CASH MANAGEMENT
A Two-way Street for Treasury Solutions
October 2, 2008
Rajesh Mehta, Citi

Global capital flows were once a one-way street, with multinationals from advanced countries investing in emerging markets. Now it's a two-way street, with emerging market corporations investing in OECD countries. The challenge is integrating the treasury requirements of both, which can be quite different.

Net private capital flows to emerging markets climbed to US$782bn in 2007, according to the Institute of International Finance (IIF), the global association of financial services firms. This was up from US$568bn in the previous year. At the same time, emerging economies have themselves become significant net exporters of capital, exporting US$1.38 trillion of net capital through a combination of official reserves, lending abroad, equity outflows (including sovereign wealth funds) and portfolio equity.

Out of the variety of forces at work in these changing flows, rising oil and commodity prices are instrumental in driving economic growth. The Middle East has doubled its net oil income in recent months and the presence of important natural resources in Africa is opening up an investment corridor between the continent and the booming, resource-hungry countries in Asia, such as China. Moreover, regulators in countries such as Russia, China and Poland are modernising and liberalising their investment markets, easing the flow of funds into and out of their economies.

Changing Flows

Historically, global capital flows were a one-way street, with Organisation for Economic Co-operation and Development (OECD)-based multinationals investing in emerging market corporations. Today we are seeing a fundamental shift in this pattern - a 'two-way street', where the OECD multinationals, faced with a slowdown in their local markets, are looking to emerging markets for growth, while emerging market companies, flush with new-found wealth, are swiftly expanding, both in their home countries and abroad.

This trend was underlined when India's largest business conglomerate, Tata, bought the UK-based car brands Jaguar and Land Rover from US-based automotive giant Ford for US$2.3bn in March 2008. In May 2007, Saudi Basic Industries Corporation (SABIC), the largest public company in the Middle East, acquired GE Plastics for US$11.6bn.

This two-way street calls for innovative business models addressing the realities of these new markets at various stages of development, with different regulatory requirements and business practices. The importance of cash and financial flows in any fast-growing company, intensified by the geographical dispersion of such multinationals, positions treasury management as a key focus area.

Addressing Different Treasury Requirements

The specific treasury solutions that an emerging multinational expanding into the OECD requires are potentially different from an OECD multinational entering an emerging market economy. For instance, when an emerging market multinational buys an established OECD company, it may be acquiring a very sophisticated treasury management structure and processes. If in its home market the emerging multinational is coping with a much more manual structure, the challenge becomes how to merge these two diverse treasury structures. On the other hand, the key concern for an OECD parent is generally more about obtaining maximum efficiency and mitigating the risks of doing business in emerging markets.

However, for both established and emerging multinationals, the constituents of successful treasury management are the same: visibility of information, transparency, standardisation and integration, allowing for effective liquidity management and efficiency through the financial supply chain. In most cases, these constituents also bring about the need for a global banking partner with the deep-reaching network, experience and expertise to connect the new and/or growing entities and make it happen.

From the OECD to emerging markets in their search for revenues, which have been hit by the slowdown in Western economies, corporations from the industrialised world are increasingly willing to enter emerging markets. As a result, the centre of gravity in treasury management is swinging away from the traditional centres and towards the emerging world.

Business follows money and the shift of corporate global treasury centres from New York to London, for example, is driven by the desire of corporate treasurers to be closer to the burgeoning new horizons. Dubai, in the United Arab Emirates, for example, has been successful in attracting treasury centres to its Dubai International Financial Centre, which spans the time zones not covered by New York, London and Hong Kong.

Efficiency in cash management is the key driver for the OECD corporate operating in the emerging world and there are several key themes that allow for that efficiency.

Integration and visibility of information
Established multinationals that are growing through acquisition need to be able to rapidly integrate the new operations into their treasury structures. In many cases, companies they have acquired do not have sophisticated treasury management systems that can be integrated into the parent company readily. In the meantime, implementing a solution such as web-based service will enable them to access the information they need to make decisions, while the integration work gets under way. Such a tool can increase visibility and control so that treasury organisations can view their overall positions and forecasts and more effectively manage global liquidity and risk across the enterprise. During this time, such corporates will lean heavily on their banking partners for 'plug and play' access to their cash operations globally.

Consistency
As multinationals expand, they want a global platform to manage their treasury operations. Standardisation of treasury platforms can provide the same level of service in an emerging market as in an OECD market. Companies want to operate a global treasury and therefore need global consistency.

Liquidity management
Corporates need to identify 'trapped liquidity' in emerging markets, caused by regulations that restrict lending to a holding company or subsidiary. Such trapped liquidity could exacerbate the group-wide liquidity picture for a multinational. At a time when funding is a critical subject, gaining greater insight into balance sheet predictability will enhance cash effectiveness, reducing reliance on external funding and optimising investment opportunities. This requires a window with an immediate view of global liquidity and the ability to choose from a range of investment options.

Financial supply chain
A truly integrated supply chain and increased control of working capital are two inter-connected areas where established corporations can expect to draw more efficiency. Smoothing the wheels of the extended supply chain puts the corporation's own working capital to work. This is just as important in the OECD countries as it is in the emerging markets. A key trend in the search for greater efficiency is the move towards centralisation of financial supply chain management. As a result, shared service centres are managing a much larger part of the financial supply chain.

Local market knowledge
As established multinationals expand into unknown territories, it is crucial that they understand the risks posed by local regulations, business trends and competition. A global banking partner with experience in these markets can help them assess those risks.

Catalyst for Growth

The challenges facing an emerging multinational depend on whether it is growing organically or through acquisitions. The organically growing emerging multinational needs to build sophisticated treasury structures to support its growth. At present, most of these companies do not operate sophisticated treasury structures and the challenge is to build elaborate structures from scratch during a period of rapid growth.

The emerging multinational growing by acquisition in OECD countries needs to identify the right integration approach between the newly bought entities and achieve standardisation and transparency.

What is common between the organically growing and acquiring companies is the magnitude of the treasury management task and the need for expertise, hence the requirement for a banking partner which has experience in both the local and global market. In many cases, a detailed understanding of local regulations, market dynamics and trends is essential. Whether a company is growing organically and needs help to build new platforms or whether it is expanding by acquisition and needs help to integrate existing systems, a banking partner can provide expert advice.

Corporations embarking on the task of creating a new treasury structure are, in many ways, in an advantageous position since they do not need to re-invent the wheel and can benefit from the vast experience and state-of-the-art technology already developed by their banking partners. Not inheriting complex legacy structures gives the corporation the opportunity to implement the most up-to-date solutions.

Both the corporation and the bank benefit from entering into a treasury solution partnership The corporation can focus on its core competencies and become even more successful at what it does best; the bank gains another client which gives it more scale and revenues, which translates into more investment in technology and innovation that eventually finds its way back to clients in the form of advanced products and services.

Mutual Needs

To conclude, the overriding requirements for corporations on both sides of the two-way street are efficiency and expert advice. As they seek, for different reasons, to create global treasury operations, they are reviewing their cash management structures and looking to implement more integrated and transparent treasury operations to achieve this goal.

Given the magnitude and criticality of this undertaking, choosing a suitable banking partner to provide the right infrastructure, geographical reach and experience is crucial.

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