters to convert three-quarters of their proceeds (the 75:25 rule) to ringgit and restricted transactions in the offshore non-deliverable forwards market. The measure was originally aimed at boosting liquidity and encouraging more domestic trade of the ringgit, as it looked to stem the currency’s recent slide against a surging US dollar at the time.
Although there is no change to the 75:25 export conversion rules, the latest new enhancements offer more flexibility in management of export proceeds and allow hedging of FX obligations beyond six months allowed, subject to BNM approval. The rules also mean non-residents can trade in MYR interest rate derivatives via Appointed Overseas Offices (AOOs).
These measures are positive as they will help to ease the administrative procedures and compliance cost for businesses and financial institutions. They may also enhance currency stability in the near-term by reducing the steps involved in retaining earnings within the country.
We believe this augurs well for companies with big foreign currency exposure, especially as exporters can immediately transfer proceeds to separate onshore accounts to meet up to six months of foreign currency obligations, without first having to convert the proceeds into ringgit. This should help limit currency volatility by making it easier for companies to retain foreign earnings within the country. Consequently, companies will have greater flexibility in managing export proceeds and hedging foreign currency obligations.
As these measures differ from those implemented by the government to foster currency stability, which often resort to restrictions to curb capital outflows, over the longer-term, we believe that the enhancements to FEA rule will facilitate the deepening of onshore currency markets and introduce greater sophistication around the availability of risk management methods to manage currency volatility.
The volume and liquidity of the onshore forex market will also increase, as local banks can offer ringgit-denominated interest rate derivatives to non-resident companies as well as resident companies.
Apart from FEA, which is positive, the government’s higher deficit target of 3.4% for 2019 announced in the recent budget may make the ringgit susceptible to weakening pressure in the short term. Currency volatility will continue to be the biggest challenge in 2019. The big question is how operationally ready are corporates to deal with it?
Jason Teo, Interim Treasurer, CFLD International, Singapore:
A continuing, fast evolving economic, trading and political landscape over 2019 will present corporates with increasingly complex challenges and ensure regulation and related risk management governance, controls and reporting requirements remain at the top of the boardroom agenda.
The unrelenting uncertainty and complexity of challenges facing treasurers demand we make greater use of technology. Yet it is clear that the rapidly increasing use of new technologies such advanced data analytics, AI and blockchain require new risk governance adjustments and regulatory scrutiny, especially where their deployment intersects with safety and consumer privacy and protection.
In a cyclical industry like real estate, where I am presently, uncertainty over the trading environment is greatly adding to the complexity. Geopolitical uncertainty, disputes over trade, tax reforms and regulatory differences across multiple jurisdictions have potential consequences for supply chain, capital allocation, staffing and business strategies. Government policies and political environments generally were a very important consideration for corporates over 2018 and will continue to wield considerable influence on boardroom decision making over 2019 and beyond.
CFLD International is a young company, which only established its international roots less than two and half years ago, but it has already been confronted with unprecedented volatilities and multiple black swan events. Headquartered in Singapore with a focus on the emerging Asia market, CFLD International is the international arm of China Fortune Land Development (a Shanghai listed company). In seeking to diversify our portfolio and to take advantage of higher-yielding opportunities we, like many like-minded investors, look to overseas real estate markets. Our global footprint includes countries like India, Indonesia, Korea, Vietnam, Philippines, Myanmar and Egypt.
While those jurisdictions have always been challenging and unique from a regulatory perspective, recent marked divergence in monetary and fiscal policies across these territories; the US-China squabble; the prolonged eurozone-UK divorce; and fall-out from the turbulence across emerging markets over 2018 have made investment decision-making much more challenging. To make matters worse, China is currently experiencing a slowdown, a liquidity squeeze and mounting debts. On top of the regulatory challenges of operating in restrictive countries, all these additional headwinds have, inevitably, made life more difficult for offshore subsidiaries such as CFLD.
I envisage 2019 will see corporates being even more proactive in reassessing their exposure to offshore locations. As a result, there will be slower decision-making over investment deals in affected countries; a reassessment of capital and liquidity allocation, and greater consideration of redeploying employees.
Nonetheless, there are two sides to a coin, where challenges can flip to opportunities. By keeping abreast of developments, staying humble and nimble, coupled with continuing to adopt automation and innovative technologies, I believe corporates can ensure sustainable and effective change across these regulatory, economic and market challenges.