Looking into the Crystal Ball: the future of global liquidity management
by Swee Siong Lee, Global Head of Liquidity Management, Transaction Banking, Standard Chartered Bank
The next few years look set to usher in major changes in the way in which corporations manage their global liquidity. While some of the factors likely to drive these changes have been present for a while, the economic environment plus recent developments in regulation and technology will have a significant impact too. Swee Siong Lee, Global Head of Liquidity Management, Transaction Banking at Standard Chartered, examines how treasuries may need to revise their global liquidity management strategies in the light of these developments.
In the current credit-constrained environment, corporations are understandably focusing harder than ever on maximising the efficient usage of their own internal liquidity. Accomplishing that against a static backdrop is challenging enough, but looking ahead there are several likely changes to the liquidity management environment – both positive and negative – that will also need to be considered and accommodated.
Regulatory and tax environment
Exchange control regulations pose a major challenge to corporates’ global liquidity management strategies, by restricting either the extent to which corporates can sweep funds centrally, or to which they can notionally pool balances residing in multiple locations. Recent years have seen a gradual relaxation of these regulations in many markets, including some of the fastest growing such as China, Thailand and Korea. In general, regulators in these countries have become increasingly aware of, and comfortable with, the range of liquidity management techniques used by the most sophisticated multinationals. In addition, corporate treasuries have typically been relatively conservative in how they operate within existing regulatory constraints, which has further helped to foster more relaxed regulation. The net effect has been that optimising global liquidity has gradually become less onerous from a regulatory perspective.
Exchange control regulations pose a major challenge to corporates' global liquidity management strategies.
However, there are limits to this benign scenario. More tightly regulated jurisdictions will still remain cautious about an activity that in their eyes has the potential to compromise their national interests in the form of tax and monetary policies. The economic downturn is only likely to increase this caution; like corporates, governments need cash, and reduced economic activity will be reducing their domestic tax take. Therefore losing potential tax revenues to multinationals’ global liquidity strategies is undesirable, both financially and politically.
On that note, the timing of a recently re-proposed piece of US legislation – the Stop Tax Haven Abuse Act – is probably not coincidental. Many of the key elements of this bill of 2 March relate to an entity referred to as an ‘offshore secrecy jurisdiction’, with both Singapore and Hong Kong defined as such. Other proposed US legislation seeks to limit the deferral of tax payments through the practice of keeping taxable income offshore.
These pieces of proposed legislation are broadly drafted, but indicate the resolve of the new US administration to reduce significantly tax revenue leakage from US individuals and corporations. If passed, there is growing concern that in their final form they may hamper the competitiveness of US multinational corporations operating internationally. From a global liquidity management perspective this could represent a significant stumbling block (in terms of economic benefit) to US headquartered companies setting up Asia Pacific treasury operations and cash pools in two of the most important Asian financial centres.