Liquidity Challenges and Opportunities in Asia
Thomas DuCharme, managing director and head of cash and trade sales, Asia Pacific, and Sridhar Kanthadai, regional product manager for financial services and liquidity management at Citigroup Global Transaction Services, look at the current state of liquidity management in Asia, and discuss how multinational corporations are dealing with region-specific challenges and opportunities.
I think there are four key drivers in the market at this time. One of the primary drivers is record low interest rates across the globe. Excess balances are not earning as much as they were 6 to 12 months ago. Consequently, companies are exploring alternative investment options such as onshore and offshore money market funds to enhance yield management.
The second driver is the Sarbanes-Oxley Act. As a result of Sarbanes-Oxley, companies listed in the U.S. must have all their accounting signed off by the CFO and CEO. The requirement for sign-off increases the need of the head-office and regional counterparts to have better access and visibility to accounts around the world, hence the need for web-based reporting tools.
The third is the continuous rollout of Enterprise Resource Planning (ERP) and treasury management systems worldwide. Corporate treasurers are integrating cash management and treasury activities under a single platform. Enhanced liquidity management reporting functionalities provide greater control and a single point for information retrieval for corporate treasurers on a real-time basis.
The fourth driver is a trend to centralize treasury management. More and more, global treasurers are looking to manage their organizations more effectively and are putting regional or global structures in place for both treasury and liquidity management.
These drivers are causing multinational corporations to ask, “how can I manage my liquidity across Asia more effectively?”
We start with in-country optimization to ensure clients’ existing account structures are efficient. For example, a company may have multiple accounts with multiple banks within a country because historically, that’s how they’ve managed their collections. However, leaving funds idle in different accounts with different banks is inefficient.
To address this issue, clients can use an in-country concentration structure whereby the local currency funds are swept from different banks into a single account. For example, we have formed partnerships with local banks in each country, so a company can collect using local banks but then sweep balances into one account. At the end of the day, this structure optimizes your in-country liquidity position and enhances your control, efficiency and returns.
You might have excess balances in one country in one currency and a deficit in another country. The question then becomes: How do I use my liquidity in one country to fund another country? Then you obviously have to go to a regional structure. Take for example, a technology company that typically invoices and collects in US dollars, a fungible currency. Subject to local laws and regulations, they can sweep their US dollars from multiple countries in Asia into a central location, like Singapore, and lend it to a global treasurer sitting somewhere in Europe. The global treasurer can then invest it in more liquid funds, in Dublin, Nassau or other offshore locations, and earn higher rates of return than they would with onshore balances in Singapore or Hong Kong for example. With funds concentration, they have the scale to justify establishing processes to manage funds within accepted investment and risk guidelines.
There are countries that do not have any restrictions around moving money (US dollars or local currency) out of the country, e.g. Australia, Hong Kong, Japan, New Zealand and Singapore.
There are countries that restrict you from taking currency out, but where you can convert to dollars with minimal approval or documentation, and then move dollars out. These countries are the Philippines and Indonesia. For example, you can’t take Indonesian rupiah out of the country, but you can convert rupiah into dollars and move dollars offshore.
Finally, there are countries like China, which do not allow you to move money out of the country unless you get regulatory approval. You can convert local currency to U.S. dollars, but you need to provide documentation describing why you are sending dollars out. A bank cannot send a cross-border transfer until the client has received approval from the regulators.
Companies can easily move currencies that do not have any restrictions – Japanese yen, Singapore dollar, Hong Kong dollar, Australian/New Zealand dollar – to a regional treasury location in Asia, for example, Singapore or Hong Kong. For other countries that permit local currency conversion into dollars and repatriation of dollars, companies are allowed to do an onshore foreign exchange to dollars and move the dollars abroad. Companies now have pools of money in different currencies in the regional treasury location. They then have the option of converting all currencies into a base currency, typically dollars. For example, a company can swap all currencies into dollars and either net the inflows and outflows of different currencies, or create an excess which the regional treasury center can lend to global treasury.
You have FX costs and withholding taxes vary by country. Every company’s situation is different however. If a company is offsetting positions, it makes sense to establish a regional structure because then it’s a question of the relative cost of financing in different currencies. But if they’re running mostly debit positions most of the time, it may not be worth setting up a regional structure.
To a large extent, clients with large local flows in many Asian countries are asking for advice on how to structure liquidity solutions – not because their companies in Asia need financing, but because their global treasury wants to concentrate liquidity globally to maximize return on their investments or to finance other entities. Rather than issue commercial paper in Europe or the U.S., for example, they could use excess liquidity from Asia and avoid adding more debt to their balance sheet.
We have just completed a liquidity solution for a big multinational. The global treasurer was financing at LIBOR plus a 10-15 basis points margin while they had an excess of the equivalent of US$ 50-60 million in Asia. We developed a structure that transferred excess liquidity from Asia to fund global treasury.
Even with countries that are restricted from participating in a pool, we have worked with the entities and the regulatory authorities to develop structures, where, for example, an entity could buy paper issued by the parent, and essentially lend to the parent.
A lot of companies have concerns about China and India because you can’t establish out-of-state and overseas structures. But there are now some very interesting solutions in these markets. For example, in China, you can maximize your liquidity through automated intercompany lending arrangements. We have a liquidity structure where you can lend money to your subsidiaries or your sister entities in an automated fashion like a liquidity product. These automated liquidity solutions are currently in vogue in China because you can’t move money outside of China without necessary documentation and paperwork.
The challenge in India is different. They have rules regarding how much of your capital you can lend out as inter-corporate lending. For example, current regulations stipulate restrictions on how much can be lent out to other companies. Banks are challenged to offer an automated solution because they don’t know how much you’ve lent out through other mechanisms. Although automating the funds movements becomes a more complex process, we continue to develop solutions within the constraints of the market.
We recently developed a solution for a company with the following issues:
All of their flows were in local currencies, some in more regulated markets like Korea and Malaysia. The client was not only banking with Citibank, but with other banks too, and they didn’t want to change banking relationships at this stage.
We set up a structure in their regional treasury center in Singapore. The client upstreams their local currency funds held with various banks in different countries (some with Citibank and some with other banks) into accounts at their regional treasury center, which is then swapped into dollars.
In markets where they can’t move the local currency, like Indonesia and the Philippines, they do an onshore FX into dollars, and transfer U.S. dollars to the regional treasury center in Singapore.
This structure enables them to concentrate excess liquidity and a good forecasting system ensures the treasury in Singapore knows how much they are receiving. When the entities need the money back, the regional treasury reverses the process and funds the local entity using local currency.
The whole structure is automated to re-allocate interest and account for all intercompany flows. The excess U.S. dollars are pooled together for all entities, long and short positions are offset and excess funds are upstreamed to their treasury in Europe where it is used either for investment purposes or to fund other entities.
In a market like Korea that has regulatory restrictions, we were able to structure a solution to transfer liquidity within the regulatory constraints.
With this global liquidity management solution, the client was able to move a significant amount of liquidity, which they had in local currency, to their global pool. This was a big win for them.
One last point; this particular client had a relatively small regional treasury team, so they wanted a solution that would not encumber them with lots of intercompany documentation and interest reallocation. This structure was designed to ensure that the entities in different companies didn’t have to do excessive documentation to open offshore accounts. All they had to do was upstream excess balances. The regional treasury center didn’t have to worry about reconciling accounts in multiple jurisdictions. So the solution met all of the clients’ objectives.
Some companies are shipping their convertible currencies directly from individual countries to a global treasury. For example, the policy might be to ship excess balances in Australian, New Zealand, or Singapore dollars to London, Luxembourg or Dublin at the end of every week.
The typical model companies follow is to optimize a country and then the region, and then ship any excess out. That’s the most common approach but it’s not the only approach. If the flows are not huge, putting a regional treasury infrastructure in place may not make sense. For some companies it makes more sense just to move the excess directly from individual countries to global headquarters.
Companies that have big flows and that can dimension the benefits will obviously set up regional treasuries.
…particularly when you have different markets – some small and some big. There are companies that are big in Japan and in Australia, for example, but not necessarily big in other countries. So, rather than establish the regional structure, you can just ship Aussie dollars and Japanese yen to Luxemburg, or Dublin, or New York, or wherever your global treasury is.
Many multinationals maintain accounts with more than one bank, so it can be a challenge to know what their intra-day cash position is. To manage liquidity effectively, you have to have good access to intra-day positions and good forecasting techniques. You have to know, for example, how much excess you’re going to have. Although there are many companies that are very good at it, others do not have good visibility of their cash positions.
Companies that enjoy better liquidity management tend to do two payment runs a month – on the15th and 30th, for example, rather than make payments every second or third day. The practice of outsourcing payments is something that has caught on in Asia, in part, because it gives companies predictability in terms of cash flows.
When companies begin to look at establishing regional liquidity management structures, they often need to re-engineer practices in individual countries. In general, to manage liquidity effectively in-country, across a region, or globally, you need visibility of your cash positions, good forecasting, a way to concentrate your funds, and the ability to negotiate FX and get it done before cutoff times. The challenges, with liquidity management in Asia and elsewhere, are not just regulatory ones.
Sridhar Kanthadai is head of liquidity management and financial services products for Citigroup in Asia Pacific. Based in Hong Kong, Sridhar is responsible for the product management and development of Citigroup’s liquidity management products for corporates and clearing products for financial institutions across 18 countries in Asia Pacific.
Prior to his current position, Sridhar worked in the development and rollout of the bank’s web-based delivery channel solutions. He has also held various positions in technology covering treasury, custody, cash and trade at Citigroup in Asia.