An Optimal Emerging Markets Strategy

By Geri Westphal

It’s a small world after all: the importance of optimizing global strategies. 

Over the past four years, emerging economy countries in Asia, Latin America, the Middle East and Africa have continued to prosper, growing at rates from 6 to10 percent per annum. Forecasters predict that based on these statistics, nearly 70 percent of world growth over the next few years will come from emerging markets, with China and India accounting for approximately 40 percent of that growth.

Concurrently, trapped cash balances continue to grow at record pace and according to S&P, the total cash and short-term investments held by 1,700 US non-financial firms rated by S&P hit $1.53tn at the end of 2013, up 11 percent from 2012.

Therefore, managing rapid growth is difficult at any time, but when the growth comes from offshore, which as noted above, it will soon, it can be especially difficult due to local country regulations for doing business and moving funds. Keeping pace with the plethora of country-specific regulations while making sure the business can thrive and growth can be a bit like being a hockey goalie: You need to be agile and flexible while making sure nothing get by.

When optimizing for growth, today’s best-in-class global treasury organization must balance risk against their desire for centralized control and cost to ensure the global business runs smoothly and cash moves as/when/where it should based on corporate needs. 

Stop , Look , Listen

The most important word of advice for those just beginning their international expansion is to stop and take time now to build a strong foundation before the velocity of growth accelerates too fast and forces you into a reactionary mode. Don’t wait. Define your treasury structure now so that you are ready when the business really starts to grow. Some of the important optimization initiatives that today’s treasurers should consider include:

• Establishing a Standard Global Treasury Policies and Procedures. This one may sound obvious, but you would be surprised at the number of large rapidly-growing multinational organizations who do not have standard policies and procedures in place. This is the very foundation on which the other optimization strategies are built, so it is critical to take time to review and standardize global policies and procedures.
• Creating a Multi-Bank Reporting and Implement Standard Messaging. Using SEPA as a catalyst, many US multinationals have standardized their messaging formats for all payments with all their transaction banking partners across the globe. Many have used SEPA as a jump starter for additional changes, including SWIFT implementations and improved automation within their ERP and TMS systems. The ISO 20022 XML format that is a SEPA-native format is quickly becoming the standard as a strategic choice for messaging beyond payments into workflow solutions like e-BAM, e-invoicing and e-billing. This format is also commonly used for FX and other trade confirmations.

Consider changing structures

• Evaluate Bank Pooling. In order to be as efficient as possible, treasury organizations should consolidate cash to the fewest places possible by establishing either physical or notional pools depending on the local regulations. Pooling is a critical first step for obtaining global visibility and control over cash.
• Establish Shared Service Centers and Regional Treasury Centers. It is important to move common activities like payroll, AP and AR to shared service centers for processing synergies and cost efficiency. Once an organization has made the decision to create a shared service center, in one or more global locations, treasury can often piggyback this structure by creating a regional treasury center to consolidate tactical treasury operations away from the corporate headquarters or out of the hands of the local business managers into a treasury center mandated for these types of activities.
• Consider Netting Centers and Payment Factories. The creation of a netting center and/or payment factory allows your organization to minimize the number of external transactions by netting payments across subsidiaries or consolidating payables to common vendors. This structure brings added efficiency by minimizing the number of actual transactions, reducing cross-currency exposures and minimizing transaction fees. It increases visibility and control and maximizes the use of available cash across the enterprise.
• Establish an In-House Bank. The creation of an In-House Bank is seen as the pinnacle of optimization strategies for treasury and is quickly becoming a popular initiative among large multinational corporations. Although the setup of this type of structure requires a lot of coordination between treasury, tax and legal, the time is well spent when offset against the savings associated with the structure, including fewer FX and cash transactions, improved net interest and increased control. The IHB is able to take deposits, pay interest, make loans and charge interest for the parent and all subsidiaries as appropriate. Simplified cash flow, greater visibility and improved liquidity are three major benefits of this type of structure.

Make like jack

• Get ahead of new regulations. Be quick. Be nimble. When managing international growth it is important to stay ahead of new regulations as best you can. The RMBinternationalization, as an example, has been a headline story for most of 2014 with many more options now available for managing excess cash, loaning RMB, and invoicing in RMB. Although some believe these changes are “not ready for prime-time” and they have decided to take a wait-and-see approach, experts are encouraging those with current or new business in China to move forward and implement new strategies now so that you are strategically ready as these markets really start to open up. Given the rapid pace of remnimbi regulatory changes and the uptick in global MNC adoption of these new measures, there has been a significant increase in the use of RMB for payments, moving the RMB into the number-7 spot as a SWIFT payment currency, with the expectation that the RMB could break the top 5 is the next several years. (For more information on RMB, see box below).

As treasury globalization continues, the focus on process efficiency and innovation becomes even more important as treasury professionals. They must consider out-of-the-box strategies for unlocking working capital and optimizing global structures. This will help them stay ahead of the growth that their companies will surely see over the next few years and beyond.