11 October 2018

UAE: Prime Location for Regional Treasury

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Recent years have seen treasuries taking on a new more diverse role within the business, while also adopting a more centralised model. The combination of these two trends has seen a growing number of treasuries looking for suitable locations in which to establish a regional treasury centre (RTC) that would be capable of handling a broad range of tasks.Noor Adhami, Regional Head of Global Liquidity and Cash Management, HSBC Bank Middle East and Hemang Desai, Regional Head of Sales, Commercial Banking, Global Liquidity and Cash Management, HSBC Bank Middle East examine the recent emergence of UAE as a leading location for this type of centre.

The growing range and complexity of treasury activities, especially in the context of globalisation, has been driving many corporations to consider centralising their treasuries. The level of regulation has risen almost inexorably since the financial crisis, requiring cross-border management of the varying regulatory regimes in addition to numerous other tasks, including cross border liquidity management, hedging, supply chain management and business advisory support. "This diversity means - alongside many other considerations - that any possible location for an RTC must be able to offer a pool of experienced skilled personnel," says Noor Adhami, Regional Head of Global Liquidity and Cash Management, HSBC Bank Middle East. "This is one of several reasons why UAE has emerged as a strong contender for new RTCs."

How treasury structures are changing

Shifts in the global economy and supply chains, the rising importance of emerging markets and volatile oil prices are just some of the factors reshaping the business landscape. This shift has prompted many treasuries to become far more proactive in partnering with the business in order to help create greater corporate value. However, in order to free up capacity to undertake this valuable role, treasuries need to optimise and automate their traditional tasks as much as possible, and centralisation plays an important part in helping them accomplish this.

Broadly speaking there are three degrees of treasury centralisation:

  • Decentralised - treasury policy making, decisions and activities are conducted by each subsidiary, with a small team retained at group level to provide advice.
  • Partially centralised - treasury policy is defined by group treasury, which may also advise or instruct subsidiaries on investments or hedging activity etc. Back-office operations may be centralised, but subsidiaries retain responsibility for executing deals with local banking partners.
  • Fully centralised - treasury policy making, decisions and most banking and financial activities are undertaken at group or regional treasury level.

Although a fully centralised environment may appear to be the most suitable structure for multinational corporations, in reality this is not necessarily always the case, so some may instead have a hybrid or even decentralised structure.

Treasury transformation: the need to centralise

The treasury structure of a particular organisation is generally dictated by the company’s strategy, organisation and underlying business model. Nevertheless, the growing trend in recent years has been for treasuries to centralise their operations. "This gradual shift towards centralisation has been encouraged by technological advances that have made it easier and cheaper to centralise, and also by governance regulations which require a high level of transparency across the organisation," says Hemang Desai, Regional Head of Commercial Banking Sales, Global Liquidity and Cash Management, HSBC Bank Middle East.

The current economic environment has also pushed companies to revisit their existing cash management structures as they seek to maximise efficiencies and increase visibility across the business. The arrangement of treasury operations - and especially the degree of centralisation - will have a major impact on these cash management structures.

Centralisation of treasury can provide immediate benefits in terms of:

  • Holistic cash management: complete visibility of bank balances, short term liquidity and long term cash forecasts, plus optimisation of banking relationships and enhancement of returns.
  • Risk mitigation: by having controls in place to manage market, credit, operational, compliance and regulatory risks more effectively.
  • Cost optimisation: through reduced transaction costs, better FX rates, a decline in manually-intensive duplicate processes and the streamlining of activities, plus maximising economies of scale.
  • Operational efficiency and control: centralisation can help protect against error and fraud through standardisation of policies and procedures.
  • Increased performance: achieved by better cash management through enhanced returns on surplus cash and by making more effective use of internal liquidity to fund growth, rather than having to rely on more costly bank facilities.
  • Stronger relationships: better rapport with key stakeholders, such as banks, vendors and customers.

In view of the extent and value of these benefits, many leading treasuries regard it as essential to determine and periodically re-evaluate the degree of centralisation that is desirable and practical from their corporation's point of view.

UAE as a regional treasury centre

When picking a treasury centre location, most corporates tend to focus on the following external requirements:

  • Banking infrastructure: does the location have a robust banking network, liberalised capital markets, efficient liquidity and investment options and access to equity markets?
  • Staffing: are trained personnel, with suitable language skills and industry expertise readily available?
  • Time zone and proximity: if an RTC was established in the country would it be close to the corporation's key business operations in the region?
  • Politics and regulation: is the political environment stable and is the regulatory regime favourable?
  • Government initiatives: are there financial incentives for setting up an RTC in the location? Are levels of taxation, stamp duty and VAT acceptable? Are any capitalisation rules not overly onerous?

Based on these criteria, UAE has emerged over the last couple of years as a popular choice of location for RTCs, comparing favourably with other possible locations in the Middle East. Its geographical location means that it is well-positioned to cover the MENAT region with ease. UAE also has robust banking and communication networks that bear comparison with more established RTC locations, such as Hong Kong, Singapore and London. The benefits of having an RTC in the UAE include:

  • A high degree of economic and political stability, various government initiatives to support digitisation and growth, top ranked in MENAT by Transparency International
  • First in MENAT and 17th worldwide in the World Economic Forum's Global Competitiveness Index, the largest ICT hub in the Middle East, already home to numerous multinationals' regional headquarters and treasury centres
  • First in the Middle East and 18th worldwide in Long Finance's Global Financial Centres Index, the location of World Bank and OECD offices, plus those of 49 operating banks, together with active bond and equity markets
  • First in MENAT and 26th worldwide in the World Bank's ease of doing business index
  • Ranked first in MENAT and 13th worldwide for trade logistics by the World Bank
  • Well educated and trained work force, relaxed labour policies, ranked first in MENAT on the Global Talent Competitiveness Index (2016 rankings)
  • Favourable personal and corporate tax environment, zero rate income tax and 83+ Double Taxation Avoidance Agreements
  • Strong IP protection, in the top quartile of the UNDP Human Development Index

Conclusion

UAE clearly makes a strong case for itself as an RTC location. However, actually opening an RTC there is immeasurably easier if a corporate treasury can rely upon the support of a banking partner that not only has a strong UAE presence but that can combine this with a deep understanding of the corporation's business and proven expertise in centralisation projects. Then, based upon its experience of global RTC best practice, it will be able to support treasury in achieving a successful implementation.

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