Rate Increases and Working Capital: An Update from the APAC Region

  • By AFP Staff
  • Published: 11/21/2022

Map of Asia at NightIn a meeting with treasury professionals from the Asia-Pacific (APAC) region, Tom Hunt, AFP’s director of treasury and payment services, gathered some interesting takeaways about their current challenges and strategic focuses, including:

  • Countries that have greater access to foreign currency reserves have fewer volatile currencies.
  • If you are a net borrower or net investor in those countries where currency reserves are tight, treasurers have to manage accordingly, i.e., bank relationships are more important than ever.
  • Working capital management has become a strategic focus for companies facing high inflation, strained supply chains and the impacts of the Russia-Ukraine war.

Impact of rate increases

What impact does the Fed’s rate increases have on organizations in the APAC region? And how does it affect the cost of doing business in the region overall? The answer to that really depends on the country.

Whether a country is in a long or short position with the local currency ultimately increases its cost of funds. The countries most impacted are hard currency countries integrated into the global markets, such as Singapore and Hong Kong.

Some countries allow in-house banking inclusion, which a long position country sees the benefit of. For those countries excluded from participation in in-house banking, such as Indonesia and the Philippines, it’s more challenging. While the rates in Indonesia aren’t as high, the current borrowing rate in the Philippines is nearly twice as much as previous months.

Increased rates are the result of one of two factors: cash pooling or liabilities/borrowings. Focusing on rates in Europe and the U.S., since February 2022 there have been rate hikes across both zones — around 275 basis points increase for the U.S., 150 basis points for the Bank of England and 50 basis points for the European Central Bank. Some of the countries that used to have negative interest rates are now negotiating with the bank for positive interest rates, especially those on the Euro cash pools where they had to pay interest to the bank because it couldn't take up the charges. Banks have their own asset liability management, so this is all under discussion.

Due to the increased Earnings Credit Rate (ECR) in the U.S., more cash is earned through U.S. cash pools, which is a trend that is expected to go on as the banks continue to increase interest rates and drive the yields. Unfortunately, we are also seeing an inverted yield curve, which is expected to continue for at least the next few quarters.

Looking into further investments, the higher ECR in the U.S. is of benefit to other countries, leading to a possible exploration of investment in U.S. money market funds — something that is already being done in European money markets. On the liability front, APAC companies are also exploring some of the longer term, IATA interest rate options, as well as loans with fixed rates.

In Pakistan, the foreign reserves have reached the minimum threshold. Many restrictions have been imposed on the import of goods, and new letters of credit cannot be established. Anything over $100,000 has to be approved by the Central Bank and is delayed by 30 days; if the amount is under $100,000, it is approved in one day.

There is much speculation regarding the Pakistini Rupee, and the rate is volatile, which means businesses never know what rate they’re going to receive on a payment. The Central Bank has limited hedging options, making it very difficult for working capital. Plus, there is a great deal of pressure on foreign payments.

Progress has not slowed in India; the increase in rates did nothing to quell demand, and companies are eager to spend their CapEx. That said, consumers are experiencing the increased rates a little differently: it affects the cost of carry and impacts the cost of exposures, both of which are much higher than normal. And, making it worse is the fact that bankers need to keep larger deposits on hand. The Central Bank of India is in a better position than Pakistan; the CBI has 6-7 months of financing capacity.

The interest rates on money markets and deposits have dramatically decreased in China — as much as 10-20% for many banks and money market funds — which is unusual given the fact that China is typically one of the largest income generators. These unusual circumstances are making it difficult to forecast for the country. Companies are working with banks to get a better understanding of the situation.

Projects in the APAC region

Of the treasury professionals Hunt spoke with, there are some interesting projects going on at companies across the Asia-Pacific region. Here are some of the top priorities we’re hearing about:

  • Financing a multi-billion-dollar syndicated loan and improving the cash conversion cycle.
  • Finding a liquidity solution and manually transferring to a notional pool.
  • Automation of cash forecasting in 140 countries with local controllers operating in silos.
  • Centralizing treasury operations around non-value-added activities and setting up a shared service center in Kuala Lampur.
  • How to recommend and implement the digitalization of standard documentation in 16 countries to their central team.

Looking for ways to improve your working capital and enhance liquidity management? Treasury experts in the Asia-Pacific region share their tips on The Road to Treasury Optimization (Part 1): Enhancing Liquidity Management, an AFP Conversations podcast episode that is a companion to the Executive Guide: A Treasurer’s Guide to Centralization, underwritten by Standard Chartered.

Copyright © 2023 Association for Financial Professionals, Inc.
All rights reserved.