The world of treasury sits astride multiple corporate functions and is perfectly placed to see trends unfold. We look at some of the key developments of the day.
Oscar Wilde said of fashion that it is a “form of ugliness so intolerable that we have to alter it every six months”. Whilst treasurers may not suffer quite the same flightiness foisted upon the denizens of the catwalk, the speculators and manipulators of industry thinking sometimes act like fashion gurus, pushing certain notions far beyond their current actual value in their desire to keep ahead of the trends.
Mobile treasury is a classic example of a lot of hot air from the providers being met by a lukewarm response from the receivers. Treasurers do use the technology, but many – most even – are not conducting their day-to-day business on a smartphone. Supply chain finance (SCF) too receives the kind of coverage that would suggest it is used by most corporates. It isn’t. Respected industry pundit, Enrico Camerinelli of the Aite Group has said that whilst there is no question that the principles of SCF are strong and that the correspondent benefits are considerable, “the reality shows that SCF programmes are evolving very slowly and are far from widespread adoption”.
It’s very easy to get carried away with the hype or to become so involved with a process that it starts to feel like a fully-fledged mainstream movement in its own right. The truth about any treasury trend is that it will be an observable operational or strategic condition that affects some of the people all of the time, or all of the people some of the time but rarely all of the people all of the time.
Of course, unforeseen events of magnitude – such as political uprisings, natural disasters and even financial events such as the 2007/2008 financial crisis, the euro cap by the Swiss National Bank and the fallout following ‘Brexit’ – will always make an impact on treasury operations and they have to be tackled promptly. But the profession should always be mindful of the direction of the industry and the major themes that are carrying it that way.
Not all trends come to full fruition but awareness of what’s out there offers valuable insight for every treasurer, whether they have a domestic or global outlook.
With this very much in mind the following pointers – drawn from Treasury Today’s conversations with industry stakeholders over the last few months, should be a useful ‘awareness’ resource. Some of these are not so obvious but all have gained a lot of ground in recent times as issues that matter.
Currency volatility: not going away
It is impossible to provide a detailed forecast for the monetary situation in each individual country; what happens in one area tends to influence developments elsewhere. In the US, the Fed’s tightening bias has serious consequences for the emerging markets. In turn, this will have repercussions for the US economy, which is sensitive to share price movement. Sharp stock market pullbacks will hit the economy hard. Monetary policy divergence between different countries leads to currency fluctuations. This does not matter greatly in good economic times but now that growth is subdued, currency weakness may be a bonus in many places whereas a strong currency can do a lot of damage. The effects of Brexit saw at least in some quarters a welcome scaling back of sterling against the US dollar. The markets, keen to dump GBP, saw yen as a good home, for example. But the attention was most unwelcome by a Japan keen to keep its currency relatively weak.
All central banks will have to tread cautiously when tightening or loosening policy. For currency and interest rates markets, this all means 2016 going into 2017 will see more volatility than seen in say the last quarters of 2015.
Given the ongoing state of global economics, currency volatility is perhaps less a trend than the norm. For treasurers, with every FX hedging strategy (hopefully) being continuously reviewed for effectiveness, Switzerland-based treasury consultant and interim treasurer, Thomas Stahr, says one of the most important concurrent themes for many firms is the implementation of IFRS 9.
The IASB’s new reporting structure includes requirements for recognition and measurement, impairment, de-recognition and general hedge accounting. As such, it offers improvements over the IAS 39 rules it will replace, but also removes aspects such as the 80-125% effectiveness testing bandwidth. Although not due to fully replace IAS 39 until 2018, early adoption is permissible. However, says Stahr, “the tricky thing is that there is almost no experience in the implementation of IFRS 9 in the market and there is no audit firm at the moment who can say with a very high degree of certainty what is right and what is wrong”. Keeping ahead of the curve in difficult times is no easy matter.
Technology: virtual accounts easing the flow
Technology trends are prone to being carried on waves of hype. What treasurers need are solutions with substance, that can be used in the real world to their advantage. For many stakeholders, the hot topic around innovation in cash management is the ‘virtual account’. The idea has seen widespread adoption by insurance companies, FX brokerages and pension funds for a number of years but banks have been taking up the cause in recent times, offering it as a practical, sensible tool for corporate clients. In short, this is a trend that is delivering.
Virtual accounts are based on bank-issued virtual bank account numbers that re-route payments to the underlying physical bank account they are linked to, ensuring each remitter is uniquely identified. From a remitter perspective, virtual accounts look and function exactly like a real bank account number, and do not require any changes other than ensuring they pay into the new unique account number provided to them.
With companies seeking to use one central location for accounts in a single currency, one of the challenges is reconciliation and understanding precisely who is being paid for what. In a typical virtual account scenario, as the virtual account detail (VA Name and VA Account Identifier) is passed on to the beneficiary, when the beneficiary receives the payment it can see it has come from the ‘virtual’ account of the subsidiary. Equally, should a payment be rejected, the company paying on behalf of the subsidiary can see straight away which virtual account the payment has come from and return it to the right subsidiary for correction.
The virtual account concept is being adopted in many countries around the world but true global provision is not yet possible. However, progress is being made. In Asia, BNP Paribas’ solution is already live in more than ten countries. The bank told Treasury Today last year that it will not be stopping there; the Middle East and the Americas, for example, already in its sights.
For Marek Chruściel, Treasury Director of Polish telco, Play, virtual account technology has without doubt made cash management a great deal more efficient. The company now runs five billing cycles each month and payments are received 365 days a year – running to over 350,000 on peak days. Payment data files are delivered on a daily basis by the bank via secure file transfer protocol (SFTP) or web service every afternoon and they are processed overnight with payments assigned in Play’s billing system.
Payments are automatically allocated, with very occasional manual input for any individual payment that requires it. “The biggest benefit is the true automation of incoming payments,” says Chruściel. “But it can also help to improve customer satisfaction because you can avoid unnecessary interaction with the clients regarding any payments that you think you didn’t receive but did in fact receive. Virtual accounts give us all the information we need the same day as the customer makes the payment.”
The biggest challenge in implementing a virtual account system is actually working out technical details, he warns. This includes the structure of the virtual accounts, the composition of the data, and ironing out the service level agreement. “These processes need to be carefully thought through, to ensure maximum automation. Otherwise you might end up with a lot of transactions that still require manual entry and intervention.”
Diversity: advancing equality
The treasury profession remains largely male-dominated. If this is to be redressed, women need to be much more visible in their roles, both inside and outside of their organisation. Like currency volatility, this is not so much a trend as an ongoing issue for the profession but at least the movement towards equality is exhibiting an increasingly positive outlook.
As part of the move to address gender diversity in the financial industry, Treasury Today’s Women in Treasury initiative creates a platform to enable women to communicate with one another, to learn from each other and to network in order to help each other.
The Women in Treasury Asia Forum, held this year in Singapore, is a testament to the willingness of participants to be forthright in their discussion. A panel of prominent treasurers from the region agreed that whilst progress has been made regarding gender diversity, women can still do more to advance their careers.
If this can be achieved, it was widely agreed that business would be better placed to succeed. As Jaime Lee, Regional Head, Treasury and Risk Management at Courts explains: “The best teams are always the ones where both men and women work together to achieve something that would otherwise be elusive for an all-male team or an all-female team.”
For Deepali Pendse, Head of Corporate Treasury Sales, Southeast Asia, Bank of America Merrill Lynch, it has already been proven that gender equality is more than just an added bonus; it actually provides businesses with a different perspective and a competitive advantage. However, she feels that although quotas are often mooted as a way to build a more equal workplace, they remain a somewhat contentious issue. Structural changes within companies are what’s needed to provide a more prudent method of driving sustainable long-term gender equality in the workplace.
A large part of this structural shift will come from removing unconscious bias, which Pendse believes we are all guilty of holding in one form or another. “Unconscious bias can come into play when we are hiring, promoting, or in our day-to-day interactions with other people, so it is important to be aware of these and try to find solutions that are better for the firm.” Her advice is to question and evaluate the decisions being made in light of the bias that exists. In doing so, it will help managers to understand their staff better and help them flourish in the workplace.
Whilst business, and society in general, needs to make more changes, Pendse argues that women have a crucial role to play in building an equal and inclusive workplace. “These changes won’t happen by themselves. I encourage women to engage their managers should they feel an unconscious bias exists, or if support is lacking.”
Market liberalisation: China and India paving the way
China: moving up a gear
In a global market place, the strongest survive. For a country to be able to move successfully into overseas trade, the economic, social and political conditions need to allow businesses to transact in both directions as smoothly as possible. In most western markets, the rules are such that trade flow is relatively unhindered (the ramifications of Brexit aside). In emerging trade nations, where markets have demonstrated far tighter control over financial activities there is a notable trend towards liberalisation, not for internal consumption but as part of a new global outlook. In India and China, the giants of Asia, the two countries are at different stages of this journey.
“In China, the journey of RMB has been long and arduous, taking in three broad stages of development,” says Amol Gupte, Head of ASEAN and Citi Country Officer for Singapore. Its arrival as a trade currency has been largely successful (a quarter of all Chinese imports are already denominated in RMB). But its capital convertibility is still at an initial stage and the third phase of becoming a reserve currency is best described as ‘just off the starting blocks’ – joining the IMF’s list of Special Drawing Rights (SDR) was scheduled for October 2016 and this is only the beginning. Becoming a meaningful reserve currency is some way off.
For RMB to gain traction, it must attain the ability to be freely-denominated, it must be easy to transfer in and out of China, and there must be capacity to co-mingle the two expressions of RMB (CNY in China and CNH in Hong Kong). ‘Ease of use’ also means establishing a regulatory environment conducive to commerce and creating a general setting which market participants are comfortable with.
Many commentators also argue that there is a need for China to open up its capital account, creating and developing its offshore financial markets so investors can hold RMB-denominated assets overseas. China’s clearing infrastructure must facilitate easier movement and settlement of RMB across the world too. This is where the multi-bank China International Payment System (CIPS) project has a key role to play, enabling banks to offer their worldwide client-base settlement in RMB. The importance of ensuring deep liquidity in RMB both onshore and offshore must also be attended to. Only a handful of countries (including Hong Kong and Singapore) have so far used the currency swap lines that the Chinese government has opened up to enable market players to indirectly benefit from that liquidity.
Intrinsically linked to the development of China as an economic force is its way of approaching governance, land reforms, income inequality, healthcare, pensions, education, the environment and a host of other internal matters. These will all at some point intersect with and influence the financial flows of the country.
For corporate treasurers with a meaningful portion of their balance sheet in RMB, it will require an understanding of the influence of reform on their supply chain, in terms of their clients and suppliers. At the very least treasurers must understand how to link onshore domestic flows into offshore flows. But if progress was ever doubted, consider that just a couple of years ago money in China was effectively trapped cash. Today, the regulations allow RMB to be moved in and out under certain defined processes. It’s a trend that just keeps going.
India: picking up the pace
In 2016, the IMF predict that India will grow faster than any other major emerging economy at 7.5%, eclipsing the 6.3% predicted of China in the same year. This has taken some effort by the incumbent political and banking leaders. Indeed, in the two years since India’s Prime Minister Narendra Modi took office, he has taken a number of small but significant steps towards modernisation, liberalisation and opening up the economy to more foreign direct investment (FDI), making India a more business-friendly location. According to a Financial Times study, between January and June 2015, the country attracted $31bn of FDI, surpassing China ($28bn) and the US ($27bn).
The red tape has to an extent been loosened and many permits required to do business can now be obtained online. There has been increased spending on India’s infrastructure. Corporate tax is due to be cut an unprecedented 25% during Modi’s tenure and FDI reforms now allow up to 100% FDI in areas such as aviation and defence.
With an historical over-reliance on the banking sector for funding, corporate treasurers in India are certainly keeping a close eye on what is happening. “Discussions around development of a proper bond market have been around for quite some time and regulators are trying hard to push through, but the turn of economic cycle and loss of confidence is complicating matters further and shying investors away,” says Harish Barai, Senior Deputy Manager, Corporate Finance – Treasury at Larsen & Toubro.
In an attempt to diversify their funding needs some Indian corporates, in particular the highly rated names, have looked overseas to raise funds due to cost. However, companies can now raise funds overseas using the rupee. The so-called Masala Bonds look set to help internationalise the rupee and also deepen the financial system. The current Reserve Bank of India’s (RBI) norms allow an Indian entity to raise a maximum of $750m per year through Masala bonds with a minimum maturity of five years. For corporates, the ability to issue such a bond will not only shield the Indian entity against the risk of currency fluctuation, but also allow for a more diversified range of funding sources and perhaps even lower costs moving forward.
Developments in the payments infrastructure have enabled corporates to develop centralised models facilitated by the use of sweeping and pooling arrangements. Indian multinational engineering firm, Larsen & Toubro, for instance has adopted this model. “Our cash flows back to the head office banks and we utilise technology to ensure that we have high visibility in order to avoid running idle balances,” says Barai.
He favours the progressive approach, commenting that the regulators are removing lots of the restrictions for both foreign and domestic companies. “Before the Modi government came in, forms were being submitted to government agencies and they just sat there not being processed. Now we see these move through at much greater speed and it is my belief that in the next year or so India will substantially move up the ease of doing business rankings.”
Soft skills: for the benefit of all
Without the right people and the right approach, a business will always struggle to excel at anything. It is an increasingly powerful notion that managing people to get the best from them is a most expedient model. The required skill – often referred to as a ‘soft skill’ – is not something everyone is born with. “The problem is that nobody teaches you how to identify what you need in human resources, how to manage staff that aren’t performing – and how to manage those that are – and how to build good relationships with the banks,” says Gary Slawther, Financing Advisor to the CEO at Octal in Oman. It is, he determines, “something that only comes with experience”.
Soft skills include the ability to build relationships and to manage people and expectations. In a sales role this is vital, but it is increasingly a management requirement to get the buy-in of all stakeholders when planning change, for example, and on a day-to-day level, handling the peculiarities of people. Companies which overlook the value of soft skills do so at great cost, says Slawther.
But it is not just an individual manager’s responsibility to create the right environment. Vivian Peng, Asia Treasurer and VP of Treasury, Flex Group says company culture allows the team to innovate in a complex environment. That same culture fosters “a great team spirit”, informing Peng’s belief that “their hard work, their ability to work as a team and also their willingness to learn” is the very key to success.