The Challenges of Trapped Cash in Asia
The 2008-09 financial crisis saw companies take extraordinary steps to stockpile cash, in an effort to protect their lifelines and reduce liquidity risk. Correspondingly, we saw a sharp and overall rise in corporate cash balances. More recently, lingering economic uncertainty has encouraged many of these same companies to continue holding on to those cash reserves. Yet for any organisation keen to deploy its reserves, it is frustrating when local restrictions create a disconnect between strategy and operations.
With most treasurers preferring to embark on a scheme of recycling cash, through deploying positive balances from one country to another in order to offset borrowings, any disconnect often leads to the pooling of trapped cash. This is an unfortunate but all too common reality for any treasurer who covers one or more of Asia’s regulatory restricted markets.
When considering liquidity strategies for Asia, the toughest challenges can be broken down into two major components:
The trouble with cash in Asia’s restricted markets is that ever-growing webs of interlocking regulation governing investments, lending, and currency exchange prevent repatriation on part, or all, of your cash where you need it most.
Many markets have already considered or started on the lengthy process of gradually relaxing the regulatory regime – think China or Malaysia for example – but to date the progress has been slow and it has done little to prevent pools of trapped cash from being accumulated. Even for those lucky few that have access to sufficient mechanisms to expedite the process, tax treatment by their own home markets often taxes repatriated monies. This forces treasurers to either hold-off or repatriate only in intervals, which further compounds the ever growing pools of trapped cash.
The question then arises: if global cash management policies dictate that cash belongs to treasury, what can a treasury do when it cannot access the cash? Many treasuries simply ‘rework’ their local structures to best fit the regulatory environment and local market workarounds, but the realities are stark. Even when considering the most sophisticated treasuries within these markets, the mere presence of regulations imposes a severe degree of simplification over any in-country treasury, liquidity or investment strategy.
Even after reworking structures, many would still conclude that if cash balances and profits generated from these markets are trapped and not readily available for deployment for normal corporate usage, they should be excluded from the company’s overall global liquidity strategy. An extreme position, but before condemning cash as trapped simply because of the appearance of insurmountable barriers to repatriation, it is necessary to critically consider the degree to which cash is either truly trapped or merely restricted.
For this purpose, consider trapped cash as completely blocked, and restricted cash as hindered by bottlenecks such as time (i.e. capital investment lock-up for a fixed period of time), rules (governing rules for debt-to-equity (D/E) ratios), regulation (i.e. the prohibition of inter-company financing,) or costs (taxes on repatriation in the home country and/or on cross-border cash flows).
As a stand-alone or in combination, these factors can have significant impact but inevitably only restrict the free movement of cash. They can be used to measure the degree of ‘trapped-ness’, helping to identify bottlenecks across processes, business models or payment structures from which re-engineering may alleviate pressure.
Before taking steps to rework structures, visibility of all relevant information will become a challenge to the analysis and decision-making process. Achieving full visibility will require a treasurer to go beyond a mere balance of cash positions and necessitate a detailed analysis across all entities and geographies.
Connectivity remains the predominant challenge to visibility across disparate geographies, but many treasurers remain content to work across an ever-expanding multitude of banking platforms or spreadsheets to obtain a historic snapshot of their positions. This process exponentially complicates matters when considering the mass of non-core banks they are often forced to use in restricted markets. The most successful treasuries are adopting a bank-agnostic approach to visibility through implementing treasury management systems (TMS) able to connect, manage and monitor treasury activities across the region regardless of jurisdiction, language or banking partner.
Repatriation of monies remains a top priority for some. However, more and more companies operating within restricted markets are content to keep money in-country; either anticipating further in-country liquidity requirements or to capitalise on relatively higher yields achieved in-country versus other markets.
Recent developments in markets such as China have seen raised reserve and interest rates and have helped secure corporates higher returns on deposits. Policymakers continue to focus on inflationary easing, and there are hopes that along with more stringent monitoring of capital inflows they will also consider expanding schemes for corporations to move more money more easily offshore – if only to act as another mechanism to ease inflationary pressures.
Nevertheless, despite the comparatively higher returns from these markets, treasurers need to remember that they remain a hindrance to a true firm-wide global cash strategy. Maintaining vigilance in reviewing the trapped cash condition and being prepared to act if, and when, the markets change will be critical factors for success. Before then, better use of technology will be the best option to impact a treasury’s visibility and insights across these challenging markets.