Changing face of Asia-Pacific liquidity management
December 12, 2016 01:00 By SPECIAL TO THE NATION
AS CORPORATES look eastward, one would realise that the Asia Pacific region is sprawling and is made up of many countries with differing monetary policy regimes. Several are still imposing some form of foreign exchange or capital controls.
With the challenging in-country risk profile of Asia-Pacific countries as well as the diligence required to successfully manage liquidity within the region, here’s the change in Asia-Pacific liquidity management.
1 Potential changes in broad financial markets and impacts on liquidity management:
We expect a confluence of several macro-economic factors that will result in increased financial market volatility. The slowdown of China’s economy, the US Federal Reserve hiking interest rates for the first time in almost a decade that runs contrary to monetary policies in the rest of the world.
All these factors will create imbalances and we expect 2016 to be a year of adjustments in valuation of currencies and commodities.
As holding US dollar becomes more attractive because of higher deposit rates, we expect demand for USD to continue, especially against Asia-Pacific currencies.
All these will have significant impact on the way corporates manage their foreign exchange and commodities exposures. We anticipate that corporates with exposures to Asia Pacific will increasingly shift their emphasis to improve cash their visibility and cash forecasting capabilities. That will help corporates tap hidden internal liquidity and reduce their dependence on external local funding.
2 Potential changes in local regulations and impacts on liquidity management. While corporates are not required to comply with Basel III, a regulatory framework related to how a bank manages capital adequacy, liquidity risk and stress testing framework, corporates are becoming attuned to the potential structural increase cost of financing. Although the extent of Basel III’s impact on a bank’s appetite to lend may not be uniformed, the general consensus is that financing costs are likely to go up and the availability of different types of debt instruments may be reduced.
Faced with these challenges, corporates are increasingly starting to consider using treasury models like setting up of in-house banks to improve visibility and control over foreign exchange exposures and cash positions globally. The objective is that with greater visibility and control over a corporate’s operations, borrowing requirements may be reduced and exposures to economic uncertainty can be better managed.
Related to centralising treasury operations, Asia-Pacific countries such as Hong Kong, Malaysia, Singapore and Thailand are also offering incentives to corporates to set up their regional treasury centres in there. Ultimately, corporates will have to regularly review and strengthen their treasury management framework. That would help chief financial officers and treasurers better adapt to changing local conditions in managing both liquidity and the value of non-functional currency cash holdings.
Corporates will have to devote resources to understanding the regulatory landscape in each country the corporate operates in. For Asia Pacific, the complexity is increased as CFOs and treasurers also have to take into account the multiple languages, payment types and currencies involved.
3 Potential changes in the technology landscape and the impact on liquidity management.
As the digital landscape continues to evolve and as corporates continue to adapt, the clearing infrastructure across Asia Pacific has also evolved to support new business models. The planned Australian New Payments Platform, China’s Internet Banking Payment System, India’s Immediate Payment Service, South Korea’s Inter-bank Home/Firm Banking Network and Singapore’s Fast and Secure Transfer are examples of round the clock clearing infrastructures and services that governments have been championing to stay relevant in the fast-changing digital landscape.
As corporates embrace technology, CFOs and treasurers will have to relook at their business models and processes, especially in foundational areas like payment methods, account reconciliation and liquidity management.
Overall, as technology and digitisation becomes widely accepted, we expect the role of treasurers to evolve to be a strategic business partner for CFOs and boards.
Tactically, treasurers are able to use tools like data analytics to provide insights on supply chains, consumer payment behaviour and trade flows to support businesses. Strategically, as corporates respond to the dynamic macro-economic and regulatory landscape, we expect treasurers will be called upon to assume a “bigger” role in helping corporates navigate successfully in these fast changing environments.
Authors: Benny Koh, Global Treasury Advisory Services, Deloitte Southeast Asia;