Corporate TreasuryNavigating the World of Treasury in Emerging Markets

Navigating the World of Treasury in Emerging Markets

Deepan Dagur, Regional Head Asia, Trade Finance & Cash Management at Commerzbank AG, discusses the responsibilities, challenges and opportunities for treasurers in Emerging Markets.

Treasurers with exposure to Emerging Markets need to be more agile than ever before: geopolitical shifts have driven a rapidly evolving landscape – a rising trend of protectionist politics in both the West and in certain Emerging Markets, combined with slowing growth in trade volumes.

It is widely accepted that the bundling together of countries and economies under the convenient label of Emerging Markets is something of a misnomer, with growth fueled by varied drivers, FDI and industrial strategies. However, among such diversity, there are several prominent factors that a corporate treasurer must consider in operating across Emerging Markets:

First, the role of the treasurer cannot be underestimated in the Emerging Market context. Local currency interest rates tend to be higher than in developed markets, making domestic liquidity management tremendously important to controlling interest expenses.

Second, several Emerging Market currencies also have regulatory complexities in terms of trapped liquidity – for example India, China and Vietnam.  Without careful planning and preparation of solutions, such as inter-company lending and dividend payments, it is extremely difficult to remit surplus funds from these markets to offset borrowing elsewhere.

Third, trade between Emerging Markets (e.g. “South-South” or “Intra-Asia”) is growing at a faster pace than between Emerging and Developed markets.  While trade finance has benefits such as shortening the cash conversion cycle and unlocking working capital, trade with Emerging Markets introduces the task of risk mitigation. Ensuring, for example, that an exporter literally gets paid, and steps are taken to mitigate risks such as buyer insolvency, foreign currency illiquidity, and regulatory uncertainty.

Supply chains: The Physical and Financial Dualism

Physical supply chains continue to shift, which will require corresponding developments in financial supply chain solutions. For example, increased railway freight capacity from railway projects in Asia (e.g. Bangladesh, Malaysia, Thailand, Vietnam), and across Africa (Kenya, Nigeria, Ethiopia and others) will create new trade flows across these markets. This will lead to the creation of various transportation solutions, especially important given the chronic port congestions across many developing countries. Furthermore, shorter transportation times will also help optimize working capital efficiency and shorten cash conversion cycles.

Alongside this, recent years have seen tremendous strides in the development of Open Account Supply Chain Finance solutions, and the Emerging Markets have been no exception. Increased levels of strategic inter-dependence with customers and suppliers has led to the rapid growth of receivables and payables financing solutions respectively.

The Innovation Imperative

Digitization is a theme is critical to all business, and treasury is no exception. Emerging Markets have a strong track record for producing and implementing digital innovations relevant to the treasury department. Countries such as India, China, Philippines and Indonesia have been global leaders in pioneering and adopting B2C solutions such as mobile micro-payments and mobile wallets.

As a result, we are seeing an uptick in treasury automation and efficiency. This extends to a more profound shift in automation and sophistication of the financial supply chain, with a particular focus on upgrades of clearing systems, payment methods and the inter-operability of banking systems and logistics operations.

Instant payments is another key area of recent progress. Treasury functions vary to the extent they have a comprehensive strategy around how such changes help them drive efficiencies around payments and receivables operations, and specific benefits this will enable in liquidity management and cash forecasting.

Treasury sits in the pivot of this, as it provides the connection between the company’s own operations and its external banking counterparties. As a result, treasury needs to review its digitization agenda and benchmark its level of automation and analytics to ensure that it is equipped to support the current and future needs of the business effectively.

Belt & Road

Regardless of a corporate’s direct presence or trade with China, not having a Belt & Road strategy is no longer an option. In 1978, China accounted for 1% of global exports and less than 1% of global FDI.  China is now the largest exporter globally with more than 13% of global exports and greater than 11% of global outward FDI.

The Belt & Road Initiative is far-reaching, meaning that it’s highly unlikely that an MNC will be able to avoid the initiative, either directly as market presence and product location, or indirectly via a supplier or a customer. The BRI impacts 74 countries in 6 economic corridors, with the number of partner countries continuing to increase. Hence it is essential for corporates of any size to have a coherent corporate (and therefore treasury) strategy on both the opportunities and risks to their business model.

Choose banking partners wisely

Finally, a corporate treasurer will have many competing priorities at any moment that may often distract from core strategic objectives. In Emerging Markets, a treasurer may have a defined vision of success such as specific KPIs on enhancing liquidity management to deploy surplus cash and reduce net interest expense; increasing payments and receivables processing automation; enhancing risk mitigation for exports to lower credit rated markets; shortening cash conversion cycles in trade finance; or using technology to drive treasury efficiencies.

Partners and financial institutions will each have unique strengths in helping a corporate treasurer achieve the specific objectives or KPIs that have been set out. It is essential for treasurers to carefully select partners that are well positioned to advise on potential solutions, to ensure defined objectives are successfully fulfilled in the Emerging Market context.

Conclusion

Regulatory, trade, markets and political uncertainty remain front of mind and will continue to dominate the treasury agenda. It is essential that treasurers adapt and implement suitable changes to enable their company to thrive in Emerging Markets.

Emerging markets present many interesting challenges for the treasurer but also represent a real opportunity to show how they add value to the organization.

Critical to successfully managing risk and realizing the opportunity is a strong partnership between the corporate treasury function and its relationships with banks that evolve over time, supporting business objectives. With the right policies in place, treasurers can then work with banks to design, develop and put in place solutions to support treasury’s risk, liquidity and digitization objectives – both now and in the future.

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