Published: April 01, 2014
Amidst all the hype and fanfare that has greeted China’s economic explosion, ASEAN is quietly emerging as a major economic player alongside China and India with consistent and sustainable growth, enormous potential as both a consumer and sourcing market, and a commitment to collaboration and international trade.
Mahesh Kini, Asia Pacific Head of Cash Management for Corporates, Deutsche Bank outlines,
“ASEAN has become a focus for both corporations and banks, with considerable acceleration over the past 12-18 months. At Deutsche Bank, we consider ASEAN as one of the three key blocs in the region, alongside China and India, a model which is also mirrored by many of our corporate customers. While in some cases, companies have a specific focus on particular markets, such as Indonesia, there are advantages to devising business strategy at a regional level, particularly as the combined scale justifies investment as opposed to an individual country level.”
Unlike China or India, the ASEAN countries lack cultural, regulatory, economic or political homogeneity. Exchange controls also apply in most cases. This creates significant challenges for treasurers seeking to manage liquidity on a regional basis, as well as achieving consistency in payments and collections and managing FX risk.
The focus on ASEAN countries is not new, particularly given the region’s colonial heritage. However, while China and to some extent India have been growth targets over recent years, ASEAN countries are now becoming a more important region for investment and trade. With some exceptions, such as Singapore and Indonesia, individual markets may not yet be large enough to justify substantial investment by foreign multinationals (although this is changing) so in many cases, they are looking to invest on a regional level which offers the critical mass required to justify investment. However, this is not easy given the diversity that exists between ASEAN countries. Sandip Patil, Regional Head, Payables and Receivables, Asia Pacific, Treasury and Trade Solutions, Citi highlights the growing regional connections and co-operation,
“Each country in ASEAN has its own identity with distinct clearing systems, banking landscape, tax and regulatory environment and business culture. However, there are strong trading links across the region, with large volumes of intra-regional flows, which is encouraging greater collaboration.”
In addition to diversity between countries, the motivation for companies doing business there, and the countries to which various industries are attracted, can also differ significantly. Victor Penna, Head of Treasury Solutions, Transaction Banking, Standard Chartered Bank notes,
“We are seeing some interesting investment flows in ASEAN as companies seek to diversify their risk; for example, Japanese companies are increasingly investing in countries such as Vietnam and Indonesia to offset their investment in China.”
Mahesh Kini, Deutsche Bank highlights the particular potential of Indonesia,
“Indonesia is a key ASEAN market due to the scale of its consumer market and high spending capacity. The country weathered the global financial crisis well and continues to grow. A large number of international companies have now established factories and assembly lines in Indonesia.”
Victor Penna, Standard Chartered Bank agrees,
“Indonesia presents particularly interesting opportunities. Before the 1997 crisis, which hit the country very hard, Indonesia had been seen as the key market for potential growth in Asia. Since then, China has dominated, but Indonesia has recovered: it is once again poised to be the next major growth market in the region. For example, as costs in China increase, Indonesia’s attraction as a manufacturing base and source of natural resources (such as agriculture and mining) becomes more compelling, depending on future government policy. Of equal if not greater interest is the vast scale of Indonesia’s consumer market.”
Other countries too have particular attractions, as Mahesh Kini, Deutsche Bank adds,
“The Philippines is now an investment grade country and offers considerable potential for the future, but the opportunities are not yet at the same level as Indonesia’s.”
Similarly, Mahesh Kini, Deutsche Bank explains,
“Thailand continues to be attractive to a variety of industries, particularly the auto industry.”
A key challenge when doing business in ASEAN is the restrictive regulatory environment in many countries, and the differences between them, which makes it difficult to identify and implement opportunities for harmonisation and consolidation, particularly for liquidity management. Mahesh continues,
“While doing business in Singapore is very straightforward, other ASEAN countries are typically more challenging, not least due to the diversity of regulation, tax rules, banking and clearing infrastructure as well as culture across the different countries. The speed and direction of change adds further complexity. For example, in Malaysia, a recent regulatory change now enables US dollars to be moved freely into and out of the country, which has allowed banks to provide automated cash pooling solutions to corporates, who can fulfil the related regulatory requirements. This is not permitted in all ASEAN countries. Consequently, corporate treasurers’ key expectation of their banks is that they will advise them promptly of regulatory developments, and be proactive in recommending what changes need to be made to cash and liquidity structures to take advantage of new opportunities or avoid non-compliance, for which the penalties are typically very substantial.” [[[PAGE]]]
As Mahesh emphasised above, regulations are changing in ASEAN, just as we are seeing in China. This creates new opportunities in some cases, but constraints in others. For example, Sandip Patil, Citi identifies a move towards liberalisation in some countries,
“During the years up to the 1997 crisis, ASEAN countries had made a lot of economic and regulatory progress, but much of this was impacted as a result of the crisis. Consequently, governments were understandably cautious in exposing their countries to further risk. Years later, a more liberal mind set emerged, the results of which we are now seeing in countries such as Thailand, Malaysia, Indonesia and the Philippines.”
In others, however, the economic environment necessitates increased controls, as Victor Penna, Standard Chartered Bank outlines,
“Most countries are adapting financial and currency regulations in accordance with their economic maturity. In Malaysia, foreign currency cross-border lending is now permitted, while Vietnam has tightened its FX regulations further to minimise pressure on its currency, reflecting its early stage of development. It will be interesting to see, however, the effect of internationalisation of domestic companies in these countries. For example, Malaysia is already well-established as a location for SSCs, but the government is now more focused on attracting RTCs (such as allowing intercompany lending). This is relevant to both foreign companies doing business in the region and Malaysian companies as they expand internationally.”
Sandip Patil, Citi concurs, but emphasises that while regulations are tightening in countries such as Vietnam, a consistent message from ASEAN governments is that their countries are open for business,
“Each country’s circumstances can differ considerably. For example, in countries such as Vietnam, although the government is encouraging growth, a key priority is to protect the country’s balance sheet and avoid volatility, which limits the appetite for relaxing cross-border regulations. However, there is a focus on promoting the value of the Vietnamese economy to encourage investment, such as developing the clearing infrastructure, and permitting domestic entrustment loans. This allows companies to manage their liquidity across their entities in Vietnam without resorting to bank loans which can be very beneficial given the wide bid-offer spread in the country.”
Few companies have the critical mass in each ASEAN country to justify a distinct cash and treasury function and there are plenty of reasons why maintaining a decentralised treasury organisation may be undesirable, with which treasurers will already be familiar. Consequently, as Sandip Patil, Citi explains,
“A key priority for multinational corporations is to find common ground between ASEAN countries, and this is where a bank such as Citi can add value:
While this requires considerable care bearing in mind the regulatory diversity that exists, liberalisation in some countries is making it more achievable to manage liquidity effectively; for example, in Thailand, it is now possible to lend useful levels of foreign currency to a regional or global treasury centre which was not feasible previously. We are seeing a similarly changing mindset in countries such as Malaysia, Indonesia and the Philippines, although the specific rules and priorities will differ. With high levels of foreign direct investment in these countries, there seems no reason why growth levels will slow, nor the continuing move towards infrastructure development and regulatory liberalisation.”
Given the growing levels of corporate investment in ASEAN, corporate treasurers need to anticipate and respond to the company’s evolving cash and treasury management needs. For corporations establishing in a country for the first time, Victor Penna, Standard Chartered Bank explains that a number of lessons have been learnt from previous experiences,
“Companies’ experience of establishing and building a presence in China has given them valuable insights when looking at the next wave of growth. Treasurers are much more aware of trapped cash, for example. This has been a typical challenge in China, but regulation is not the only factor that has resulted in large trapped cash balances. In some cases, companies effectively ‘over-invested’ in some markets by funding all their start-up costs, working capital and operating costs with equity, but they ended up with too much cash once revenues started to be generated. Today, treasurers are assessing their balance sheet structures and business models when investing in new countries in a more sophisticated way, and reducing some of the challenges of the past.”
He continues,
“Companies doing business in ASEAN inevitably have different priorities and concerns from a cash and treasury management perspective depending on their industry and business model, as well as the countries on which they are focused. For example, in fast-moving consumer goods (FMCG) in lower and medium-income countries, undeveloped and highly fragmented supply chains result in companies selling through many thousands of tiny vendors and distributors, creating large volumes of cash collections. In these cases, the ability to connect into an extensive branch network becomes essential. Mobile money is also becoming increasingly important in some markets such as the Philippines for low-value purchases. For industries that operate B2B, and therefore have a higher proportion of electronic payments and collections (often in USD), process standardisation, efficiency and liquidity management is more important.”
Sandip Patil, Citi agrees, emphasising the importance of liquidity management,
“Although corporations’ cash and treasury management priorities in ASEAN differ depending on their industry, business model and the countries in which they do business, liquidity management is probably the most frequent demand. There are various drivers for this: one is the growing focus on risk management in all organisations; second is the changing lending environment as a result of Basel III, particularly the reduction in committed loans. This makes organisations’ liquidity position more vulnerable, particularly for seasonal businesses, so managing liquidity risk is a key priority.” [[[PAGE]]]
The challenge, however, is how to optimise liquidity given the exchange controls and limitations on cash pooling both domestically and cross-border that exist, as figure 1 illustrates.
Please click image to enlarge
Many large multinational corporations recognise the importance of maintaining market proximity whilst integrating regional cash and treasury management within a global framework. Regional treasury centres (RTCs) have a major role to play in ASEAN in identifying and leveraging opportunities for efficient cash and liquidity management, with a growing choice of potential locations. Mahesh Kini, Deutsche Bank notes,
“With its liberal regulatory environment, cosmopolitan culture and excellent infrastructure, Singapore is well established as a hub for RTCs, with Hong Kong not far behind, and Shanghai also becoming more popular. While Malaysia has traditionally been a popular location for shared service centres (SSCs), alongside Thailand and Philippines, there are efforts to move up the value chain, so it is becoming a more attractive location for RTCs.”
Furthermore, treasurers are increasingly aligning their functions with other parts of the business, such as trading centres, as Victor Penna, Standard Chartered Bank explains,
“We are seeing a growing number of trading centres being established in Singapore, building on its role as a logistics hub. While some have a pan-Asian focus, others have a global remit. With flows being channelled through one vehicle, it makes sense to manage FX, cash and liquidity at this level. Therefore, treasury centres are becoming far more closely aligned with trading centres. For less restricted markets, intercompany purchases and sales can then be booked through the trading centre in local currency, with FX risk concentrated centrally.”
As a result, as Sandip Patil, Citi adds,
“Regional treasury centres are moving from strategic infrastructure providers to profit centres to create shareholder value. Treasurers and finance managers recognise the opportunities to lower working capital requirements by increasing cash flow forecast discipline, optimising the financial supply chain, reducing costs and maximising efficiency and yield.
To achieve this, companies are finding better ways to work with their banks. For example, a multinational corporation may have 100 – 120 entities across 13 -15 countries in the region, which in the past has often resulted in 60 or more banking relationships and over 1,000 bank accounts. Increasingly, a KPI (key performance indicator) for treasurers is to reduce banks and accounts, which requires a bank with a strong local and regional network, robust balance sheet and innovative technology that can offer tools such as virtual accounts to support automated processing and sophisticated management reporting, and multi-currency pooling.”
Victor Penna, Standard Chartered Bank continues,
“Whereas in the past, western MNCs were inclined to set up global multicurrency notional pools in London or Amsterdam, they are now setting up these structures specifically in Asia Pacific. For a company whose key growth markets are in Asia, which will typically also have the most significant working capital requirements, it makes more sense to centralise and leverage cash within the region. Consequently, they may have two multi-currency notional pools, one in Asia, such as in Singapore, loosely linked (e.g., on a net pool basis) to their global pool.”
While liquidity management is a priority, treasurers and finance managers also need to ensure that payments and collections, whether domestic or cross-border, local or foreign currency, are efficient and secure. In particular, it is difficult to standardise payment methods given the differences in payments infrastructure and culture in each country. However, there is a growing range of automated solutions for payments and collections which are proving instrumental in enhancing payments efficiency and control and accelerating collections. Another advantage of these emerging solutions is that the need to work with multiple local banks in order to access their branch networks becomes less critical. As Mahesh Kini, Deutsche Bank discusses,
“With considerable diversity across each market, managing accounts payable and receivable, and reconciling these in an automated way, is very challenging. For example, in Indonesia, the number of islands makes it difficult to centralise and accelerate collections, which are often in the form of cheques, giros or cash This phenomenon has led to the establishment of partner banks in the country. In Malaysia, image-based cheques have been introduced, similar to Singapore, which enables clearing to take place from a single location. This allows collections to be centralised but it also means that collections can be managed by a single bank such as Deutsche Bank.”
He continues,
“In addition to providing tailored solutions for accounts payable and receivable in each ASEAN country, a clear value proposition that a major international bank such as Deutsche Bank can offer, is to consolidate this disparate information in a meaningful and cohesive way to enable automated processing (such as reconciliation) and information management. We do this in various ways: one example is Payer ID, a virtual account solution that uses unique reference information on each cheque or electronic payment to identify the payer and therefore enable customer accounts to be updated immediately, releasing credit lines for new business. A related solution supports automated reconciliation, such as payment of multiple invoices, to streamline processing.
“Virtual account solutions enable companies to reduce their external bank accounts by replacing accounts per division with virtual accounts that are linked to one actual account. Reducing bank accounts is often an important KPI for treasurers, and it also improves efficiency and control.”
In addition, mobile solutions are growing in significance for B2C collections in particular, but there are cultural differences which limit the maturity and adoption of these solutions in some countries. Mahesh continues,
“Mobile wallet solutions are particularly relevant in the B2C space, and countries such as Indonesia are well positioned to take advantage of these opportunities. In others, such as the Philippines, which has very high mobile phone usage, there is less appetite at this stage to use this technology for banking purposes, although this is likely to change in the future. Thailand is somewhere in between, but existing regulations around mobile wallet limit its value for the time being.”
The use of mobile devices for consumer payments is likely to increase in time, as he suggests, but the opportunities extend beyond one-off credit transfers to direct debits, which offers considerable potential for many industries. Mahesh Kini, Deutsche Bank suggests,
“The use of mobile devices in the payment process offers considerable potential value for direct debit and ACH payment approvals. Currently, direct debit schemes are not yet established in countries such as Thailand, the Philippines and Indonesia or are not yet mature in others. As the clearing infrastructure becomes more sophisticated in these countries, the use of mobile devices to approve transactions is likely to make electronic payments more attractive compared with the use of cash or cheques.”
Cross-border payments and collections are also becoming increasingly important as companies expand their ASEAN business, particularly amongst those that have set up RTCs or trading centres in locations such as Singapore. While managing emerging currencies is not the focus of this article (but see the May 2014 edition of TMI in just a few weeks’ time) the challenges of exchange controls and fragmented liquidity remains a challenge, as Mahesh Kini, Deutsche Bank concludes,
“Managing cross-border payments and the related FX requirements efficiently is a priority, especially in emerging markets. At Deutsche Bank, we provide tools to automate the payment and FX workflow using FX4Cash and produce the relevant reporting according to the market in question. In countries where post-FX trade reporting applies, we automate the production and transmission to the relevant authorities. Where pre-trade reporting is required, we facilitate the process, including the validation of documentation before transmission to the regulator.” [[[PAGE]]]
While intra-regional trade in ASEAN is growing, China remains the most prominent trading partner for most ASEAN countries. China’s continuing liberalisation programme has a variety of implications for both local and foreign multinationals conducting cross-border business between ASEAN and China. For example, the expanding use of RMB for cross-border trade is particularly relevant for trade between China and ASEAN countries where USD as the traditional currency for cross-border trade in the region is typically not the base currency for either counterparty. Victor Penna, Standard Chartered Bank explains,
“We are undoubtedly seeing the RMB become a more important trading currency, but the statistics do not necessarily show what is driving the trend. Two years ago, Western companies were motivated to purchase from Chinese suppliers in RMB primarily because they could remove the FX margin from the cost price, providing them cost transparency on their underlying cost base while gaining direct control over the FX exposure. Today, companies are looking at trading in RMB from a more holistic perspective so that they can unlock efficiencies within their working capital cycle. For example, when a manufacturer looks to lower their production costs by moving to lower-cost countries in ASEAN, it may make sense for them to settle in RMB with buyers in China in return for longer payment terms.”
Beyond cross-border trade, however, there are wider implications for centralising cash and treasury management at a regional level (rather than excluding China which has traditionally been the case) and establishing regional liquidity structures to include China. Victor Penna continues,
“The bigger question is what increasing China liberalisation means for the large number of RTCs operating in Singapore. The reality is that China was previously an island from a liquidity and FX point of view. It was often managed separately from other parts of Asia and the only direct linkages were the USD trade flows between China and the rest of the region. Now the China (Shanghai) Free Trade Zone means that internal RMB liquidity flows can be linked to the rest of Asia through a two-way pooling structure. Given the potential size of these flows and resulting exposures, this could completely reshape a corporate’s overall cash positions, funding needs and FX exposures in and out of China. I’m not sure that many treasurers have really taken the time to evaluate what this means for their long-term strategy in Asia. It certainly shifts the weight of exposures and active treasury management within Asia, linking RMB liquidity from China leveraging China (Shanghai) Free Trade Zone and other currency pools currently managed offshore to this bigger picture.”
Looking forward, as the number of both local companies and foreign multinationals expand their business in ASEAN, we are likely to see the number of RTCs increasing, not only in Singapore, but in other locations too, particularly as governments encourage local companies to retain their treasury centres onshore. As Victor Penna, Standard Chartered Bank says,
“Over the next two to three years, we are likely to see companies headquartered in parts of ASEAN, such as Malaysia, Thailand and Singapore, moving from domestic to international treasury management models, and therefore dealing with many of the challenges that are familiar to their western peers. In the past, these companies often had no choice than to establish their international treasury centre in Singapore, as their home market was too restrictive. In the future, it may be that we see more governments using Malaysia’s example to relax restrictions or offer incentives in order to keep local companies’ treasury centres onshore.”
The goal of the AEC is to achieve a single market by 2015 and regional economic integration by 2020.
Furthermore, while every government will have its own economic objectives which will dictate how they each flex their regulatory controls, the development of the ASEAN Economic Community (AEC) will further boost intra-regional trade links and greater co-operation between ASEAN countries is also encouraging stronger trading connections with countries outside the region. The goal of the AEC is to achieve a single market by 2015 and regional economic integration by 2020. These dates were reaffirmed at the October 2013 Brunei Summit, with 80% of measures towards the 2015 target already implemented. Continued progress towards economic integration will further boost confidence amongst foreign investors and strengthen ASEAN’s position in the global economy.
What the AEC will not do is to dilute the diversity and individuality of each ASEAN country. And thank goodness. Doing business in ASEAN is exciting, challenging and rewarding. Rather than seeking homogeneity across ASEAN which is neither feasible nor desirable, treasurers need to leverage emerging, innovative solutions that reflect the diverse needs in each country whilst building on and helping to drive regional synergies and co-operation.
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