Corporates need to look for alternative methods to secure banking support in order to boost operating efficiency, especially when expanding into emerging markets.
Higher growth in emerging markets requires greater working capital. However, regulatory constraints in many of these markets – most notably China – limit intercompany lending as a source of working capital funding, according to Citi in a research note released on March 5.
“Treasurers should consider alternative funding solutions, such as trade financing and asset securitisation, which can be economically advantageous over working capital bank debt,” said Gourang Shah, head for treasury advisory, Asia Pacific treasury and trade solutions at Citi. “Additionally, companies should work with a bank that has in-country presence and the expertise to mitigate regulatory and operational complexities and optimise liquidity and funding flows.”
According to a Citi Treasury Diagnostics Benchmark Survey, corporate treasuries have increased involvement in working capital management with 66% of respondents operating a shared service centre while treasury involvement in customer receivables has increased by 13 percentage points (pp) since 2009 and in supplier payables by 10pp.
Also, two of the world’s most important markets – China and India – are reforming their economies and financial systems. As a result, treasurers need to be prompt in evaluating treasury management changes and provide optimal structures and processes to take advantage of these reforms, notes Citi.
For example, China’s internationalisation of the renminbi continues to gain pace with a series of reforms in 2012 that allow companies to facilitate cross-border transactions, liquidity management and centralisation of foreign exchange exposures.
“These [treasury management changes] include optimisation of funding options for investments in India, and integration of renminbi into group-wide cash and liquidity management structures to improve efficiency, visibility, and control,” said Shah.
Additionally due to uncertain global outlook, many companies have accumulated large cash reserves. However, large cash cushions can drag down asset productivity and become a cost burden in the long run, highlights the bank. In circumstances like these, treasurers should re-examine their operating cash requirements – a variance analysts of free cash flow can identify the appropriate cash buffer, for example.
“‘Excess cash’ should be mobilised to support the company’s strategic initiatives, such as capital expenditure and M&A [mergers and acquisitions],” said Shah.
Despite increased investment by companies to leverage emerging market growth, many multinational corporations (MNCs) – especially those headquartered in emerging markets – do not have optimal treasury structures.
To address this, treasuries must consider the benefits of including emerging markets in global netting, cash liquidity structures and re-invoicing or principal structures, says Citi.
In Citi’s survey, the rise of emerging market MNCs and expansion of their western counterparts in the region has accelerated treasury centralisation, where 66% of respondents operate a centralised treasury, 60% use netting structures and 48% use an in-house bank.
“As companies become increasingly globalised and treasury complexity grows, treasurers are considering new models in order to achieve efficiency and control. One possible solution is an in-house bank – the most sophisticated form of treasury center – which acts as the company’s single contact point with external banks and thus reducing bank fees on foreign exchange and other financial transactions,” said Shah.
Regulatory initiatives such as Basel III and the Dodd-Frank Act increase banks’ costs and will ultimately raise banks’ costs and will ultimately raise credit costs and bank fees for corporates. Treasurers must, as a result, understand the implications.
“They will need to budget for increased bank fees, assess the impact on interest income and expenses and plan for an increased burden on collateral service management,” said Shah. “Globally, Basel III seeks to bolster banks’ capital and liquidity requirements but will have significant repercussions for companies in terms of the cost and availability of products and services, from bank deposits to trade finance.”
“Other international regulatory initiatives include the ongoing implementation of IFRS accounting standards, which have now been introduced in 125 countries,” he added.
With increasing regulatory changes, corporate treasurers should learn to leverage advanced treasury analytical tools from banks and ERP (enterprise resource planning) providers to enhance visibility, control and efficiency.
The percentage of daily cash balances has risen by 22pp to 64% since 2009. Respondents with a fully or partially automated forecast – facilitated by a treasury management system (TMS) or ERP – has risen by 15pp to 43%, according to Citi’s survey.
Around 350 treasurers from top MNCs participated in the survey, conducted over a period of four years, from 2009 to 2012. The respondents represent a broad range of industry sectors, with 76% from companies headquartered in developed markets and 24% from emerging markets.