The past year has thrown plenty of challenges treasurers’ way – rising interest rates and inflation, increasingly stringent regulatory requirements around anti-money laundering (AML) and the related know your customer (KYC) rules, as well as wars and bank collapses. Managing risk in such a dynamic environment is not easy.

Given the spate of US bank failures, counterparty risk has come under increased scrutiny during the past year. In March, Silicon Valley Bank (SVB) collapsed, becoming the largest US bank to fail since the 2008 global financial crisis. Two days later, Signature Bank closed. Further bank collapses followed throughout the year as concerned clients withdrew their funds, creating a run on the banks: First Republic Bank in San Francisco, Heartland Tri-State Bank and finally Citizens Bank.

Damian Glendinning, Chairman of the advisory board of consultancy CompleXCountries, says treasurers have generally looked again at their counterparty risk management processes. “Overall, the issues in the US vindicated their approaches: they showed the value of daily balance reporting and cash sweeping, so corporate treasurers immediately knew exactly what their exposure was,” he says. “Also, most counterparty limit management processes had limited the risk.”

Glendinning identifies four lessons that corporate treasurers learned during the US bank collapse crisis. First, in some cases, newly acquired subsidiaries had not been brought into the daily balance reporting, cash sweeping or counterparty risk management processes. “These were the cases where surprises happened, and information on the exposure was not immediately available,” he notes.

Second, it became necessary to try to halt payroll or supplier payments being made to employees or suppliers with accounts in these banks. Treasury departments did not necessarily have the information to do this immediately, he says, although they were able to work with human resources and procurement departments to react quickly. It was also important to stop customers paying invoices into accounts with SVB, for example.

Third, in the case of SVB, some companies had indirect exposures they had not picked up in their processes, especially via HSBC in London where payments to some suppliers went via that institution to SVB. (In the immediate aftermath of the SVB collapse, HSBC UK Bank plc acquired Silicon Valley Bank UK Limited for £1.)

The final lesson from the US bank collapses, notes Glendinning, was that it was not clear what more could be done to identify this kind of exposure before the collapse. “However, most treasurers have further restricted the amount of cash they hold in small regional banks.” None of these measures is specific to Asia – but the same reactions apply, especially for the subsidiaries of multinational corporations in the region, he adds.

The 2023 AFP Liquidity Survey found that 48% of treasury departments appear focused on concentrating their organisations’ partnerships with larger banks for services to protect against instability with banking partners. Himashi Soriano, Managing Director, APAC Association for Financial Professionals (AFP), says the survey also found that treasurers are doing more due diligence regarding bank safety and soundness. “Organisations may be showing signs of diversifying their cash and short-term investment allocations, and so relationships with banking partners remain crucial,” she says. “Banks play a key role in supporting organisations in their cash and short-term investment strategies by providing them with critical information on economic indicators and trends. Treasury practitioners have faced various challenges in an unsettled economic environment. Unable to accurately predict the economic environment, organisations are more likely to seek out their banking partners for guidance and advice.”

The AFP survey, which was underwritten by Invesco, found that cash and short-term allocation to bank deposits was down eight percentage points compared to the previous last year – the lowest rate in four years. “Concerns about the banking crisis have led organisations to move their short-term investments into Government/Treasury money market funds, treasury bills and Agencies,” says the survey.

With rising interest rates and inflation, macroeconomic risk is also a significant concern for treasurers. In its October 2023 Regional Economic Outlook for Asia and Pacific, the International Monetary Fund (IMF) observed that inflation in China had remained low, “in sharp contrast to its peers”. Average inflation in the country had been lower than before the pandemic. Elsewhere, the persistence of core inflation is higher in Asia Pacific advanced economies than in advanced economies in the rest of the world. The persistence of inflation for Asia Pacific emerging economies are slightly lower than those for peer economies in the rest of the world, but not significantly so, the IMF says.

In September, the Asian Development Bank’s (ADB’s) Asia Bond Monitor warned that governments and central banks in emerging East Asia needed to stay vigilant to guard against potential financial risk associated with higher interest rates. Softening inflation in the past several months had allowed most central banks in the region to hold off on further interest rate hikes, and some have started lowering rates to boost economic growth, says the ADB. The Monitor noted that a recent shift away from interest rate hikes, along with sound economic fundamentals, helped support a slight improvement in financial conditions in most emerging East Asia markets between June 1st and August 31st. Interest rates in the region remained elevated. Higher borrowing costs had contributed to debt stress and bond defaults in some Asian markets during the few months leading up to September.

Soriano says AFP’s research shows that treasury professionals consider macroeconomic risk “to be one of the most challenging risks to manage and we anticipate that macroeconomic risk will have the greatest impact on organisations’ earnings in the next three years”. To help reduce their organisations’ vulnerabilities to various external threats, treasurers can take the following three actions, she adds:

• Achieve efficiency. The more a company can automate treasury tasks, the more accurate and timely forecasts and positions will be, allowing better decisions to be made. At a time when companies’ working capital and liquidity will be under pressure, all efficiency gains will help build operational resilience.

• Maintain liquidity. Adopting strategies to streamline the use of liquidity internally like better use of pooling opportunities will reduce net borrowing requirements, protecting the company against the adverse effect of rising interest rates. Managing working capital more effectively, potentially in partnership with key suppliers and/or customers, can help to manage risk, thereby reducing costs to boost sales and profitability.

• Manage vulnerabilities. A clear financial risk management policy, endorsed by leadership, will help manage the effects of market volatility and limit the impact on business costs. Treasurers can work with the wider business to adopt strategies that enhance the use of working capital and liquidity.

• Inflation and rising interest rates have increased the pressure to do effective cash management, notes Glendinning. “There is rising interest in supply chain financing products, as suppliers ask to be paid sooner, while customers look to extend payment terms. While there is concern about customers’ ability to pay, this does not yet appear to have resulted in significant payment delinquency or a reduction in customer credit limits.”

“A robust and dynamic cash flow forecasting process to understand working capital and investment capital requirements helped Nestlé Lanka to navigate the tumultuous economic conditions it faced during 2022-23. Sri Lanka suffered an economic crisis with an acute shortage of forex, electricity and fuel. This posed a significant business continuity risk in executing food and beverage manufacturing processes to meet consumer demand.

“Understanding the changes in the operating environment and proactive collaboration with non-finance business partners are imperative for value creation,” says Manosh Kulasena, Head of Treasury at the company. “One solution will not suffice when the risks are multidimensional. All teams orchestrated multiple solutions in a dynamic environment.”

The company’s solution included an intergroup foreign currency borrowing of US$45m, which was structured to navigate between liquidity and profitability during challenging times.

Multiple solutions to manage FX revaluation losses on foreign currency borrowings amidst steep currency depreciation were also formulated and risk management strategies mitigate the adverse exchange impact on its foreign currency borrowings by around 70%. In April, Jonathan Teh, Regional Sales Head of Global Banking Multinationals, Asia Pacific, Global Payments Solutions at HSBC, wrote that after years of low interest rates, treasurers were coming to terms with a sharp series of rate hikes. The US interest rate hikes of early 2023 was the “fastest shift in monetary policy since the 1980s” and for some corporate treasurers, the new monetary policy conditions presented significant cash management challenges. “This is especially true for companies with high levels of debt that must now manage higher repayment costs. Another group of companies that need to adjust are fast-growing technology businesses that in the past could rely on fresh rounds of funding to maintain their cash position.”

Companies in this situation should look closely at their liquidity situation and debt obligations so that they can assess how much cash they have available, as well as their future outgoings. “For companies with geographically dispersed operations, centralising funds can help ensure that the business is able to fully utilise its money, while providing broader benefits to operational efficiency.”

Another challenging issue for corporate treasurers is AML and KYC compliance. AFP’s Soriano says treasurers are always looking to make sure that they are compliant, but the process can be burdensome. “Having clear processes in place can help reduce risk and enhance efficiency.” She recommends a number of ways to manage the issues corporate treasurers face:

• Supporting the procurement process and knowing that verified settlement instructions are in place before any payments are due to be made.

• Keeping full and accurate records of all KYC assessments so that queries from banks and other parties can be resolved quickly.

• Checking sanctions lists prior to payments being released.

• Having clear payments procedures that cover all operational issues including how to verify changed settlement instructions.

Glendinning says KYC “continues to be a nightmare for both banks and their clients. Even when corporates use central repositories, banks are often reluctant to go to pick up documents from there, and different parts of the same bank continue to require the same document, or have different requirements.” Moreover, there continue to be exposures with banks requiring sensitive personal data, such as passport copies or utility bills for bank signatories: this data is often transmitted and stored in unencrypted systems, and can be in violation of data protection laws.

“The situation on AML seems to be slightly better: most companies screen customers and suppliers against the lists of sanctioned counterparties, and have introduced sanctions training sessions for relevant staff. Many corporates are now wary of payments to or from people or entities whose names are likely to trigger alarms in banks: they often reach out proactively to the bank to avoid potential misunderstandings.”

When it comes to managing foreign exchange (FX) risk, Glendinning says the “basic principles” have not changed, although the rising cost of hedging has led in some cases to a reduction in the level of hedging. The renminbi has been an international currency for a long time, he notes, and the “only question” now is whether to hedge it onshore or offshore. “Onshore hedging is usually viewed as being cheaper, but it carries with it constraints due to exchange control requirements. Offshore hedging can be done in the CNH market or via NDFs: both are liquid, though they can be more expensive than the onshore CNY market. There is no evidence that exchange controls in China are being tightened.”