Market Developments in Central and Eastern Europe
The financial world has changed radically over the last few months due to the impact of the credit crisis. This market turmoil will affect the way banks and corporates deal with each other. Given the uncertainty in the market, corporates will specifically be looking at what to do to protect their business. Apart from the day-to-day payments business, corporate treasurers will re-evaluate the exposure they have with different banks. Furthermore, active risk management will become more important than ever.
Looking at central and eastern Europe (CEE) in particular, we have certainly seen positive economic outlooks developing as trade expands from the west to the east: many US or western European-based companies now have huge subsidiaries in eastern Europe.
The role of CEE is changing from cheap provider of skilled labour to a maturing market place, thanks to the growing gross domestic product (GDP) in these countries. We believe that the liquidity crisis will have a certain adverse effect on these developments. Nevertheless, this will be a temporary situation and growth in CEE will continue to outperform the growth rate in the eurozone.
The positive economic trend and improved regulatory environment has made the CEE region increasingly attractive for companies wishing to expand their business or set up a shared services centre.
In terms of corporate interests, we are seeing more opportunities to set up cross-border cash management facilities in many of these countries where previously there were a number of obstacles. There are still some regulations that make it quite challenging to set up businesses in different countries across the CEE, but on the other hand there is a trend towards greater regulatory synchronisation across the region. Some CEE countries have entered into the EU and they are on track to adopt the euro; this will slowly, but certainly, lead towards further harmonisation of regulatory environment.
For example, the single euro payments area (SEPA) is exerting a great influence on many CEE countries’ regulatory regimes and increasing their harmonisation. In countries such as Poland, Slovakia, the Czech Republic and Hungary, the regulatory environment is comparable to what you see in most western European countries. From that point of view, we see that there are more possibilities to set up cross-border solutions because it is easier, for instance, to sweep balances out of CEE to a concentration (treasury) account in western Europe. A cash management set-up like this should be examined to see if its structure is compliant with local regulation regarding:
Poland is still a growing market. Within the country, private companies are grouped into capital groups owned by international corporations or Polish entrepreneurs. There are also state-owned companies, mainly in sectors such as power, mining, public transport, utilities etc, which are grouped and transformed into huge conglomerates.
Global capital groups need overlay liquidity management structures, well known in western Europe, which consist of real and virtual cash pooling. These groups expect banks to provide them with comprehensive local, regional or global cash pooling solutions. In Poland, pooling structures (including accounts of separate legal entities) are not precisely regulated – either from a tax or legal perspective.
The Cash Management Council (CMC), in which ING Bank Slaski is a member, has been working under the umbrella of the Polish Banks Association (ZBP) to initiate and support the introduction of the Banking Act (and Tax Code) in order to provide a framework for cash pooling services. The Banking Act was changed among others in 2004 when Article 93a was introduced.
The English translation of this article provided by the National Bank of Poland is as follows:
Unfortunately, the original text of Article 93a, as proposed by the CMC, did not survive the full legislative procedure with the result that it now only touches notional cash pooling. Moreover, it is only dedicated to the tax capital groups. In Poland, there are just a few groups like this due to the fact that a tax capital group classification requires fulfilling rigorous fiscal and legal conditions. In practice this means that Article 93a is hardly useful as the legal basis for cash pooling structures.
As stated, Article 93a does not regulate zero balancing structures. One of the fundamental hurdles of setting up a zero balance structure in Poland is that the tax office may recognise certain types of sweeping as financing of entities instead of liquidity management (article 199a of the Tax Code). Then each sweep that has been made within the framework of cash management could be classified as the result of a loan’s contract and liable to tax on civil law transactions. Furthermore, incorrect settlements of benefits between companies can also cause a tax official to issue a tax adjustment to the company.
The legal and fiscal challenges are much wider than the above-mentioned examples, but it does not restrain banks and groups of companies from launching cash management solutions in Poland. Due to the legal and tax expertise needed to set it up, such structures only pay off when turnovers are considerable.
The CMC has proposed a change to Article 93a of the Banking Act in order to give a wider meaning to the definition of a capital group, instead of the tax capital group, and covering both notional pooling as zero balancing. A change could theoretically be introduced along with the changes made for the Payment Services Directive (PSD) in the next year. But even if it happens, other acts (e.g. the Tax Act) will also need to be changed, which probably will take a few more years.
Overall, corporates operating in the CEE region are not asking for very difficult things in terms of their cross-border cash balancing. In fact, they are basically asking for reliability. They want to have a robust service, operational stability and effective resourcing. Banks, such as ING, continue to invest in their capabilities and are able to deliver this. The regulatory environment is slowly becoming more transparent and today cross-border structures can be set up. As in the rest of the world, it remains a matter of due diligence and when setting up a cash pooling structure, good legal advice is essential. The current turmoil in the liquidity markets will further boost the demand for cash management structures, as these are essential for working capital management.