Cash is king in Thailand

Cash-rich companies in Thailand are taking advantage of currency liquidity to expand operations overseas and acquire cheap assets. The Thai baht is not internationally traded, while many of Thailand’s products and services do travel overseas. This, experts say, is one of the drivers for local banks to expand offshore operations.

International banks are benefitting as many domestic Thai companies do not have global cash management operations in place to facilitate their expansion. The credit crunch is also encouraging Thai companies to look at their own banking practices, standardise some of them and release cash from the system.

“Companies that have available funds are looking for opportunities to acquire other companies or are looking for new markets cross border in order to obtain new revenue streams,” says Kee Joo Wong, head of global payments and cash management at HSBC Thailand. “Asset values are becoming cheap so cash-rich companies are looking for investment opportunities. We see this happening in various sectors, including food and beverages, hotels and property developments.”

Some manufacturing companies in Thailand are now looking to set up shop in countries such as Vietnam and Cambodia, in order to increase their competitiveness and diversify their manufacturing base. Banks say they too are evolving their offerings as companies expand overseas. Thailand suffered the impact of higher oil prices earlier this year when the current account balance swung into a deficit from a prolonged surplus. With oil prices since declining, this is helping to lower production costs for companies in Thailand.

“We continue to advise investors to put on positions in Thai baht securities, because liquidity in this market is still reasonable. Lower oil prices will also help profit margins for many Thai companies next year and will act as a buffer,” says David Fernandez, head of emerging Asia economic and sovereign research at J.P. Morgan.

However, like other emerging markets, Thailand faces challenges for cash management. These include the effects of its fragmented clearing infrastructure and banking practices as well as the paper-dominated commercial processes. Experts say it is not uncommon for sizeable companies to have a large number of banking relationships and bank accounts. But how does this impact their cash management operations? Some companies will have a lot of liquidity spread across these accounts, but they might not have visibility of all the cash and they don’t have controls in place to centralise it. This is one of the inherent inefficiencies within cash management in Thailand.

Another cash management trend is the dominance of paper, whereby companies exchange physical invoices and/or settle transactions by using cheques as a settlement method. This is further complicated in Thailand by a wide raft of taxes that need to be filed, including value added taxes and withholding taxes. The series of taxes necessitate the exchange of paper while the transaction is being settled. However, this is changing, albeit slowly.

“The clearing landscape here, though it is paper dominant and fragmented, is evolving very rapidly. In the last 12 months the clearing landscape has changed completely: from a predominantly paper-based clearing system, electronic clearing is now becoming more prominent,” says Sandip Patil, director, treasury and trade solutions head for Citi in Thailand.

“There is now a state of the art clearing system which is already live for payments with same day credits. The country is also testing our direct debit clearing infrastructure. Very soon we will see cheque exchanges between the banks digitised,” he adds.

Cash management banks are also rolling out multi-bank pooling structures and multi-entity pooling structures. Domestic banks are also on the lookout for liquidity management solutions, which will help to increase visibility of cash across all their accounts and provide them with the tools to centralise this and optimise their cash.

Regulations in Thailand meanwhile stipulate that foreign banks are only allowed to have one branch in the country, but this has not deterred international players. Market players point to new innovations such as mobile technology to settle transactions and also the ability to fund this mobile wallet through direct debits to bank accounts. Concentrating liquidity across multi-bank accounts and across legal entities is also a growing trend.

“Despite being an emerging market with its own challenges, we see impressive innovation,” adds Patil at Citi. “From a branch footprint perspective, the local banks clearly dominate. However foreign banks tie-up with local partners to offer the required footprint to clients. These include tie-ups with correspondent banks, convenience stores, post offices and telecom companies,” he says.

Thailand is a popular destination for foreign companies on the lookout for a Southeast Asian investment location. However, like its Asian counterparts, it is also waiting to see how the economic crises in the US and European financial systems will impact its export-dependent economy. The government recently proposed a $35 billion programme of increased spending and investment in its stock market, in order to keep the stock market and economy ticking over. However there are growing concerns that the economic and political turmoil is taking its toll on the Thai economy.

Banks and companies based in the country meanwhile are looking at export flows as a means of financing their activity onshore, as traditional plain vanilla credit may not be as easily and readily available. With credit spreads widening, there is more pressure on pricing and also on lending restrictions. Investors are increasingly opting to go elsewhere and foreign direct investment inflows have seen sharp declines.

“There is also pressure to improve the infrastructure in Thailand, as some of our domestic clients increasingly look to expand overseas and find ways to improve circulation of funds domestically,” says Raof Latiff, executive director, head of treasury services clearing and foreign exchange, Asia, J.P. Morgan Treasury Services.

“For example cheques are popular instruments in Thailand; however they take time to clear and are considered risky instruments. The movement towards electronic transactions is increasing but there is a lot more scope for that migration from paper to electronic. Companies can only manage their money better if they can also receive it faster; this is the challenge in Thailand today.”

This story was first published in the November issue of FinanceAsia magazine.