Cash management in Africa and Cash management in Asia: extracting signal from noise: Difference between pages

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  | label2 = Phil Boyall
  | label2 = Tony Mclaughlin
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  |  data2 = Regional Cash Product Head, Asia Pacific
Principal, Global Cash Management Africa, Head, Cash Origination, Barclays Africa
Treasury and Trade Solutions, Citi


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==Introduction==
==Introduction==
During the first part of this century, Africa has experienced significant economic growth and this is widely expected to continue for the foreseeable future. For example, pan Africa GDP growth in 2014 is expected to be 4.8% and as much as 5%–6% in 2015. This growth is fuelled by a number of factors including an increasingly educated population, which is expected to exceed 2 billion by 2050, collective GDP of USD 2.4 billion and consumer spending of USD 1.4 trillion, both forecast by 20201.
In Asia, as in the rest of the world, the macro-economic context in which treasurers operate is balanced on a knife edge. Will the global economy emerge from the global financial crisis into a period of self-sustaining recovery based on concerted stimulus? Or, are we on a never-ending treadmill where each increment of GDP growth depends on ever more debt, and round after round of stimulus until finally the gunpowder runs out?
This growth has been and will continue to be helped by the gradual liberalisation and relaxation of the regulatory and business regimes which pertain in many African countries as they seek to attract investment. Many countries do, of course, still apply some form of exchange controls, which vary in impact. However, one thing is clear, the differing regulatory regimes across the continent have historically prevented, or made more difficult, the free flow of capital that is available elsewhere in the world, e.g. the European Union.
At this stage, nobody knows, but the answer will determine whether central banks will be able to step back from being the dominant economic actors in the global economy. The path of interest rates, currencies, and asset prices will follow in the wake of the outcome.
This does mean that any business either looking to expand or invest in a country needs to ensure that their legal set-up is in accordance with local regulatory requirements and any contracts signed take account of any exchange control regulations that may be in place. If this is not the case, it is possible that resident to non-resident payments and receipts, including any capital injection or repatriation, may be restricted, or, in some cases, not permitted.
Treasurers do not have the luxury of waiting for a “new normal” to emerge: the wheels of treasury turn every day. The challenge for treasurers in Asia is to manage the financial risks of corporate expansion while moving ever closer to global best practices, a task often made more challenging by the realities of operating in a dense information environment.  
Throw into the mix that only a few banks have both a local and regional presence, clearing and settlement systems differ in each country and cash is the predominant payment method (currently only about 25% of Africans have a bank account), which all add to the fiscal challenges that already exist. There are positive developments, with some African regions seeking to implement cross border common clearing platforms. Examples include the South African Development Council Integrated Regional Electronic Settlement System (SIRESS) across South Africa, Lesotho, Namibia and Swaziland; and the Regional Payment and Settlement System (REPSS) across the 19 countries that are members of the Common Market for Eastern and Southern Africa (COMESA).
Some of the information is signal, and some is noise. In Asia, treasurers are tuned into a broad sweep of external developments that either hinder or enable their company’s core mission:
In spite of these issues, corporates are actively seeking to increase their operations across Africa. Currently there are approximately 650 multinational corporates doing business across Africa and many more are looking to take advantage of the opportunities that exist. Clearly, corporates need to select counterparties that have the expertise to help them achieve their objectives; including banks that have both local and pan regional capability to ensure optimal cash management and treasury solutions are put in place.


==Banking requirements==
# '''Political developments''' – Ripples are felt around the region as China exerts greater influence across a number of fronts. Stable governments are sought in Thailand and Indonesia. There is a new optimism in India that a new government will herald a wave of FDI and increased investment. Japan is making a herculean effort to rise from 20 years of underperformance. ASEAN countries seek to establish themselves as an integrated trading bloc with the AEC launching in 2015.
Historically it has been difficult for corporates to manage their operations across Africa both in multiple countries and regionally. Each country has different regulatory regimes and banking practices and this has traditionally led to corporates needing to work with one or more local banks in each country; these banks providing the day to day working capital facilities required.  
# '''Taper tantrums''' – 2013 saw kneejerk reactions to the prospect of withdrawal of stimulus. Capital flew and currencies plummeted. As a lesson to central banks around the world, in 2014 the Swedish Rjksbank raised rates too early and quickly had to reverse course. Treasurers will be watching developments carefully, seeking to manage the attendant interest and currency rate risks.
As bank account penetration is low, payments to employees and receipts from consumers have predominantly been in cash with the resultant issues around control and security and the need for an extensive local branch network. This is particularly so for those businesses with operations in more remote areas in industries such as agriculture and mineral extraction.
# '''Tax environment''' – In an era when governments are in deficit they seek ways to augment tax revenues. While corporate tax rates in the region may drift downwards to attract investment, there are multiple developments with governments attempting to plug tax holes. Of relevance to treasury are moves to tax “permanent establishments” on their activities and to capture more income by modifying transfer pricing rules. Another area that has attracted attention is “beneficial ownership”. This concept of who is entitled to interest payments is important to create a sound footing for both target balancing and notional pooling arrangements.  
Cheques are also an important payment method and the processing and issuance of cheques has needed to be managed by the local operation. As each country develops and improves its clearing systems, more and more countries are placing an upper limit on the value of a cheque that can be issued and cleared through the local cheque clearing system. The effect of this has been that there is greater utilisation of electronic payment methods. For example, the upper limit for a cheque to be cleared through the cheque clearing system in Kenya is KES1m and any cheque above this amount is cleared via the local urgent payment clearing system.
# '''Impact of new bank regulation''' – A set of new rules is about to affect banks’ short, medium and longer term funding and capitalisation. In particular, the Liquidity Coverage Ratio (LCR) is being progressively implemented from 1 January 2015, with Australia choosing to fully implement a 100% LCR requirement from the starting date. Banks will need to maintain High Quality Liquid Assets (HQLA) against the expected run-off of deposits that can happen within a 30-day stress scenario. Treasurers should expect LCR to affect bank transfer pricing (and therefore deposit pricing) and have an impact on the relative attractiveness of different kinds of deposits.
During the first few years of this century, most African countries have invested and developed centrally managed clearing systems including both Real Time Gross Settlement (RTGS) and Net Settlement Systems (NSS). It has been necessary for local banks to join these systems and this has led to the introduction of additional banking services regarding electronic payments and receipts; although multibank direct debit solutions are still not available in each country.
The discerning treasurer distils signal from noise, and then takes action. From Citi’s experience working with treasurers from the top multinational corporations, we see a common focus on four signals that are key to successful treasury management in Asia – managing currency risk; capturing RMB internationalisation opportunities; achieving global treasury standards; and keeping pace with Asia infrastructure developments.
Whilst bank account penetration is low, mobile phone penetration is high and it is estimated that over 70% of the population have a mobile phone. This is driving the development of mobile payments, which is particularly significant in Kenya through M-Pesa. Currently the majority of payments through mobile payment services are C2C type payments, but solutions are being developed particularly for corporates to make salary and other low value payments. Other developments include both closed and open loop cards which, for example, can be used to pay wages to unbanked employees.
Local banks have also developed electronic/internet banking services and these are now widely available in most countries, albeit the functionality may differ from country to country. Most such services provide balance and transaction reporting as well as electronic funds transfers (EFT) so corporates can now obtain visibility of account balances and initiate payments from their own offices. In addition, a number of banks have developed bulk file and Host to Host/SWIFT Corporate connectivity channels and this is supporting the development of corporate central or regional treasury structures.
Domestic liquidity management is key. Whilst cash concentration is available in some form in many countries, there are limitations on multi-entity arrangements; particularly in instances where there are minority shareholders. Notional pooling and margin enhancement type facilities are also limited; one reason being that the Central Banks in many countries have not yet given these structures due consideration. One exception is South Africa where the South Africa Reserve Bank has established the parameters for such structures, but even then notional pooling is not allowed between resident and non-resident entities.


==Changing corporate treasury needs==
From our own experience, there are three generally accepted models with regard to treasury structures across Africa – fully centralised, centralised but local control, and local operation and control. We are also aware that approximately 75% of corporates have a fully or partly centralised treasury model. Of course local operation and control will still be required where local payment and collection methods continue to be used and where there is an element of “trapped cash” that has to be managed and invested locally.
With the growth of business across Africa, corporates are looking at ways in which they can increase or introduce the level of centralisation across their operations to mirror practices in place elsewhere within the business. Regional treasury hubs and Shared Service Centres are most definitely growing in popularity. In view of its accessibility, established infrastructure and well established fiscal and banking regulations, South Africa continues to be a popular choice for treasury operations. However, other countries, such as Kenya and Ghana, are becoming recognised as treasury hubs for East and West Africa as well as non-African centres, such as the UAE and Singapore.
The drive for centralisation across Africa is just as high as elsewhere in the world, despite the differing regulatory regimes that exist in each country. Whilst these may prevent “standard” treasury procedures being established, corporates are becoming more sophisticated in putting practices and procedures in place so that they can manage the financial risks as effectively as possible.
In addition to the number of corporates and NGOs operating across Africa, large regional and domestic companies are becoming more sophisticated with regard to their cash management needs. As a result, domestic and regional banks continue to develop and enhance the range of services available to meet the ongoing and future demands of such organisations.
With regard to minimising the risk and overcoming banking challenges in each country of operation, procedures and practices need to be established for the following areas:
* Payables
* Receivables
* Visibility and control of cash
* Risk management


==Payables==
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
From our own discussions with our clients, we know there is a move to introduce electronic payments where possible as corporates believe there is significant room for improvement in existing processes. However, it may be difficult to introduce these changes because of local payment practices. Most large clients are planning to move to electronic payment methods in the future, but they recognise that cash and paper payments will still be required to ensure they have a complete range of local payment options.
|-
This has led to many corporates developing payment factory type operations. This gives them the ability to submit a single file of payments from its chosen location anywhere in the world to its bank, appropriately authorised by the company. Such files can be single or multi country specific, including both high value and low value payments.
| style="background:#e9d7e0"|1. Identifying the company’s risk exposures
In addition to centralising electronic payments, benefits include lower costs, better security, control and cash flow forecasting together with transaction status feedback so that any return or rejected items can be managed immediately.
| style="background:#e9d7e0"|
Cross border and resident to non-resident payments must be in accordance with Exchange Control and Central Bank Reporting requirements in each country. Banks can perform this reporting on behalf of clients providing that the payment file from the corporate has the correct details regarding the relevant transactions.
* Going beyond the notional exposure to take into account the volatility of each currency pair
Whilst cheque usage is declining in most countries as electronic payments become more acceptable, they are still important in many countries. Banks have also developed bulk cheque printing solutions so that a file of cheques can be included which can be printed and distributed by the bank supporting the centralisation of the payment process.
|-
Not all payments can be centralised. Cash payments continue to be important, particularly to non-banked employees and small suppliers and of course these services do have to be provided locally. Domestic banks have developed “doorstep banking” services, which can be used to deliver bulk cash to the corporate and paid to workers in individual pay envelopes. However, bank services now exist in some countries, e.g. South Africa, where non-banked payees can receive a SMS message on their mobile phone including a security code. The recipient can then either use an ATM to collect the cash or, where they have a mobile banking account, use their phone to buy goods and services.
| style="background:#f2ebef"|2. Quantifying the risk
Mobile banking and card services are rapidly evolving and are becoming a common payment form across many countries on the continent. This will provide a relatively inexpensive and simple way for companies to pay small amounts to non-banked beneficiaries whilst supporting the continuing centralisation of payments across Africa.
| style="background:#f2ebef"|
* Quantifying a Value at Risk (VaR) number for the firm’s risk
* Stress testing scenarios
* Comparing VaR at an individual/silo level to Portfolio level, showing the benefits of a centralised approach
|-
| style="background:#e9d7e0"|3. Setting a risk target
| style="background:#e9d7e0"|
* Setting target in terms of VaR/Net Income, establishing the risk to firm performance
* Benchmarking risk profile against peers
* Simple objective, e.g. 95% confidence that less than 20% of Net Income is at risk from FX volatility
|-
| style="background:#f2ebef"|4. Constructing an optimised hedging strategy
| style="background:#f2ebef"|
* Moving beyond single hedge ratio to optimal hedge ratio, taking into account volatility, correlations and hedging costs
* Taking into account subjective constraints, e.g. treasury policy
* Using Options, not only FX forwards to benefit from upside
|-
| style="background:#e9d7e0"|5. Back testing chosen hedging strategy
| style="background:#e9d7e0"|
* Back testing of strategy to validate hedging strategy against prior periods to find opportunities to tune outcomes
* Continuous evaluation of hedge effectiveness, particularly when hedge accounting is applied
* Reassessing strategy post major market dislocations


==Receivables==
|}
With a high percentage of collections being made in cash and cheques, many of these directly into a corporate bank account by the end customer, there are significant issues regarding data quality and reconciliation. In addition collection costs can be substantially higher than in other regions; for example, the European Union. Despite these issues, electronic collection methods are only seen as marginally better than cash and paper due to little difference in value dating practices and the development of sophisticated and secure cash solutions.
The issues are two-fold. Firstly, if a corporate receives cash directly, it has to ensure sufficient security and cash handling procedures are in place to get the cash to the bank and credited to their account. Secondly, if the end customer is paying cash over a bank’s counters, the corporate requires early notification of the sum deposited. In both cases, not only is it vital that all cash collections are accounted for but they have to be reconciled against the original order, so reconciliation is key.
Cash in Transit (CIT) services are common across Africa and they can be outsourced to a bank or third party provider who will arrange to collect cash on behalf of its client and provide near real time value of funds deposited into its accounts. Intelligent Tills have also been developed which can count, verify and store cash and, in some cases, receive immediate value even though the cash has not physically reached the bank.
With such a low proportion of the population having a bank account, coupled with developing banking systems across the region, direct debit does not offer the same benefits as it would in other regions of the world. Alternative banking services are being rolled out that allow those who do not have a bank account (non-banked) to pay using mobile phones and ATMs, which will enable utility type operations to be able to collect payments more efficiently.
Many banks will be able to provide pre-printed credit slips to assist the reconciliation process. For example in South Africa, immediate notification can be sent to a corporate for each payment across a bank’s counters. This is very important, particularly where the payor requires delivery of goods but has to pay before these can be delivered.
Banks are increasingly offering services to enable collection directly from a mobile wallet into a bank account, thus capturing C2B or even B2B payments, with real time notification, and eliminating the security risk and reconciliation issues associated with cash.


==Visibility and control of cash==
Of equal, if not more importance, is the management of working capital. Corporates will be able to manage their terms of trade, but will need to ensure that payment cycles are managed effectively, particularly where cash payments and receipts are involved.
Managing cash positions across Africa may result in trapped cash in a particular country and, along with mobilising hard currency and counterparty risk, these are some of the major difficulties a corporate with African operations has to overcome.
Most multinational and large local corporates are now seeking sophisticated liquidity management solutions for Africa. This is a challenge in view of the exchange control and local regulatory regime.
Of utmost importance is visibility of cash positions in each country of operation. This can be achieved through the use of the developing electronic banking channels across the region. In addition, most banks can initiate a SWIFT MT940 statement so the overall regional cash position can be monitored centrally.
Managing cash in a single country in a single currency is relatively simple, but managing cash in different countries in different currencies is more challenging. This is particularly so across Africa where cross border cash concentration is difficult as the regulatory environment and cash pooling solutions have not been developed as in other parts of the world. Despite the absence of regional solutions, liquidity management solutions are available in individual countries which will assist a company in maximising interest income and minimising interest expense on local cash positions.
Where cross border cash concentration is possible, it must be undertaken with a full understanding of the tax and legal effect this may have on the company. For example, intercompany loans may be created, transfers may be seen as a repatriation of capital or a dividend and there may be minority shareholders to consider. Regional liquidity structures are in place, for example in an offshore centre such as Mauritius, but these should only be used where all tax, regulatory and legal issues can be overcome. Exchange risk must be taken into account if local currencies need to be converted to, say, USD, for overall group liquidity purposes and are subsequently returned to the participating subsidiary in each country if a shortfall occurs.
As already described above, notional pooling is not widely offered across Africa as this type of arrangement is normally provided subject to central bank legislation and a legal right of set-off.


==Risk management==
Across Africa, there are additional risks associated with cash management compared with some other regions across the world. This section is not intended to be all encompassing, but focuses on several key risks relating to managing cash holdings and payments on the continent.
Political and economic stability on the African continent has improved substantially over time, and the risk of international corporations being unable to remit funds out of Africa has reduced. However, there is still a requirement to comply with local regulations, so this risk has not been eliminated. Any subsequent regulatory changes may alter the rules governing such transfers and treasurers need to consider this risk when putting any structure in place. Careful planning and forecasting on the part of treasurers is required to minimise funds held in certain countries, taking into account local exchange controls and keeping abreast of local developments to consider any changes or amendments to these regimes that may be introduced in the future and the effect on existing structures and practices.
Given the multi-currency nature of the African continent, combined with the weakness of some local currencies in comparison with international currencies, exchange rate risk is significant. For example, the ZAR/USD exchange rate has moved from a period average of 8.2612 in 2008 to 10.8735 in Q1 20142. Various tools are available to mitigate a degree of this risk, from holding foreign currency accounts, through to forward exchange rate contracts and hedging where local regulations permit.
In many African countries, it is standard practice to be billed in foreign currency. This practice in itself can create a form of counterparty risk in countries which experience foreign currency shortages, and at a bare minimum can negatively impact the working capital cycle. Treasurers must work closely with both their counterparties and their banks to manage this risk as far as possible.


==Summary==
The rise of RMB as a trading and treasury currency is worthy of particular attention. This is a subject where local knowledge is a must to understand exactly what is permissible within the rapidly developing rules. While there is rightly a great deal of focus on RMB developments, USD in Asia continues to play a decisive role.
The cash and liquidity management needs of a corporate operating in Africa are becoming more sophisticated. However, as explained in this article, there are a number of reasons why these disciplines are more complex across Africa and it will take time to change.
Certainly banking systems across Africa are becoming more sophisticated, which is supporting the ever-growing needs of a corporate treasury. However, whilst electronic transactions are increasing and liquidity management solutions are being developed, there will still be a large proportion of cash payments. The development of mobile banking and payment card solutions will certainly assist in bringing efficiencies and cost savings to banking in many countries.
In view of this complexity it is vital that corporates partner with a bank with a good knowledge of local markets to ensure they can access the most effective solutions for their needs. Using such a trusted partner will assist in managing risk, improve liquidity management, enhance working capital and increase efficiency whilst reducing costs.  


==Parallel lives: RMB and USD==
RMB internationalisation is of great importance to multinationals with significant investments and sales in China. The following table gives a flavour of RMB significance. The $18trn worth of RMB money supply in China is approximately the same as US market capitalisation! We may well ask what happens when that magnitude of currency becomes freely convertible, given what restricted outflows have already done to prices in selected property markets around the world.


<sup>1 Source: Africa in 50 years’ time – Africa Development Bank; Growing in Africa – Ernst & Young</sup>
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
| '''Country'''
| '''GDP in USD'''
| '''Money Supply (M2) in GDP'''
|-
| style="background:#e9d7e0"|UK
| style="background:#e9d7e0"|2.4trn
| style="background:#e9d7e0"|2.4trn
|-
| style="background:#f2ebef"|USA
| style="background:#f2ebef"|15.5trn
| style="background:#f2ebef"|11trn
|-
| style="background:#e9d7e0"|China
| style="background:#e9d7e0"|8.5trn
| style="background:#e9d7e0"|18trn
|}


<sup>2 Source: International Financial Statistics, IMF 2014 Yearbook</sup>
From a treasury perspective, the rules are relaxing so that the familiar range of treasury practices are gradually coming on stream in the China context. For example, it is now possible to have RMB as part of a cross border pool, giving companies with large sales in China the ability to use the proceeds as part of their regional funding. Netting rules are also relaxing. The progressive liberalisation of interest rates will see a sharper competition for loans and deposits, while widening of foreign exchange bands and the end to one way appreciation will lead to increased currency hedging.
USD and RMB lead interesting parallel lives within the region. Asia’s export champions have generated huge dollar surpluses in the region. US multinationals also have very substantial USD balances in the region. These balances mount up on the balance sheets of local and international banks, leading to plentiful dollar liquidity in the region at competitive prices, albeit with pricing spikes from time to time. With US interest rates expected to rise and political rumblings in Washington about the huge cash balances held by US corporates offshore, treasurers watch USD in Asia as carefully as developments in RMB.
The ability to fold RMB into global liquidity structures is a microcosm of a broader trend in Asia – it is becoming more possible to operate global standards in Asia. If we benchmark the best practices, then we can pinpoint where treasurers are able to act themselves with their partner banks, and where market liberalisation is required to facilitate a more efficient model.
 
==Achieving global treasury standards in Asia==
The extent to which best practice can be implemented in Asia can be illustrated through a selected list of benchmarks. Companies can ask themselves how they score on each dimension, and in which markets progress is hindered by local practices, rules and regulations.
 
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
! colspan="4" style="color:#48001f; font-size:18px; background:none" | '''Embedded Treasury'''
|-
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_2.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_2.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_4.png|center]]
|-
| style="background:#f2ebef"|'''In Scope'''
| style="background:#f2ebef"|'''Policy Coverage'''
| style="background:#f2ebef"|'''Control'''
| style="background:#f2ebef"|'''Working Capital Management'''
|-
| style="background:#e9d7e0"|
* Intercompany loans
* Counterparty risk
* Supplier payments
* Financial guarantees
| style="background:#e9d7e0"|
* FX risk
* Liquidity risk
* Counterparty risk
* Interest rate risk
| style="background:#e9d7e0"|
* % of operating flows included in pooling structure
* % of accounts under control of treasury
| style="background:#e9d7e0"|
* Working capital management in scope
* Use of supplier finance
|}
 
 
 
Asia consists of broadly liberal and restricted markets. The liberal markets have open capital accounts, freely convertible currencies, developed clearing infrastructure, and transparent regulatory and taxation environments. In these markets the implementation of global standards is largely achievable.
In restricted markets embedded treasury solutions have to be locally customised while trying to maximise alignment with global standards. It could be the need to supply reams of supporting documentation for foreign exchange deals or international payments, or the inability to trade on open account. It could be the difficulty of extracting trapped cash in a tax efficient manner. The restricted markets may have such day to day operational burdens and constraints that best practice treasury becomes a secondary consideration.
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
! colspan="4" style="color:#48001f; font-size:18px; background:none" | '''Real Time Treasury Management'''
|-
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_real_time_management_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_real_time_management_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_real_time_management_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_real_time_management_1.png|center]]
|-
| style="background:#f2ebef"|'''Visibility'''
| style="background:#f2ebef"|'''Forecasting'''
| style="background:#f2ebef"|'''Concentration'''
| style="background:#f2ebef"|'''Automation'''
|-
| style="background:#e9d7e0"|
* % of balances visible daily
* % of short term investments visible daily
| style="background:#e9d7e0"|
* % of entities that provide daily forecast updates
| style="background:#e9d7e0"|
* % of balances concentrated daily
| style="background:#e9d7e0"|
* % of sweeps automated
* % receivables matched automatically
|}
 
In restricted markets achieving visibility and control can be challenging. For example, domestic cash pooling in India is problematic. India does not yet use SWIFT for domestic use, so the standard approach to receive an MT940 which triggers and MT101 to sweep funds from local banks is not possible. Local currency pooling is common in markets such as China, Malaysia and Thailand, although in several markets treasurers can find it hard to use MT101s for sweeping purposes. In many markets local banks are unable to provide MT942 intraday statements.
In Indonesia, notional pooling is the preferred method for cash concentration due to higher tax cost for physical pooling. In Korea, multi-bank sweeps are possible, but only for single entity and not multi-entity companies. Cross border structures involving restricted markets entail significant regulatory challenges.
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
! colspan="4" style="color:#48001f; font-size:18px; background:none" | '''Efficiency And Control'''
|-
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_1.png|center]]
| style="background:#e9d7e0"|[[File:Cash_management_in_asia_pacific_embed_treasury_1.png|center]]
|-
| style="background:#f2ebef"|'''Pooling & Mobilisation'''
| style="background:#f2ebef"|'''Centralisation'''
| style="background:#f2ebef"|'''Electronification'''
| style="background:#f2ebef"|'''Treasury Performance Mgt'''
|-
| style="background:#e9d7e0"|
* Global mobilisation of cash
| style="background:#e9d7e0"|
* In-house bank
* Netting centre
* Shared Service Centre – Payments & Receivables
| style="background:#e9d7e0"|
* % of payments electronic
* % of receivables electronic
| style="background:#e9d7e0"|
* Quantifiable KPIs in place for treasury
|}
 
 
As the regulatory environment, clearing infrastructure and tax implications are varied by market, the integration of Asian subsidiaries into foundational treasury structures, such as netting centres, Shared Service Centres (SSCs), and in-house banks can be complex. Careful analysis of company flows, banking capabilities and the market environment is needed to create solutions that will allow high efficiency and control for a company within the given constraints.
Treasury professionals look through the frictions and barriers as they seek to implement globally consistent models. While difficulties remain in restricted markets there is a clear trend across Asia to upgrade the basic clearing and settlement infrastructure that ultimately provides the base layer of a more efficient, digital treasury.
However, not all best practices are imported. As necessity is the mother of invention, treasury solutions in Asia have evolved that are now being exported to the rest of the world. For example, so-called Payer ID solutions are more advanced in Asia than in other parts of the world. Takeup of new mechanisms like Bank Payment Obligation (BPO) is faster here than elsewhere. We also find treasurers in Asia at the forefront of currency hedging, given a unique set of restricted currency constraints.
 
==Asia infrastructure upgrades==
There is a far-reaching and systematic thrust by authorities across Asia to upgrade financial infrastructure with the underlying objective to modernise, manage risk and protect consumer interests. These developments are enablers of best practice treasury operations.
 
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
| '''Regulatory themes'''
| '''Recent regulatory changes in Asia'''
| '''Common underlying objective and intended regulatory impact'''
|-
| style="background:#e9d7e0"|1. Systemic risk reduction and control
| style="background:#e9d7e0"|
* BAHTNET SWIFT based messaging in Thailand
* '''Real time payments systems introduction''' in Singapore and planned for Australia by 2016
* '''New clearing settlement systems and clearing rule changes:'''
: - Domestic RMB clearing in Hong Kong, Philippines and Singapore
: - Onshore USD clearing in Taiwan
: - ACH settlement system in India
: - National Bill Payment System in Malaysia
: - Multiple intraday settlement windows for Malaysia ACH and India NEFT
* '''High-Value Payment Systems enhancements:'''
: - NextGen RTGS: India, Indonesia, China (CNAPS II) and Sri Lanka: Common Electronic Fund Transfer Switch (CEFTS) under National Switch for Payments
* New liquidity standards for High Value and Near-Real-time Payment Systems for banks
* RMB internationalisation with CIPS rollout in China
 
| style="background:#e9d7e0"|
* Higher collateral and increased intraday liquidity for banks
* Higher investment in infrastructure
* Faster realisation of funds for clients
* Increased end to end data availability
 
|-
| style="background:#f2ebef"|2. Transparency and consumer protection
| style="background:#f2ebef"|
* Multi-factor authentication requirements for online banking in Singapore, Korea and India
* Pricing controls regulations on domestic wire transfers in Vietnam, Thailand, Philippines, India
* Penal clauses for delayed credits in India
* '''Mobile payments and third party payment service provider guidelines:'''
: - IMPS and aggregator guidelines in India
: - Mobile device standards related to Consumer Electronic Clearing System (CECS) rules and standards introduced in New Zealand
 
| style="background:#f2ebef"|
* Increased transparency
* Reduced fraud
* Data storage and outsourcing issues for providers
* Regulated non-bank players
* Consumer grievance framework
 
|-
| style="background:#e9d7e0"|3. Standardisation, automation and convergence
| style="background:#e9d7e0"|
* '''Standardisation and integration of payment settlement systems''' across ASEAN
* Bank of Korea '''FX reporting system enhancements'''
* '''Cheque truncation and electronic cheque clearing''' in Hong Kong, India, Thailand etc
* '''Online tax payments''' recently introduced in smaller Asian countries like Bangladesh and Vietnam
 
| style="background:#e9d7e0"|
* Paper to electronic
* Increased interoperability in payment systems
* Harmonised legal framework
* Narrowing differentiation in providers
 
|}
 
 
Looking to the medium term we can anticipate that the base layer of financial clearing infrastructure in Asia will be modern, electronic and efficient. These trends are positive, but not a one-way street. The same regulatory impulse to protect and develop can create barriers and impediments – restrictions on outsourcing and requirements to process data onshore can prevent corporations and their banking partners from implementing regional or global solutions.
 
==Conclusion==
While the macro picture remains uncertain, the drivers of Asian growth remain in place: low cost production, increasing incomes driving consumption, huge need for investment in infrastructure and developing and deepening of financial markets. Companies therefore are “long” Asia and the region continues to be a key strategic focus for any company seeking global expansion. In this highly competitive market, treasurers must continue to distil signal from noise to raise the bar on their operations.


[[Category:Book_Export]]
[[Category:Book_Export]]

Revision as of 12:47, 27 July 2015

Cash management
Treasurers Handbook
Authors
Tony Mclaughlin

Regional Cash Product Head, Asia Pacific

Treasury and Trade Solutions, Citi

Introduction

In Asia, as in the rest of the world, the macro-economic context in which treasurers operate is balanced on a knife edge. Will the global economy emerge from the global financial crisis into a period of self-sustaining recovery based on concerted stimulus? Or, are we on a never-ending treadmill where each increment of GDP growth depends on ever more debt, and round after round of stimulus until finally the gunpowder runs out? At this stage, nobody knows, but the answer will determine whether central banks will be able to step back from being the dominant economic actors in the global economy. The path of interest rates, currencies, and asset prices will follow in the wake of the outcome. Treasurers do not have the luxury of waiting for a “new normal” to emerge: the wheels of treasury turn every day. The challenge for treasurers in Asia is to manage the financial risks of corporate expansion while moving ever closer to global best practices, a task often made more challenging by the realities of operating in a dense information environment. Some of the information is signal, and some is noise. In Asia, treasurers are tuned into a broad sweep of external developments that either hinder or enable their company’s core mission:

  1. Political developments – Ripples are felt around the region as China exerts greater influence across a number of fronts. Stable governments are sought in Thailand and Indonesia. There is a new optimism in India that a new government will herald a wave of FDI and increased investment. Japan is making a herculean effort to rise from 20 years of underperformance. ASEAN countries seek to establish themselves as an integrated trading bloc with the AEC launching in 2015.
  2. Taper tantrums – 2013 saw kneejerk reactions to the prospect of withdrawal of stimulus. Capital flew and currencies plummeted. As a lesson to central banks around the world, in 2014 the Swedish Rjksbank raised rates too early and quickly had to reverse course. Treasurers will be watching developments carefully, seeking to manage the attendant interest and currency rate risks.
  3. Tax environment – In an era when governments are in deficit they seek ways to augment tax revenues. While corporate tax rates in the region may drift downwards to attract investment, there are multiple developments with governments attempting to plug tax holes. Of relevance to treasury are moves to tax “permanent establishments” on their activities and to capture more income by modifying transfer pricing rules. Another area that has attracted attention is “beneficial ownership”. This concept of who is entitled to interest payments is important to create a sound footing for both target balancing and notional pooling arrangements.
  4. Impact of new bank regulation – A set of new rules is about to affect banks’ short, medium and longer term funding and capitalisation. In particular, the Liquidity Coverage Ratio (LCR) is being progressively implemented from 1 January 2015, with Australia choosing to fully implement a 100% LCR requirement from the starting date. Banks will need to maintain High Quality Liquid Assets (HQLA) against the expected run-off of deposits that can happen within a 30-day stress scenario. Treasurers should expect LCR to affect bank transfer pricing (and therefore deposit pricing) and have an impact on the relative attractiveness of different kinds of deposits.

The discerning treasurer distils signal from noise, and then takes action. From Citi’s experience working with treasurers from the top multinational corporations, we see a common focus on four signals that are key to successful treasury management in Asia – managing currency risk; capturing RMB internationalisation opportunities; achieving global treasury standards; and keeping pace with Asia infrastructure developments.


1. Identifying the company’s risk exposures
  • Going beyond the notional exposure to take into account the volatility of each currency pair
2. Quantifying the risk
  • Quantifying a Value at Risk (VaR) number for the firm’s risk
  • Stress testing scenarios
  • Comparing VaR at an individual/silo level to Portfolio level, showing the benefits of a centralised approach
3. Setting a risk target
  • Setting target in terms of VaR/Net Income, establishing the risk to firm performance
  • Benchmarking risk profile against peers
  • Simple objective, e.g. 95% confidence that less than 20% of Net Income is at risk from FX volatility
4. Constructing an optimised hedging strategy
  • Moving beyond single hedge ratio to optimal hedge ratio, taking into account volatility, correlations and hedging costs
  • Taking into account subjective constraints, e.g. treasury policy
  • Using Options, not only FX forwards to benefit from upside
5. Back testing chosen hedging strategy
  • Back testing of strategy to validate hedging strategy against prior periods to find opportunities to tune outcomes
  • Continuous evaluation of hedge effectiveness, particularly when hedge accounting is applied
  • Reassessing strategy post major market dislocations


The rise of RMB as a trading and treasury currency is worthy of particular attention. This is a subject where local knowledge is a must to understand exactly what is permissible within the rapidly developing rules. While there is rightly a great deal of focus on RMB developments, USD in Asia continues to play a decisive role.

Parallel lives: RMB and USD

RMB internationalisation is of great importance to multinationals with significant investments and sales in China. The following table gives a flavour of RMB significance. The $18trn worth of RMB money supply in China is approximately the same as US market capitalisation! We may well ask what happens when that magnitude of currency becomes freely convertible, given what restricted outflows have already done to prices in selected property markets around the world.

Country GDP in USD Money Supply (M2) in GDP
UK 2.4trn 2.4trn
USA 15.5trn 11trn
China 8.5trn 18trn

From a treasury perspective, the rules are relaxing so that the familiar range of treasury practices are gradually coming on stream in the China context. For example, it is now possible to have RMB as part of a cross border pool, giving companies with large sales in China the ability to use the proceeds as part of their regional funding. Netting rules are also relaxing. The progressive liberalisation of interest rates will see a sharper competition for loans and deposits, while widening of foreign exchange bands and the end to one way appreciation will lead to increased currency hedging. USD and RMB lead interesting parallel lives within the region. Asia’s export champions have generated huge dollar surpluses in the region. US multinationals also have very substantial USD balances in the region. These balances mount up on the balance sheets of local and international banks, leading to plentiful dollar liquidity in the region at competitive prices, albeit with pricing spikes from time to time. With US interest rates expected to rise and political rumblings in Washington about the huge cash balances held by US corporates offshore, treasurers watch USD in Asia as carefully as developments in RMB. The ability to fold RMB into global liquidity structures is a microcosm of a broader trend in Asia – it is becoming more possible to operate global standards in Asia. If we benchmark the best practices, then we can pinpoint where treasurers are able to act themselves with their partner banks, and where market liberalisation is required to facilitate a more efficient model.

Achieving global treasury standards in Asia

The extent to which best practice can be implemented in Asia can be illustrated through a selected list of benchmarks. Companies can ask themselves how they score on each dimension, and in which markets progress is hindered by local practices, rules and regulations.


Embedded Treasury
In Scope Policy Coverage Control Working Capital Management
  • Intercompany loans
  • Counterparty risk
  • Supplier payments
  • Financial guarantees
  • FX risk
  • Liquidity risk
  • Counterparty risk
  • Interest rate risk
  • % of operating flows included in pooling structure
  • % of accounts under control of treasury
  • Working capital management in scope
  • Use of supplier finance


Asia consists of broadly liberal and restricted markets. The liberal markets have open capital accounts, freely convertible currencies, developed clearing infrastructure, and transparent regulatory and taxation environments. In these markets the implementation of global standards is largely achievable. In restricted markets embedded treasury solutions have to be locally customised while trying to maximise alignment with global standards. It could be the need to supply reams of supporting documentation for foreign exchange deals or international payments, or the inability to trade on open account. It could be the difficulty of extracting trapped cash in a tax efficient manner. The restricted markets may have such day to day operational burdens and constraints that best practice treasury becomes a secondary consideration.

Real Time Treasury Management
Visibility Forecasting Concentration Automation
  • % of balances visible daily
  • % of short term investments visible daily
  • % of entities that provide daily forecast updates
  • % of balances concentrated daily
  • % of sweeps automated
  • % receivables matched automatically

In restricted markets achieving visibility and control can be challenging. For example, domestic cash pooling in India is problematic. India does not yet use SWIFT for domestic use, so the standard approach to receive an MT940 which triggers and MT101 to sweep funds from local banks is not possible. Local currency pooling is common in markets such as China, Malaysia and Thailand, although in several markets treasurers can find it hard to use MT101s for sweeping purposes. In many markets local banks are unable to provide MT942 intraday statements. In Indonesia, notional pooling is the preferred method for cash concentration due to higher tax cost for physical pooling. In Korea, multi-bank sweeps are possible, but only for single entity and not multi-entity companies. Cross border structures involving restricted markets entail significant regulatory challenges.

Efficiency And Control
Pooling & Mobilisation Centralisation Electronification Treasury Performance Mgt
  • Global mobilisation of cash
  • In-house bank
  • Netting centre
  • Shared Service Centre – Payments & Receivables
  • % of payments electronic
  • % of receivables electronic
  • Quantifiable KPIs in place for treasury


As the regulatory environment, clearing infrastructure and tax implications are varied by market, the integration of Asian subsidiaries into foundational treasury structures, such as netting centres, Shared Service Centres (SSCs), and in-house banks can be complex. Careful analysis of company flows, banking capabilities and the market environment is needed to create solutions that will allow high efficiency and control for a company within the given constraints. Treasury professionals look through the frictions and barriers as they seek to implement globally consistent models. While difficulties remain in restricted markets there is a clear trend across Asia to upgrade the basic clearing and settlement infrastructure that ultimately provides the base layer of a more efficient, digital treasury. However, not all best practices are imported. As necessity is the mother of invention, treasury solutions in Asia have evolved that are now being exported to the rest of the world. For example, so-called Payer ID solutions are more advanced in Asia than in other parts of the world. Takeup of new mechanisms like Bank Payment Obligation (BPO) is faster here than elsewhere. We also find treasurers in Asia at the forefront of currency hedging, given a unique set of restricted currency constraints.

Asia infrastructure upgrades

There is a far-reaching and systematic thrust by authorities across Asia to upgrade financial infrastructure with the underlying objective to modernise, manage risk and protect consumer interests. These developments are enablers of best practice treasury operations.


Regulatory themes Recent regulatory changes in Asia Common underlying objective and intended regulatory impact
1. Systemic risk reduction and control
  • BAHTNET SWIFT based messaging in Thailand
  • Real time payments systems introduction in Singapore and planned for Australia by 2016
  • New clearing settlement systems and clearing rule changes:
- Domestic RMB clearing in Hong Kong, Philippines and Singapore
- Onshore USD clearing in Taiwan
- ACH settlement system in India
- National Bill Payment System in Malaysia
- Multiple intraday settlement windows for Malaysia ACH and India NEFT
  • High-Value Payment Systems enhancements:
- NextGen RTGS: India, Indonesia, China (CNAPS II) and Sri Lanka: Common Electronic Fund Transfer Switch (CEFTS) under National Switch for Payments
  • New liquidity standards for High Value and Near-Real-time Payment Systems for banks
  • RMB internationalisation with CIPS rollout in China
  • Higher collateral and increased intraday liquidity for banks
  • Higher investment in infrastructure
  • Faster realisation of funds for clients
  • Increased end to end data availability
2. Transparency and consumer protection
  • Multi-factor authentication requirements for online banking in Singapore, Korea and India
  • Pricing controls regulations on domestic wire transfers in Vietnam, Thailand, Philippines, India
  • Penal clauses for delayed credits in India
  • Mobile payments and third party payment service provider guidelines:
- IMPS and aggregator guidelines in India
- Mobile device standards related to Consumer Electronic Clearing System (CECS) rules and standards introduced in New Zealand
  • Increased transparency
  • Reduced fraud
  • Data storage and outsourcing issues for providers
  • Regulated non-bank players
  • Consumer grievance framework
3. Standardisation, automation and convergence
  • Standardisation and integration of payment settlement systems across ASEAN
  • Bank of Korea FX reporting system enhancements
  • Cheque truncation and electronic cheque clearing in Hong Kong, India, Thailand etc
  • Online tax payments recently introduced in smaller Asian countries like Bangladesh and Vietnam
  • Paper to electronic
  • Increased interoperability in payment systems
  • Harmonised legal framework
  • Narrowing differentiation in providers


Looking to the medium term we can anticipate that the base layer of financial clearing infrastructure in Asia will be modern, electronic and efficient. These trends are positive, but not a one-way street. The same regulatory impulse to protect and develop can create barriers and impediments – restrictions on outsourcing and requirements to process data onshore can prevent corporations and their banking partners from implementing regional or global solutions.

Conclusion

While the macro picture remains uncertain, the drivers of Asian growth remain in place: low cost production, increasing incomes driving consumption, huge need for investment in infrastructure and developing and deepening of financial markets. Companies therefore are “long” Asia and the region continues to be a key strategic focus for any company seeking global expansion. In this highly competitive market, treasurers must continue to distil signal from noise to raise the bar on their operations.

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