Treasury Outlook for 2013: A Year of Opportunity

Published: March 01, 2013

Treasury Outlook for 2013: A Year of Opportunity
Is 2013 the year everything changes? While the economic challenges are far from over, proactive corporates are also sensing the opportunities afforded by the new landscape. Citi’s recent Treasury Outlook for 2013 conference highlighted key trends from each of the four major regions, and the different ways in which the bank is engaging with clients to design solutions to address the macroeconomic, regulatory and geographic trends.

With the US avoiding the fiscal cliff for now, and growth in Asia stabilising, it is easy to think that the worst is over for corporate treasurers, finance directors and supply chain management heads. Yet it may still be too soon to become optimistic. As such, Citi’s recent Treasury Outlook for 2013 conference brought together a number of corporates, financial services professionals and industry experts to discuss key trends they can expect for the coming year, and how best to not only safeguard against threats, but also take advantage of the opportunities.

The conference kicked-off with Michael Saunders, Head of Western Europe Economics, Citi, providing a macro-economic outlook for the year ahead.

“In Europe, the economy will disappoint,” stated Saunders. “Europe is finding it very difficult to become insolvent, and as a result, is sitting on debt it cannot shift. And the sovereign crisis in the region is far from over, with a Greek exit likely within the next few years.”

The message was clear. Those expecting a quick return to a healthy global economy will be disappointed, particularly as a deep European recession means a slow recovery.

The key question, however, was how this outlook may affect corporates in the year ahead – with concerns about liquidity constraints and the possible US debt ceiling at the top of many agendas. In addition to this is the looming implementation of Basel III, which could reduce the capital available to certain corporates, encouraging them to instead look towards the public markets, or shadow banks.

“The total capital requirements in 2011 were around 8%,” explained Rajesh Mehta, EMEA Head, Treasury and Trade Solutions, Citi Transaction Services. “By 2019, global banks that operate in markets where regulators believe there could be a systemic risk could have to keep around 15.5% of their capital.” Given this, “banks are likely to prioritise investment grade companies when it comes to lending,” Mehta noted.

However, these challenges also offer opportunities for those willing to take the necessary steps to increase operational efficiency and hence competitiveness. Citi’s Transaction Services business in each region is reacting to trends by implementing initiatives that mitigate risk, increase simplification and standardisation, and encourage investment.

EMEA: Danger and opportunity

Swati Mitra, EMEA Region Head, Corporate Client Sales Management, Citi Transaction Services, opened by reminding delegates of a quote cited by John F Kennedy, stating that “The Chinese use two brushstrokes to write the word ‘crisis’. One brushstroke stands for ‘danger’ and the other stands for ‘opportunity’”.

“EMEA is a region that reflects this philosophy,” explained Mitra. “While clearly there are many challenges in Western Europe driven by Eurozone considerations, we are at the same time seeing many opportunities for growth and investment in Central & Eastern Europe, Middle East and Africa.”

In order to take advantage of these opportunities for growth, corporates are recognising the need for more efficient treasury operations. Given this, the biggest priority in the region is a move towards simplification and standardisation of transactions, with the SEPA deadline providing an opportunity to re-evaluate and re-engineer bank account and liquidity management structures.[[[PAGE]]]

“SEPA isn’t just an infrastructure change for the banking community,” Mitra continued. “For many of our clients, it is a great opportunity for them to look at their connectivity, formats and account structures, as well as their risk and control processes. Over the past 12 months, close to 50 % of the bids and proposals that we’ve worked on have also had an XML component. So it is very clear that corporates are using SEPA as a trigger-point to look at standardisation within their banking relationships.”

What’s more, there has been an increase in corporates rationalising the number of banks they use, the number of connection points they have, and even the number of instruments they use – all aimed at streamlining treasury practices.

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Certainly, European corporates are also using SEPA as a catalyst for the move towards improved cost management and increased standardisation. The industry as a whole is witnessing an increased focus on end-to-end processes, with corporates looking at purchase-to-pay and solutions around card programmes and supply chain management programmes, as well as cash management solutions.

There are, of course, obstacles to overcome. For instance, while account location flexibility is a major advantage of the SEPA initiative, legal and tax implications are hindering corporates from benefiting from this yet. Citi has been helping corporates in their migration to SEPA, and has started to look towards future EMEA corporate trends such as a requirement for improved data and reconciliation.

North America: Digital world

As the focus of the conference shifted to North America, a sense of uncertainty and caution remained prevalent. A hot topic of debate was once again Basel III, with Michael Fossaceca, North America Head, Corporate Client Sales Management, Citi Transaction Services, stressing that the accord will prompt a huge differentiation between investment and non-investment grade companies – in terms of the capital that banks are required to keep on their balance sheets. As such, North American corporates are becoming increasingly concerned about the financial health of their supply chains and their suppliers or distributors who may be unable to access bank funding.

Another trend evident among corporates in North America is the move to streamline banking relationships. Keen to diversify counterparty risk, corporates would previously partner with multiple banks. However, rather than eliminating risk, this move merely created a different set of risks often less understood than those they had replaced.

“Corporates are finding that they are unable to efficiently monitor all of these accounts,” explained Fossaceca. “The growing consensus is that corporates can monitor a few core banks more efficiently with better counterparty management.”

In addition, Fossaceca commented that with corporates sitting on large amounts of cash there has been a trend with Dodd Frank and The Account Guarantee Program (TAG) in 2012 for clients to leave balances on deposit and use the ECR to offset fees.  He also noted that with TAG expiring many companies are still using ECR as a way of getting good value for their deposits and have decided to diversify their account holdings amongst many banks only to find that they have created a different set of risks as they now have to monitor multiple counterparties.

Looking forward, another major trend for 2013 across North America is the move from paper to electronic. Currently, the use of paper-based payments is declining at a rate of about 7% annually, and Citi has observed double-digit growth in card volume.

“One of the things we are working with clients on is expediting the move from paper to electronic,” says Fossaceca. “Cheques are becoming increasingly outdated, as the efficiency of electronic payments becomes ever-more apparent. However, many corporates lack the resources to move on to more advanced databases. To help clients and speed up the move to electronic, Citi launched a service in October 2012 called Citi Payment Exchange whereby we collate vendor payable information for our clients and enable increased visibility and efficiency.”

Elsewhere in the region, Citi is helping corporates to improve their connectivity – perhaps through optimising enterprise resource planning (ERP) systems. Of course, SWIFT and XML are front-runners, and Citi has been advising North American corporates on how they can optimise processes, extract working capital and increase their connectivity to make their business bank-agnostic.

Asia: Opening up

Half of the world’s population lives in Asia. And whether it is through manufacturing, distribution, or simply belonging to a wider supply chain that eventually taps the markets in Asia, most corporates deal with the region in some way.

Traditionally, however, doing business in Asia has been complex, with many restrictions, hazards and inefficient and risky manual processes, as well as a fragmented legal and economic environment.

Yet given the increased competition for foreign investment, these barriers to entry are being pulled down as Asian countries strive to implement measures that make operating in the region simpler and more efficient. Ahead of the pack – as always – is China.[[[PAGE]]]

“The internationalisation of the renminbi (rmb) is high on China’s agenda,” asserted Manash Dasgupta, Asia Head, Client Sales Management, Citi Transaction Services. “While they have been allowing cross-product trade in rmb for quite some time, they are now concerned with establishing the rmb as a clearing currency outside of China.”

In addition to successfully carrying out currency swaps with central banks in countries such as Singapore, Hong Kong, Brazil, Indonesia and South Korea, China is now allowing corporates to pool their rmb overseas.

“There are, of course, regulations and thresholds, but they have opened the doors,” continued Dasgupta. “What’s more, they are putting in place the building blocks to enable the rmb to support all trade transactions.”

Corporates with rmb surpluses – and no desire to participate in a pool – can also have entrustment loans, and give loans to overseas subsidiaries.

“As long as you can prove that you have an agreement in place, you can do these transactions; this was never possible before,” stated Dasgupta. “Even if that is not feasible, corporates can still use the balances they have in China to get a bank loan outside of the country.”

Furthermore, foreign currencies are now allowed to be pooled overseas – eliminating the problem of having trapped-cash in China.

All in all, China is becoming more treasurer-friendly. Processes that previously required three separate pieces of documentation now only require one. Indeed, in some cases, banks now have the freedom to decide how much paper-work is required – enabling some transactions to take place with deferred documentation providing the company has a transaction history with the bank.

Asia is no longer the complex environment it once was, and treasurers are seizing on opportunities to increase their own corporate efficiency in areas such as mobile payments, which many are favouring in place of often risky and inefficient manual processes.

“Operational technology in Asia is really high. In Tokyo, Singapore and Shanghai, for example, almost everyone has a mobile phone,” explains Dasgupta. “But penetration goes further than that now. In India, farmers are paying for products and accessing information through their mobile phones.”

Consumer banking has been accessible through mobile phones – particularly smart phones – for some time. However the trend is now towards looking at how to make everything a treasurer does possible through the use of a mobile phone – improving treasury processes, and potentially changing business models.

Latin America: A regional shift

Another region capitalising on the use of mobile phones for treasury purposes is Latin America. Citi launched mobile payments in Mexico in October 2012, which was extended to corporates by the end of February 2013. And a similar agreement has been reached to pursue the same objective throughout the rest of the region.

Certainly, this move is part of the bid to increase efficiency in Latin America – essential given the region’s economic growth of around 4-5% over the past five years.

One notable trend in Latin America concerns shared service centres (SSCs). Previously, the region was a hub for SSCs. Increasingly, however, companies are preferring to put SSCs in Asia, and even the US rather than Latin America – with those that stay experiencing higher costs.

“We have two types of clients in Latin America,” said Carolina Juan, Latin America Head, Corporate Client Sales Management, Citi Transaction Services. “The international clients, and what we call the ‘local champions’. This first group of clients took the decision to open SSCs around twelve years ago, and they were cautious. They took out asset-contingency plans to enable them to replicate their systems in another SSC. The second group – the ‘local champions’ – didn’t take the same measures, and are now struggling with processes such as invoicing, collecting money etc.”

Certainly, implementing a contingency plan for an SSC within Latin America – although expensive – is a worthy investment. Costa Rica’s so-called ‘SSC industry’ has become more expensive. Companies which are intending to open up SSCs in countries such as Panama and Brazil are faced with high labour costs and tax regulations.

Instead, the region’s growth is predominantly in the consumer industry, due to its rising middle-class. Given this, Citi has been designing new products and solutions to help companies manage the rise in cash flow, as well as to aid reconciliation and improve efficiency.

Looking to the future

The global economic crisis impacted each region differently. For some, it meant putting in place contingency plans and being more cautious. For others, it meant coping with the strain of rapid growth. Globally, however, the need was for increased efficiency, and this need is being met. Whether through standardisation in Europe, electronic transactions in North America, mobile payments in Latin America, or reduced documentation in Asia, each region is improving processes and becoming a more dynamic environment for corporates to operate and explore new opportunities in 2013.

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Article Last Updated: May 22, 2024

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