Venezuela

Commentary

All international companies put a lot of effort into avoiding having cash trapped in emerging countries. But, despite our best efforts, there are still situations where cash accumulates in places from which it can’t be repatriated. This quickly becomes a lose/lose situation for the MNC: often the countries involved have high rates of inflation, and usually provide low rates of return on bank deposits – or even no return at all. So the cash loses its economic value, while counterparty risk quickly becomes an issue, over and above the sovereign risk concerns. Further, depending on the company’s accounting policies, exchange losses can negatively impact reported profits, as the local currency depreciates.

The purpose of this call was to discuss how to make the best of this bad situation – to look for ways of managing the issue.

• Generally, there was consensus that standard risk management approaches continue to apply. No-one is prepared to ignore their usual principles.
• However, there was consensus that some flexibility may be appropriate. The question is – how much?
• The first problem is bank deposits: all participants preferred to continue to use international banks, even if they often provide lower rates than local ones. The counterparty risk issues with local banks were not viewed as sufficient to offset any increased return.
• Most participants were in favour of putting pressure on the international banks to increase rates: in Latin America,  the European banks were generally viewed as being more responsive than their American counterparts, with Santander being used frequently: BBVA was