Uncertainty ahead, so better capital efficiency urged

An office worker at Raffles Place.
An office worker at Raffles Place. ST PHOTO: LIM YAOHUI

Companies here need to get their own houses in order to ensure that they can weather the volatile financial conditions ahead, according to a leading financier yesterday.

Mr Gregory Seow, the corporate banking head for South-east Asia at Bank of America Merrill Lynch, advised firms to make it a priority to improve their capital controls and operating efficiency, given economic uncertainty and the impending interest rate hike in the United States.

He told The Straits Times: "Companies should first ensure that, in this uncertain time, proper funding is put in place. Make sure you have enough internal buffer but, more importantly, have a working capital efficiency programme to ensure proper liquidity and cash management."

Singapore businesses seem aware of the challenges ahead, with many expecting lower profit while becoming more cautious in using surplus cash this year, according to a survey the bank carried out of 630 chief financial officers in Asia, including 30 in Singapore. It found that 53 per cent of Singapore respondents expect profit to decline this year while 80 per cent saw a US rate hike as a key risk this year. Both figures were double the regional average.

"Compared to their regional counterparts in Asia, Singapore companies appear to be more prudent, as this market is an open economy vulnerable to issues - the Greek debt crisis is still unfolding, China's growth is slowing and domestic conditions are pressured by restructuring," Mr Seow said.

FINANCIAL HOUSEKEEPING

Companies should first ensure that, in this uncertain time, proper funding is put in place. Make sure you have enough internal buffer, but more importantly have a working capital efficiency programme to ensure proper liquidity and cash management.

MR GREGORY SEOW, corporate banking head for South-east Asia at Bank of America Merrill Lynch, on companies meeting the challenges ahead

He stressed that the fundamentals of local firms are actually robust despite the pessimism, with many flushed with liquidity from retained earnings or long-term credit acquired during this period of low interest rates.

"But the challenge for them now is to meet the returns. That's where capital efficiency comes in. It's been a buzz word, especially among the larger multinationals that straddle several jurisdictions, but the awakening just came and not enough has been done so far. This will be a priority this year."

Mr Seow also noted that his bank's clients are taking a more selective stance over expansion through mergers and acquisitions.

The prudent climate suggests that corporate bond issues by local firms are unlikely to grow from last year's level.

"Local companies are definitely not rushing to raise funds in the capital market," added Mr Seow.

"They are planning to grow but more so organically, and a lot of them have already acquired five- to 10-year debt. Companies will want to manage that first."

The regional pipeline is there, Mr Seow said, but volume will likely decline slightly compared with last year.

A version of this article appeared in the print edition of The Straits Times on July 02, 2015, with the headline 'Uncertainty ahead, so better capital controls urged'. Print Edition | Subscribe