by Helen Sanders, Editor
This month has been significant for a number of reasons. February 2014 sees the Winter Olympics in Sochi, the end date (or should it be start date) of SEPA, and the very last episode of ‘Who Wants To Be a Millionaire?’ in the UK. Yes, the game show that was first broadcast in 1998, with peak viewings of 19 million viewers, 30 series, five millionaires and 83 foreign language versions has finally come to an end. So, in the spirit of nostalgia and trivia, here is today’s first question. There are no lifelines, as unless you have a very odd treasury setup, you probably have no audience, and your husband/ wife/ partner will be alarmed if you call them to answer random trivia questions.
So, for – say £1,000:
Which of the following statements is not true of the United Arab Emirates (sorry, did I forget to mention that UAE was the theme of this month’s article?):
A. Expo 2020 will take place in Dubai.
B. More than 50% of GDP is generated through oil and gas-related activities.
C. Foreign trade first developed in the second millennium BC, encouraged by the domestication of the camel.
D. There are probably a large number of parcels in a pile at Dubai Port ordered online by UK customers who unwittingly selected ‘United Arab Emirates’ rather than ‘United Kingdom’ from the ‘Country’ list when clicking too quickly.
Did you get it? C is probably questionable, coming as it does from the All-Seeing Font of All Knowledge (the internet); D has nearly happened to me many times, so it may be true. In fact, B is the one that is definitely not true: contrary to popular opinion, only 25% of GDP in UAE is generated from oil and gas revenues (source: CIA World Factbook). This reflects a highly successful policy of economic diversification, and although there are still efforts to further reduce this concentration, together with efforts in areas such as increasing local employment and developing infrastructure, UAE is strongly positioned to sustain solid economic growth. According to the World Bank’s most recent international business report, ‘Doing Business 2014’, UAE is the 23rd easiest economy in the world in which to do business (of a total of 189) the highest in the region and ahead of Japan, Netherlands, Switzerland, Belgium, France and many other established economies.
Developing financial maturity
Bearing in mind that the UAE is only 30 years old (don’t we all wish….), the speed with which its economy continues to mature is remarkable. As Sunil Veetil, Regional Head of Payments and Cash Management, HSBC Middle East and North Africa says,
“Over the past seven or eight years since I was last based in the Middle East, the market dynamics have changed considerably. UAE is now firmly established as a solid base for doing business across Middle East and Africa, which is very apparent when you look at the amount of traffic through its roads, port and airport. Not only is traffic passing through, but there is a growing focus on adding value at these transit points.”
He continues,
“Not only is the economy growing rapidly, but the international profile of UAE and the wider region continues to develop, with major events such as Expo 2020 in Dubai and the FIFA World Cup in 2022 creating positivity and encouraging tourism, trade and investment.”
The challenge for an economy that has developed so quickly is that this development cannot always be consistent across all areas. Therefore, UAE has historically lacked the regulatory and financial infrastructure to which many foreign multinationals have been accustomed. This in turn can lead to a lack of business confidence and inconsistent business models which may be less efficient. As Steve Donovan, Treasury and Trade Solutions Head for Middle East, Turkey, North Africa and Pakistan, Citi describes, however,
“Not only are we seeing very positive economic change in many parts of Middle East, such as UAE, but the regulatory and banking environment is also developing rapidly in line with international standards. For example, several central banks are investing heavily in clearing systems to improve automation. Banks too are placing substantial investment into financial infrastructure projects to support regulatory changes.” [[[PAGE]]]
Treasury sophistication
This has a number of implications for corporate treasurers operating in, or responsible for UAE. Firstly, the focus on automation is not limited to the banking and regulatory infrastructure. The government of the UAE is actively encouraging the wider use of technology for efficiency, transparency and control. This is in evidence in automation initiatives in government departments and state-owned entities, which has a trickledown effect into the private sector. We are already seeing organisations, both state- and privately owned, starting to adopt new internal processes and technology very successfully. Indeed, one of the pioneers in the region, TDIC (Tourism Development & Investment Company) was awarded the 2013 TMI Award for technology. Steve Donovan, Citi outlines,
“While local companies have traditionally performed cash and treasury-related tasks manually, they are rapidly adopting innovative technology to automate these processes and achieve financial and operational efficiency. There are a number of factors contributing to this shift: one is the need to compete effectively with foreign multinationals; second, Middle Eastern state governments are encouraging greater transparency and automation.”
Government initiatives such as Smart City (which encourages citizens to use mobile devices to interact with government departments), and the emphasis on electronic payments, are rapidly leading to new opportunities for treasurers. As Sunil Veetil, HSBC explains,
“The UAE recognises that efficiency is essential to maintaining this positive momentum. The government is being proactive in encouraging automation to enable UAE to be competitive and boost business confidence. In many cases, such as the use of mobile technology, companies are able to ‘leapfrog’ legacy technology developments to become market leaders.”
The prevalence of cash and cheques has been a major hindrance to corporations in the past. Making payments to construction workers has resulted in some companies, and their banks, having to set up mobile bank branches to make salary payments, with considerable challenges in ensuring the accuracy and transparency and security of cash in transit. The increasing opportunity to use electronic methods for B2B and B2C payments and collections, salaries, contractor fees, expenses etc. whether using a bank account or mobile device, has major implications for companies across all industries. Steve Donovan, Citi demonstrates,
“As a result [of the focus on efficiency], we are seeing more demand for solutions such as virtual cards, but the regulations surrounding mobile and card solutions still need some development. These innovations are likely to develop strongly for eCommerce, vendor payments, salaries and contractor fees. As UAE strengthens its position as a transport hub, virtual card solutions for the travel industry will continue to grow.”
Regional treasury hubs
Encouraging foreign investment is a key element of the UAE’s economic development, and since it was formed ten years ago, around 900 companies have now set up in the Dubai International Finance Centre (IFC). According to the IFC’s own figures, 26% of these are from Europe, 27% from the Middle East, 16% from North America and 11% from Asia. Many of these companies are leveraging their presence in UAE to set up regional treasury centres to manage cash and treasury requirements for the Middle East but also more widely, such as Africa and parts of Asia. As Sunil Veetil, HSBC discusses,
“The focus on automation and technology innovation is driving change in the cash management landscape, particularly as both Middle Eastern and foreign multinationals with a presence in the Middle East expand into frontier markets such as in Africa. We are seeing a growing number of companies establishing regional treasury centres in Dubai attracted by the lifestyle, security, favourable time zone, infrastructure and ease of travel.”
Steve Donovan, Citi agrees,
“UAE is proving an ideal location for regional treasury centres for Middle East and Africa, as companies leverage its favourable tax environment, infrastructure, time zone.”
It is not only foreign multinationals that are developing efficient organisational and operating structures. When automating and streamlining processes, local companies too are focused on creating efficient structures such as shared service centres, as Sunil Veetil, HSBC describes,
“Shared service centres are also becoming more important e.g. for centralising payments and collections. These may be in UAE but may also be in countries such as Turkey.”
Aligning bank relationships
The similarities in the way that foreign and local corporations are managing cash and treasury are growing. Not only are the techniques and technology that they are using becoming more consistent, but business culture is also starting to become closely aligned. One of the areas where this is apparent is banking relationships, where some shifts are taking place. The banking sector in the UAE is highly competitive, with large numbers of both domestic and foreign banks. Steve Donovan, Citi explains,
“As a general rule, local companies will typically work with local or regional banks while foreign multinationals often work with their global banking partners. There is more of a mix emerging now, however. Local companies are becoming more sophisticated and expanding their international profile, so they are increasingly including global banks in their banking panel. Similarly, foreign multinationals value the branch network that a local bank may offer, with an overlay provided by a global bank. Consequently, we are seeing more of a mix in terms of companies’ choice of banking partners.”
Sunil Veetil, HSBC agrees,
“Foreign multinationals typically prefer to work with global banks with which they have a relationship in order to manage their counterparty risk, leverage global lending arrangements, and achieve consistency in their cash management processes. Local multinationals tend to have different banking requirements for borrowing and cash management and are more likely to work with local banking providers as well as global players. However, it is just as important for these companies to achieve process efficiency and standardisation, and many are looking to rationalise their banking partners wherever possible. We are increasingly seeing Asian multinationals establishing a presence in UAE, which again creates different requirements as they are typically looking to repatriate cash to China, Japan or Korea. As HSBC has a strong presence in Asia, there is considerable demand from these companies for us to support their regional and global cash management objectives.”
As a result of this gradual shift towards greater efficiency in policies, processes, organisational structures and bank relationships, bank connectivity is also becoming more consistent with other parts of the world. There is no electronic banking standard in UAE, so proprietary systems are common, of varying degrees of sophistication, particularly amongst larger companies. As companies optimise their cash and treasury management infrastructure, they are increasingly seeking greater bank independence by using SWIFT, particularly as the number of bank relationships will typically increase as they expand their international remit. Sunil Veetil, HSBC discusses,
“The use of SWIFT is typically more attractive to these companies than proprietary electronic banking solutions as they can leverage a common infrastructure as they expand into frontier countries where they may have different banking partners.” [[[PAGE]]]
Cash and liquidity management
The demand of both foreign and local companies for visibility and control over cash is the same in UAE and the Middle East as in other regions as Sunil Veetil, HSBC emphasises,
“Liquidity management, in particular the ability to achieve full visibility over cash and centralise balances, is a priority for all companies in the region to facilitate investment or repatriation of cash.”
One of the frequent challenges for countries with fast-growing economies, particularly where regulations may not be clearly defined, is the perception of corruption and financial opacity. UAE has performed well in this respect. According to the Corruption Perceptions Index 2013 by anti-corruption organisation Transparency International, UAE was ranked at number 26 of 177 countries, which compares very favourably with other parts of the Middle East (e.g., Saudi Arabia – 63rd; Oman 61st; Jordan 66th) with only Qatar on a par (28th of 177). From a global comparison perspective, France is ranked 22nd, Spain 40th and United States 19th, reflecting the growing trust with which UAE is held from a global investment perspective. This is very valuable in supporting the decision to invest in UAE and locate treasury centres there, including centralising regional cash wherever possible. Domestic cash pooling (both physical and cash concentration) is achievable in UAE, including between different legal entities. Although notional cross-border cash pooling is not permitted, cash concentration is available, with many companies locating cash pool header accounts in the Dubai IFC.
Lack of regulatory definition still poses some difficulties, as Sunil Veetil, HSBC describes,
“There are some challenges when establishing a cash management presence in UAE compared with regions such as Europe. Although there has been significant progress, there are still some infrastructure challenges, such as clearing systems, and there remains some fragmentation and lack of uniformity across Middle Eastern states. HSBC therefore plays a vital role in creating standardisation and efficiency for our customers.”
Another challenge, as Steve Donovan, Citi outlines, is the complexity of organisational structures,
“One of the complexities in the region is the prevalence of joint venture companies, which makes liquidity management more complex.”
Increasingly, however, banks are able to support more bespoke cash pooling requirements to support corporate cash management objectives, which will become more common as corporate experiences in complex cash pooling are publicised more widely.
Future development
The ongoing focus on industrial diversification, financial, regulatory and physical infrastructure development will continue to place UAE in a strong position as a regional hub. In an increasingly competitive environment, companies of all sizes are seeking to optimise their processes, and are therefore looking to their banks and vendors for support and advice. As Sunil Veetil, HSBC says,
“As local multinationals in particular seek to achieve the same degree of financial and operational efficiency as their foreign peers, there is a growing demand for our advisory services, and we have built a strong advisory team in UAE to support this. As a result, we are able to develop solutions that meet their business requirements whilst taking local regulations and infrastructure into account.”
There is significant change ahead, however. While only 11% of companies located in the Dubai IFC are headquartered in Asia currently, this proportion is likely to grow in the future as an increasing number of Asian companies expand their geographic footprint. Furthermore, although revenues from China still account for only 2% of foreign direct investment in the region, this is growing rapidly, and is often described as the ‘New Silk Road’. In 2012, China invested US$8.2bn in the UAE. This is small compared with Chinese investment in other parts of the region (e.g., $120 bn in Iran) but Chinese companies are just as likely as their European and North American peers to recognise the value of UAE as a regional hub. Currently, most trade is conducted in USD, but as Steve Donovan, Citi concludes,
“RMB is poised to become a significant currency for international trade in the region; this has not happened yet, but we would expect it to do so in the next two to three years.”
UAE’s track record over the past 30 years suggests that it will be more than able to adapt to shifting trade and investment patterns, and leverage these new opportunities.