Treasurers brace themselves for macro shocks

Asiamoney, October 2011

Across Asia, companies and investors are bracing themselves against roiling markets and macroeconomic shocks. But how does it affect the lot of the corporate treasurer? Does cash management remain safe and steady while markets toil, or do challenges feed through to them too?

It does have an impact, though the good news is that the global financial crisis in 2008 taught treasurers in this region some harsh lessons that they have taken to heart. “A lot of companies were better prepared for this period of uncertainty than they were in 2007,” says Sridhar Kanthadai, managing director and Asia Pacific head of treasury and trade solutions at Citi. “That’s different.”

In particular, they have a sharper awareness of risk. “The global financial crisis was a catalyst not only for treasury services but the whole economy: a wake-up call to focus on risk management,” says Mark Wuscher, segment head for corporates, Asia Pacific at JP Morgan Treasury Services. “In everything from counterparty to foreign exchange and cross-border risk management, companies have implemented more robust and transparent systems within their treasury operations.” That preparation stands them in good stead now. “2011 has served as a reminder to check and take another look at risk management and how they’re managing it within their regional treasury centres.”

But the issues they face are similar to those from the financial crisis. In particular, there remains a premium on liquidity. “Liquidity is the lifeblood of any institutions,” says Kanthadai. “A lot of the work we are doing, whether in advisory or sales roles, is helping them visualise their sources of liquidity, set up the structures to mobilize it, and optimize it. There’s nothing like too much liquidity.” As one banker puts it:  “It’s like having an extra pint of blood in your body is not going to kill you.”

Ashutosh Kumar, global head of corporate cash and trade at Standard Chartered, agrees. “There are two elements. The first is how can I get the trapped cash from my working capital to my supply chain. The second is information and visibility around the whole working capital and cash. Treasurers want to ensure they are aware of the flows in terms of real time balances: if they have multiple entities or accounts, how can they manage their liquidity better?”

As conditions have worsened, some say the existence of liquidity at all has become more important than getting it to generate any profitable purpose. “A few quarters ago, treasurers were concerned about returns. That’s not a conversation anymore,” Kanthadai says. “Returns on liquidity are not the criteria: they want it to be safe.” Some disagree, saying that the need for efficient use of capital is all the more important today. “There is a focus on how corporate can stretch to the last dollar,” says Mahesh Kini, regional head of cash management for corporates, Asia Pacific at Deutsche. “With interest rates going up in some markets, the interest in returns on balances and liquidity is coming back after the lows in 2008 and 2009. Then, when the interest environment was soft, treasurers were not too concerned about leaving it in the current account.”

Liquidity is a pressing consideration not just because of the lessons of the global financial crisis, when it locked up completely. In Asia, there are local considerations too, notably in China, where regulators and government have removed liquidity from the system in order to counter inflation, increasing the challenge for corporate treasurers and the priority they place on the liquidity they do have.

So what can be done to boost liquidity? Within the traditional cash management sphere, measures can involve the usual tools of pooling, sweeping and aggregating across various different operational entities and locations, subject to regulations. “Some of our clients use excess liquidity in Asia to fund their needs in Europe and the US, then bring it back at the end of the day,” says Kanthadai. “They use liquidity 24 hours a day instead of different pools.”

In Asia, given regulatory variation, this can be easier said than done. “With the explosive growth of Asian economies, a lot of multinationals have seen businesses grow exponentially in markets like China and India, and are sitting on extremely large cash reserves in those markets,” says Wuscher at JP Morgan. “A hot topic in Asia is in regard to trapped liquidity markets where they have large deposit bases in RMB or Indian rupees. There is a focus on how corporations deploy those assets within a market that’s trapped – either to boost a franchise, or to gain a better return in those markets.” Working out how to do so needs an evaluation of local tax implications, and the cost issues around repatriation of restricted currencies. “The real topic is how do corporations redeploy the RMB back into the market or into investment vehicles,” Wuscher says; for example, RMB money market funds have become attractive, as have entrustment loans, allowing companies to lend to other corporations.

Another way of improving liquidity – and this really was a lesson of the financial crisis – is keeping the supply chain open. “All these companies buy products and services and have inventory needs; their relationships with their suppliers are very important,” says Kanthadai. “A conversation coming to the fore in Asia is that many of our clients are concerned about their smaller suppliers and asking if we can help them.” Supply chain financing effectively means putting the bigger corporate’s credit standing to work to secure cheap and ready funding for its smaller supply chain partners.

Wuscher agrees. “The really strong emergence has been on the supply chain finance side,” he says. “That has been a transformation since the start of the 21^st century, moving away from letter of credit to open account trade finance. Post-crisis, that has accelerated as regional and global treasurers have realised there is a lot of trapped cash within their own working capital cycle.”

Kumar at Standard Chartered notes the same trend among his own client base. “Clients are worried and want to ensure that their supply chains are not impacted,” he says. “That’s one thing that started during the crisis and continues to be an area of importance for our clients.” A stable supply chain is vital not just because an imbalance at one part of the process impacts the rest of it, but also because this is a bad time to be disrupted. “In an environment where volatility is high, you look vulnerable if you are not able to produce goods, and the competition will take over. It’s very important that suppliers are intact and doing well.”

Another legacy of the financial crisis is that, bankers say, companies are becoming more efficient financially. “They have become much more adept at managing their working capital needs,” says Kanthadai. “That’s been a big push for many clients.” In some cases this might involve factoring receivables for cash in order to create liquidity. “They’re saying: how can I take receivables off my books and get liquidity in there for working capital? They use it to replace bank loans, in some cases. It means re-engineering financial efficiency, and it minimizes the need to access bank lending to some extent.”

Another part of this emphasis on financial efficiency is a renewed focus on back office processes. “Some of the gains were painfully made in the crisis, and treasurers want to make sure those costs don’t come back,” says Kanthadai. “How do they get more efficient from an operational standpoint? What can they outsource to banking providers? There are moves to a smaller number of financial institutions as partners, and to shared service centres.”

Treasurers also want certainty in their banking relationships. “The key in volatile times is being able to rely on your providers,” says Richard Brown, Asia Pacific regional head at BNY Mellon. “Whether you are a corporate or a bank, you probably have enough to deal with to not want to face the possibility of a provider deciding that you are not a priority, or retrenching from some products or markets that you need to access.” He says consistency comes down to the financial stability of the provider, and says BNY Mellon’s AAA rating helped it gain market share during the global financial crisis. “We are gaining share again as the stability of other banks comes under question.”

Several bankers note they have brought business lines closer together as a better reflection of how treasurers work. “Historically there’s always been a focus on cash management, trade finance and FX separately within treasury, and since 2008 there’s been a greater convergence of those business lines,” says Wuscher. “When we engage with regional treasurers or CFOs, they are talking in terms of working capital. How do they break down the silos between the various functions – cash management, supply chain, FX – to integrate information with better visibility and control?” This doesn’t necessarily mean greater complexity: “the basic themes and concepts are still around receivable and payable management, liquidity and supply chain financing,” says Wuscher. “But corporations are pooling those basic needs together with a greater focus on the working capital cycle.”

Kumar sees the same pattern at Standard Chartered. “We look at cash and trade together – because a client looks at it from a holistic perspective,’ he says. “Whether a client has cash in an open account structure or a letter of credit, it’s still a receivable, it doesn’t make a difference to him if it is cash management or trade finance. So if I can provide that service in a holistic way, my clients will be better off.” It comes down to visibility again. “If I am a client and I want to know my net cashflow position today, I need visibility of my cash payables and receivables, and that of my trade payables and receivables. I may have a positive inflow of cash, but a few large payments on the trade side may turn the whole thing into a negative. If I don’t have all that information together, I will never get a holistic picture.”

The impact of global problems for treasurers here clearly varies depending on whether they are working for an Asian or a multinational company. “The difference is for MNCs it’s a challenge back home, whereas for Asian corporates their concern is their consumer markets,” says Shivkumar Seerapu, regional product head for trade finance in Asia, and also global product head for financial supply chain, at Deutsche Bank. “It is less of a concern for a huge proportion of our Asian client base who have a largely regional or local business model. Asian economies, banks and corporates by and large sailed through the 2008-9 financial crisis much better than their European counterparts.” For European MNCs with Asian regional treasurers, “it’s a different story. Intra-regional trade flows won’t be impacted much, but pressures from home countries might mean a slowdown in investments and growth.” His colleague Mahesh Kini notes this can mean a change in what head office expects from its Asian treasurers. “Asia continues to be seen as a cash cow for multinationals in the west, and with pressure building up at head office, we see a more intense focus on Asia as companies seek to streamline their liquidity and use this region to fund some of their initiatives at home.”

Kini also notes a difference in the way that multinationals and locals handle challenges around liquidity: basically, the westerners are further along with this process, probably through necessity. “Western MNCs are looking at further centralizing their liquidity management and their payment processing through concepts like payment on behalf and payment factories, to gain better control and management of payments,” says Kini. “It’s about getting liquidity, as soon as it comes into the system, to head office. In markets like Korea, India and China treasurers would like to manage liquidity remotely with visibility. And they want to be able to invest the balances in products ranging from plain vanilla bank deposits to structured deposits, money market funds and third party investment options.”

“It looks like a re-engineering of the payment process, but it’s not,” adds Kini. “It’s really about using liquidity in a more efficient way.”

There are other challenges besides in Asia; Kini notes the need to “constantly have vigilance around regulatory changes in the region.” This is particularly true in China as the rules around the currency evolve (see separate article). But generally treasurers have something of a one-track mind at the moment: steering in between the market shocks and making sure that no matter what happens, they stay liquid. No matter how bad things get this time around, it does appear that treasurers in this region are better prepared.