Dynamics in the treasury world, particularly in emerging markets within Asia, are changing fast. Exchange-rate fluctuations, rising input costs, variable conditions for fundraising, and frequent and significant changes in compliance all add to the level of challenge. Factor in the need for cross-border and multi-product approaches to cash and liquidity management, plus the need within corporates for rapid solutions, and it becomes clear that the demands on corporates and their treasurers are significant and growing.
Asia is diverse – in terms of regulatory regimes, market practices, business conventions, cultures, languages and currencies. The need for skilled corporate treasurers backed by strong resources is everywhere evident.
Treasury centres in Asia Pacific hold a high level of cash from both cash generation and retained earnings. This is particularly the case in highly regulated countries such as India and represents both an opportunity and a challenge for corporates and their treasurers.
In terms of opportunities: as value chains extend and become ever more complex, trade finance and working capital solutions will continue to play an important role as a means of facilitating payments and managing risk in international trade.
As to challenges: Asia continues to build on its reputation as an engine for growth globally. However, many countries are going through periods of transition politically, which in turn creates uncertainty for the short to medium term. This uncertainty is one of the factors that encourages treasurers in Asia to hold more cash than might be deemed necessary under more stable market conditions.
That said, Asia continues to attract global multinationals, while Asian corporates are expanding both within the region and beyond, seeking greater operational and financial efficiency.
Take the example of Singapore. Singapore’s regulatory environment is among the least restrictive in the world and is complemented by one of the most competitive tax environments in the world. The low withholding taxes and double taxation agreements with over 50 countries provide a favourable environment in which to base regional treasury centres.
Tax incentives are available to companies that use Singapore as a regional base, global headquarters or centre from which to conduct research and development or higher-value activities. In particular, the Finance & Treasury Center (FTC) Incentive administered by the Economic Development Board is relevant to companies wishing to establish a treasury centre in Singapore. Companies with FTC status enjoy income tax concessions and withholding tax exemptions for periods from five to 10 years. Singapore’s wide double tax treaty network, low corporate income tax rate and sophisticated banking sector also make the garden city a strong choice for treasury operations. From 2010, companies are taxed at a flat rate of 17% on their chargeable income regardless of whether they are local or foreign companies. In 2011, the Singaporean government also introduced a pooling system to give businesses greater flexibility on their FTC claims, reduce taxes payable on foreign income and simplify tax compliance.
As a result, Singapore is the base for many notable multinationals, including German technology company Bosch, Japan’s Sony Corporation, consumer electronics giant Philips and pharmaceutical players such as Germany’s Bayer AG, Switzerland’s Novartis and the US’s Pfizer. Other high-profile names include Google, Chevron, Merck & Co, General Electric, Proctor & Gamble, General Motors, UPS, Hewlett-Packard, Cargill and Kimberly-Clark.
By setting up a regional treasury centre – with specialist treasury resources, processes, controls and technology – treasurers can support geographic expansion, whether organic or through M&A, and avoid replicating or fragmenting of activities from office to office – factors that have an adverse impact on liquidity, risk and cost. Centralised bank relationships and control over cash also create economies of scale and streamline operations.
Access to specialist treasury resources is uneven in Asia, so establishing a regional hub enables treasurers to leverage talent pools in more established centres of excellence, such as Singapore and Hong Kong. India, the Philippines, Thailand and Malaysia, meanwhile, are increasingly attractive locations for financial shared service centres, including payment and collection factories. India, for example, is popular due to its English-speaking financial and technology talent pool along with its cost-effectiveness and attractiveness as a business environment.
It is notable that the regional and global treasury hubs evolving in Asia are providing treasurers with better visibility and control over group liquidity, helping to reduce dependence on borrowing and control costs. Using group liquidity more effectively enables treasurers to negotiate financing centrally and leverage their group company's credit rating. Similarly, treasurers can take a consolidated view of risk and hedge FX, interest rate and commodity risks at group level where appropriate. They can also work with their tax colleagues and senior management to organise the business and its treasury activities as efficiently as possible.
Prem Thakur is general manager, finance and treasury, at Sopra Steria in India.