• Business flows and working capital cycle severely impacted by pandemic-led drop in employment and consumer demand
• Production and supply chain diversification may not impact China as much as speculated, as consumption demand in longer term expected to remain high
• End of fiscal stimulus may delay recovery till 2022 and beyond  

The dramatic drop in employment globally as a result of COVID-19 mitigation measures has caused a drag on consumer spending and production that is impacting business flows and working capital cycles. Faisal Ameen, head of global transaction services for Asia Pacific and Japan at Bank of America, observed that companies are preserving cash flow and identifying additional avenues to liquidity in order to survive. The challenge for transaction banks is compounded by historical low interest rates which started before the pandemic but had since been exacerbated by quantitative easing and accommodative monetary stance to stimulate economic recovery.

Amid the escalating trade friction between the US and China, companies are speculated to be shifting production bases and supply chains closer to their home markets. Ameen however opined that the impact on China may not be as drastic in the longer term as perceived. He predicts that Chinese consumption demand in the future will continue to drive a significant onshore production and supply chain capability that will be difficult to be entirely shifted. Meanwhile, there is risk that as fiscal stimulus starts to unwind and taper as economies recover in 2021, full global economic recovery may be delayed and extended beyond 2022. Bank of America in the meantime is focused on helping FI and corporate customers integrate, automate, digitalise their trade, payments and treasury capabilities.

The following is the full edited transcript of the interview.

Foo Boon Ping (FBP): What is the impact of COVID? 

Faisal Ameen (FA): When I respond to thisquestion, it is not just going to be the effect of COVID-19.

And we see the direct impact of COVID-19, where we've actually seen vast swaths of population unable to work the way they used to work. Many of the industries and sectors and countries being impacted across the region, factors of production down significantly, underlying flows also being impacted significantly.

Business flows and working capital cycle impacted by pandemic-led drop in employment and consumer demand  

We saw many companies that actually stopped production, initially within China as it tries to put in COVID-19 measures to deal with these challenges. We saw a huge amount of liquidity squeeze, where liquidity in the market was drying up, there was no access to asset levels. 

And then, as the capital markets came back, we then started seeing a flood of liquidity, and there was a flight to quality. And that was fairly consistent across the globe. And we also saw, collapse on the demand side, resulting from COVID-19. Markets like China, Taiwan, and Vietnam started seeing a big recovery much earlier than others as they manage the COVID-19 process in a much tighter fashion. We see that markets like India, in Southeast Asia, with the exception of Vietnam being challenged for a lot longer, because of uneven challenge. 

What we started seeing is longer accounts receivable, 

DSOs (days sales outstanding) started expanding, they tried to stretch their days payables outstanding as well. As they got pressured on the working capital cycle, clearly, all across the globe.

FBP : What kind of outlook do you think it will have?

FA : If we're looking at the 2021 outlook, we're expecting a very slow recovery.

There is a lot ofchallenges when it comes to employment rates across the world. And I think that the recovery is going to be slow because it's going to be underpinned by a drag on consumer spending recovery. There is going to be an impairment in the demand for trade. Not all countries are going to be recovering at the same rate. We think that India and Southeast Asia are still going to have a negative outlook in the near term. 

Production and supply chain diversification may not impact China as much, as consumption demand expected to remain high

We hear a lot about production base diversification, shifting supply chains and shifting production. The reality is that the supply chain is going to take a lot longer to make a shift, whereas production can shift quicker. But what is shifting in terms of production are things which are going to be far more automated. There's a lot of speculation that China's going to lose out in terms of future production capacities. But China is going to be a cornerstone of consumerism and consumption. So whatever you have in terms of production in China is not going to be sufficient to satisfy China's own domestic consumption requirements, it will mean much higher levels of investment to satiate that demand. China has taken 30 years to get to this level of production efficiency and variety and the extended supply chain that is not easy to replace, it could take a good decade to 15 years, even with force push for that diversification. It's not as simple as “okay, I decided that I'm going to lift and shift and it will happen”. 

Are you going to have the same level of productivity when you shift your factors of production? It's a factor of how much freedom people have to move within their cities and countries, how much pent up demand there is, how much cash flow for expenditure there is? How comfortable are people with the progress of their cities and their countries in tackling COVID-19 or at least managing COVID-19.

Governments have put stimulus in place, you've got furlough schemes, loan repayment, moratorium across the region, and many of these are going to come to an end, because governments don't have massive deep pockets.

The future outlook is also going to be weighed by what companies are doing. Many more companies are preserving cash. They're trying to have better quality forecasting. Looking at centralised liquidity and treasury payments and receipts because they need a tighter hold on the working capital cycle. In deposits, there's been a flight towards quality and so, institutions like us are awash with cash more so than we actually need and optimally place out. 

Many companies are reviewing the types of credit facilities that they have committed vis-a-vis uncommitted, short term vis-a-vis long term. And those mixes are changing depending on who you are and what industry you're in. And then it's not just banks, but companies are reassessing the credit ratings of suppliers, banks and clients. These factors are also going to have some ramifications. Because until companies start spending money to increase the factor of production, you're going to see much more muted growth. 

End of fiscal stimulus will delay recovery till 2022 and beyond

Everyone is now focused on COVID-19 and COVID-19 measures, and as those measures pare off, you will start seeing the ramification of that play out in 2021. So I think that recovery would be in 2022 and beyond. I wish I could paint a much more optimistic picture. It's important to have a fairly pragmatic view, and then hope that it is a little bit better than that pragmatic view.

FBP : And for you, how are you making adjustments to your business? 

FA : Volumes, in trade are down, in payments are up, but the value is down. So while we're processing more payments, the actual total value of those payments are down, and that is absolutely reflective of the underlying economies in all of our markets. Our CEO made a commitment that no one would lose their jobs due to COVID-19. And while others have taken a different view, he's very much stuck to it, and I think the employees have really appreciated it. Clients actually need you more. And you cannot switch out your coverage when there are more dialogues that are happening. They're more or less being adapted to connect with your clients much more frequently. They've actually seen a lot more engagement. And the other thing is that the clients are also trying to figure out where everything is heading, what are we observing not only within their industry, but across the industries. And so there has naturally been a desire to connect with their bankers. 

FBP : How would that impact your FIs? Or your correspondent relations in the region?

FA : We choose the FIs that we want to partner with, it is, very important that they also choose us, because it's not a one way, it's a two way relationship.

Focus on helping FI and corporate customers integrate, automate, digitalise and have more intelligent treasury capabilities

And it's not the support in terms of the liquidity and trade and banknotes and, other services that we provide. It's also the advisory because of where we are in the kind of exposure that we have in our client base, we are seeing a lot across an entire spectrum of geographies and industries. And the constant pressure that financial institutions have from non-regulated players, and our ability to help them navigate through that, that is being really appreciated. It's a situation where these non-regulated players are coming in and completely eliminating the fee and attacking the FX aspect. And clearly, institutions with a large retail presence have been seeing some of the flows move to these third-party payment providers. 

Our FI clients came to us asking for a solution that allows them to initiate instructions, by any means or any channel to send any payments, whether wire or ACH, in any currency. And using any FX rate, whether it is live rate, guaranteed, debiting any account, as cost effectively as possible. And as quickly as possible, and to ensure that the payment is received, within a very defined time. You might think is onerous, is completely reasonable, because these are the areas where they need to be able to deliver in order for their international payments to stand up against competitors. It's challenging for FIs, payments are handled by transaction bank, FX is handled by a global market entity. We're very fortunate because we've got really close working partnerships, and we were able to look at the solution holistically rather than worrying about what part of the transaction belongs to which part of the business and that was pretty powerful. As soon as we launched with this one client, there were 33 others that wanted the solution immediately, across the world. And that has been the kind of things that we've been able to support from a product perspective, not just an overarching liquidity support and solution.

FBP : How else are you helping your FI and corporate customers?

FA : One aspect revolves around the push for automation, digitalisation that we've been doing with our clients for a long time and enabling them to accelerate some of the adoption, How do we get our clients to have a much more intelligent treasury capability and capacity, conduct business in real time, simplify the operating environment, deliver actionable insights, and the last area being risk mitigation, including detecting and managing fraud. 

We've introduced the CashPro Assistant so that you have availability of servicing on a real time basis. We've introduced e-signatures to make the ability to interact with the bank and do that in a seamless fashion. We've introduced mobile wallets, intelligent receivables, reconciliation capabilities, and virtual cards and we're also looking at virtual account management solutions for e-commerce flows. We tie that back in so that our FI clients can also serve as their clients there, online ecommerce partners across the world. Just like our corporate clients need that service to look at “on behalf of” solutions for them on a cross regional basis. 

We're giving insights in terms of how treasurers are reacting. We're doing our own surveys, in terms of how, each treasurer has managed their current challenges, what are they focused on, and some of the insights on their own liquidity and how they're faring, and so that they can have considered judgments in terms of how they want to deploy themselves. 

For our FI clients. We've been very much invested in the swift GPI, so that they have visibility in terms of the charges, as well as the investigation in payments when it leaves them, and they can track those payments online. And then we're introducing cashflow forecasting that's being rolled out in quarter one 2021. 

It's AI enabled cash forecasting solution. It aims to automate the cash forecasting process to improve accuracy and support working capital decision making, not just getting data, suggestions in terms of what the deployment avenues would be as a result of that tying it into their cash flow forecasting capacities. 

We're also investing in a major way, in completely revamping the underlying infrastructure of this bank, and it's a billion-dollar initiative, a huge undertaking which we're fully committed to. In fact, our first country, Indonesia is going live in three weeks. And thereafter followed by China and many other regions to Asia's leading in that deployment. And it's not about real time payments, it is about real time value. 

Because it then talks about the ability to deploy that cash in multiple time zones in a near instant scenario. So it enables many other things and it simplifies your reconciliation process because you're not only looking to be paid, but you're getting the value for it. And your working capital cycle becomes very different. And those are some of the examples of the kinds of things that we're doing.

But we're also looking at the potential to adopt things like Ripple, not for their digital currency, but just for the movement of funds on a fairly real time basis. And so it's not about looking just within what we can do, but where there are platforms that we can leverage that help with clients, and for them to be a little bit more efficient. We're absolutely looking at that. And I spoke about VAM (virtual account management) solution for fit. And to be able to help multiple e-commerce vendors within that spectrum and be able to bifurcate their payments from everybody else's payments, is also going to be important, and therefore that's where virtual account solutions come into play.

FBP :  Thank you.