Does Trapped Cash Really Matter?
By Helen Sanders, Editor
‘Trapped cash’, or more precisely, cash that cannot be transferred from a country due to capital or currency controls, is not a new problem for treasurers. It’s also not a problem that is going away. Cash sitting securely in an account or investment that is generating a return, in a currency that is quietly appreciating, may not cause treasurers too much of a headache. However, this is rarely the reality in locations where trapped cash is an issue, typically ‘emerging’ markets, such as in parts of Asia, on which this article is focused. In writing this article, I am delighted to introduce Ann Lin Khoo, Asia Pacific Head of Market Management – Liquidity Structures, Treasury and Trade Solutions at Citi, and Shi Wei Ong, Head of Cash Liquidity Management Products at Standard Chartered Bank.
A worsening situation?
Although trapped cash has been going up the list of treasury priorities over the past two years or so, Shi Wei Ong, Standard Chartered explains that the regulatory fundamentals that result in trapped cash remain largely unchanged,
“Trapped cash has been a long-standing issue in parts of Asia, and while there may be regulatory changes that deepen the challenge in individual countries in the short term, in the longer term this issue is not going away. Countries that have been liberal in the past, such as Australia and Singapore, are likely to remain as such, while cash will continue to be trapped in countries such as Vietnam, Sri Lanka and India. Similarly, we don’t expect to see any fundamental change in semi-regulated countries, such as Malaysia and Indonesia, where foreign currency can be moved cross-border but local currency is retained in-country.”
The issue is not, therefore, that cash is becoming trapped in more countries, but regulations in countries where capital and currency controls already exist are, in some instances, becoming more stringent, reflecting geopolitical and economic uncertainties. However, more important is the changing market and credit environment, and an evolution in companies’ own business strategies, which together are making it more important than ever to manage in-country liquidity effectively, leverage cross-border liquidity and interest optimisation strategies, and reduce the incidence of trapped cash wherever possible.
Despite its negative connotations, cash ‘trapped’ in-country has not always been a problem. In the past, many companies were happy to hold surplus funds in China, for example. The level of investment that they were making into their Chinese businesses meant that there was a reason to hold cash locally, and meanwhile, RMB was steadily appreciating. Even so, many corporations found that revenues were continuing to outstrip costs by a growing margin, and surplus cash balances were building up. As a result, treasurers welcomed China’s gradual liberalisation of cross-border trade, capital and currency controls that allowed funds in China to be transferred more easily offshore and included into regional or global liquidity management structures, therefore offering greater flexibility to utilise cash at a group level.
Although 2014 - mid-2016 saw a number of important opportunities for foreign investors opening up, we have seen a modest step back in recent months, with less certainty over the guidelines on cross-border liquidity, which corporations are not inclined to risk breaching. This is not a situation unique to China: other countries too are placing greater restrictions on cross-border liquidity, whether of foreign or local currency, including Malaysia and Indonesia, as well as the effects of demonetisation in India. Effectively, as countries across Asia react uneasily to political and economic issues such as a new US administration and its uncertain relationships in Asia, and an ongoing market correction in China, it seems that the walls are going up, at least temporarily. Shi Wei Ong, Standard Chartered comments,
“Recent trends show that we may be entering an era of protectionism. Even those countries that were opening up, such as China, are taking a step back and looking into a long-term path towards liberalisation of their regulations and currencies.”
Resurgence of familiar issues
While regulatory change may create difficulty in unlocking trapped cash in some cases, it is not typically the reason why treasurers are becoming more concerned about the level of trapped cash they hold in-country. Instead, there are a variety of both external and internal factors that together emphasise the importance of effective cash, liquidity and risk management: