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However, as with any region, Asia has its own unique set of intricacies, local regulation and risks. To explore these in depth, we asked Christopher Emslie, Country Treasurer in Singapore for ABB, Jonas Falk, Managing Director of SKF Treasury Centre Asia & Pacific and Corrado Lillelund Forcellati, General Manager in Nordea’s Asia operations, how they view the current environment in Asia from a corporate perspective.
Circumstances are arguably better than ever for Nordic corporates looking at entering the Asian market. Several factors are driving these new opportunities, notably the internationalisation of the renminbi, improved consumer purchase power with extra focus on sustainability and quality, the Chinese-driven One Belt, One Road initiative and a thriving fintech environment. “We’re experiencing that all the above factors are currently resulting in a number of strategic initiatives from Nordic corporates. These are being triggered by a clear ambition to channel even further resources to Asia in order to exploit the growth potential in the region,” explains Forcellati.
“From the start, any company thinking of entering the Asian market has to be aware that complexity and ambiguity need to be assessed differently in Asia compared to the Nordic countries. This should be reflected in a companies’ risk framework to assess and manage the sustainability of businesses carried out by Nordic companies. This could mean assessing the US impact on Asia trades and local currencies, which can have local regulatory consequences, such as China cross-border rules, Indonesia local currency requirements and Malaysia’s restrictive offshore funding constraints,” he continued.
Localisation and adaptability
However, some of the most common hurdles facing Nordea customers looking to expand in Asia tend to be within the companies themselves, with many struggling to smoothly apply – and hence leverage – on existing Group practices, governance and policies. Forcellati explains: “The complexity of the Asian region with its very local practices and changing regulatory requirements, encourage companies to adapt their business model by, for instance, localising more than what might be wishaed at Group level. Managing the trade-offs between the resources needed to deal with the complexity and ambiguity vis-à-vis growth expectations and balance- and trade flow management are hurdles to be increasingly addressed and understood.”
Knowledge of local risk is key
Currently, two of the main risks areas are increased volatility, with Nordic corporates sometimes struggling to keep abreast of a rapidly evolving global versus protectionist macroeconomic environment, and, secondly, enhanced governance requirements. This can be in terms of payments monitoring, as a result of increased fraud cases in Asia, and due diligence in understanding counterparty risks (for instance, bribery) involved in the supply chain of Nordic customers.
For Nordic companies overly concerned by the potential of entering a new risk environment, Christopher Emslie, Country Treasurer, Singapore for ABB has some calming words: “Many of the risks faced in Asia are also faced in the Scandinavian countries just maybe not to the same extent. In well-developed Asian markets the risks are not so high or have a minor impact on business dealings.”
However, Jonas Falk, Managing Director of SKF Treasury Centre Asia & Pacific Pte Ltd, adds that a solid and knowledgeable banking partner is of high importance: “Banks that are up to speed on the latest regulations and can provide us with valuable insights into the countries they cover and add real value to the relationship. Sometimes rules and policies can quickly change in Southeast Asia and not always in the same transparent way we are used to in the Nordics.” On the corporate-bank relationship, Forcellati adds: “From a company perspective, localisation is definitely important for the day-to-day banking needs. However, from a cash management, trade finance, treasury- and risk management perspective, a lot can be achieved – in terms of efficiency, predictability and access to know how – by operating and leveraging on Nordea’s capabilities and (regulatory) knowledge in Shanghai and Singapore.”
Geopolitical risk and managing foreign exchange exposures
Given the current turbulent and uncertain times, geopolitical and currency risk are always top of the corporate agenda. “The major concern in Asia is the geopolitical climate. There is, of course, the unpredictability of North Korea but also the potential impact of Trump, the European elections and even the post-Brexit landscape. All these have an impact on business and the ability to do business. They affect the volatility of currencies, which increases risk when tendering and planning, and can have a far reaching impact,” explains Emslie.
With currency volatility always a concern for international treasuries, Forcellati explained how some Nordics companies were offsetting this risk: “Depending on business model, level of localisation and Group policies, Nordic companies are – to a higher degree – offsetting the local currency volatility by using an increasingly broad range of tools and products and by exploring the creation of natural hedges. For example, this can be in- and outgoing payments analysis, invoicing currency considerations for primarily countries with restrictive foreign exchange regulations (e.g. China, Indonesia, Malaysia). There are also specific procedures in terms of how foreign currency accounts are treated depending on local regulations and foreign exchange restrictions, especially if operated by non-resident banks a/o companies.
“Away from foreign exchange risk, we also notice some counterparty risk, involving payment fraud, bribery cases, and defaults, which need to be addressed and mitigated in governance policies of by Nordic corporates. Furthermore, we see a general trend to reduce the number of available banks for trade confirmations in the region. This is also increasing the counterparty risks for our Nordic corporates resulting in the importance of formulating clear credit policies,” concludes Forcellati.
On a practical and operational level, when it comes to ironing out the potential complexities of cash management, Forcellati says there is no best-practice manual. “The optimal cash management set-up really depends on the chosen business structure, trade flow and geographical presence in the region. But if we are talking trends, an increasing number of Nordic companies are interested in pooling USD liquidity/proceeds from intra-Asia trade activities, as well as optimising cross-border flows from transactions being largely invoiced in local currencies (e.g. CNY). Based on the numerous and changing local regulatory requirements in Asia, a common best practice is to enhance the overall understanding of possibilities and limitations by choosing a bank that is knowledgeable and proactive in finding proper cash management solutions, whether in terms of remittance of dividends a/o value days when settling derivatives.
“Corporates should be aware of specific challenges related to sweeping services or cross-border cash pooling in Asia, which could include foreign exchange restrictions, thin capitalization rules, corporate- and insolvency issues and tax considerations. Nordea has invested in acquiring sufficient legal- and regulatory clarity and visibility along being able to offer Regional cross-border cash pool set-ups out of Singapore. Also in terms of payments and collections, depending on payment types (e.g. Capital- or trade related) and currency chosen, country specific regulations do apply. This is part of doing business in Asia, and corporates should maintain the ability to stay abreast of regulatory changes which their bank should facilitate and combine with a deep understanding of customers’ business set-up and the resulting payment a/o collection flow profiles.”
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