Hedging FX

Commentary

Turkey is a challenging environment – but it works. Inflation is around 85%, the currency is depreciating rapidly and very expensive to hedge, and funding is regulated and very hard to obtain. Two years ago, restrictions were placed on the remittance of dividends, though today, those restrictions have been lifted and there are no formal exchange controls. 

Despite all this, participants on our call generally reported growing businesses, with positive results.

The main challenges:

• Overdrafts are not available, or they are prohibitively expensive. This is not new: the country has always imposed cost penalties on short term borrowing. The central bank now requires a reserve deposit for all loans: one participant said this was 60%, while another reported 200%. Either way, this has effectively made local loans all but impossible.
• One way of satisfying reserve requirements is to purchase Turkish government T-bills. No foreign bank is prepared to do this, so funding via international core relationship foreign banks is no longer possible. Local banks are generally also reluctant to lend: the few exceptions are government owned banks.
• Bank deposits in foreign currency hardly receive any interest; local currency ones attract interest at around 30%, against an inflation rate of about 85%.
• Given this, and given the high rate of inflation, there is a lot of pressure on working capital: customers are seeking longer payment terms, while suppliers are looking to be paid early. One participant has sought, without success, to put in place supply chain financing solutions.
• Most participants manage to run their businesses with no debt. Cross border intercompany

Commentary

In our last call on Colombia and Peru in October 2021[https://www.complexcountries.com/treasury-fx-in-colombia-peru], there were concerns about political uncertainty. Since then, the president of Peru has been impeached and a left wing former guerrilla elected president of Colombia has been beset by scandals. So how has this impacted the companies operating in the countries?

In short, not a great deal. Currency volatility continues to be a challenge and reduced foreign investment has hampered growth. But in terms of politics the markets are relatively sanguine as the respective governments stumble along without enough power to make radical changes and the long run potential remains.

From a Latin American perspective both countries are relatively easy to operate in for treasury, with local teams coping well with the challenges.  

Colombia:

• Most companies repatriate cash via dividends and intercompany loans. The process involves a lot of admin, but it works.
• Funding is relatively easy but also entails a lot of bureaucracy and it is essential to get communications with DIAN (the tax & customs agency) accurate.
• Some companies avoid the transaction tax (‘cuatro por mil’) by parking cash in fiduciary accounts for 24 hours. It saves money but, again a lot of form filing.
• The currency volatility also caused one participant to have their local credit dramatically reduced
• Citi is the

Commentary

Egypt has been through a tumultuous period recently, with significant economic and political turmoil, severe foreign currency shortages, and a generally difficult operating environment. In this situation, it is a relief that the country is making the headlines a lot less, so it was time to see where things stand.

Overall, the message which emerged is that the country is indeed stable, but that the recovery is taking longer than hoped. The main issue appears to be an IMF package which was agreed at the end of 2022, but whose implementation seems to be bogged down by disagreements over the timetable. Two key elements of the agreement are the liberalisation of the FX market, and the sale of some 32 companies which are currently owned by the government. Unsurprisingly, the government is seeking a longer time to execute the company sales, while foreign investors are waiting for the inevitable currency devaluation before making any significant asset purchases. It was not clear how the country would get out of this impasse.

This leaves our participants to manage through the current situation. Many are in industries which receive preferential treatment for FX, such as pharmaceutical or food related industries. However, even they frequently struggle to get FX allocations. Also, they run a variety of business models, with offshore sales in hard currency and imports for onshore sales in EGP both being common.

The picture which emerged was interesting:

• The allocation of FX is not decided by the central bank. It is the decision of each bank. However, when a bank runs out of foreign currency, it can no longer process foreign remittances.
• The main source of the country’s foreign currency is Egyptians working abroad, especially in Saudi Arabia and other Gulf countries. 
• This means it is better to work with banks who have

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Commentary

FX and currency hedging are complex topics, which generate a lot of discussion in most companies. We held this session to see whether members are changing their hedging strategies in response to the recent increase in currency volatility, coming after a period of (relative) stability.

The quick answer was that few, if any, participants are reviewing their policies for this reason. Several are indeed reviewing their policies, but this is part of an ongoing cycle, under which most people revisit their policies regularly, to make sure they are still appropriate. There is consensus that a hedging policy, once decided, should be consistently followed – though many of the policies described allow for some degree of judgment around a central approach.

For the rest, the discussion below is one of our more difficult reads, but maybe more worthwhile for that. It is long and complex: I will not try to cover all the points. The policies implemented show a lot of variety:

• Some hedge future cash flows, while some hedge balance sheet, and some hedge both.
• It is important to be clear about the objectives of hedging. These varied amongst participants. There is a complex relationship between budgets and hedging.
• Most participants are looking at options, though not many are using them, mostly due to cost.
• Especially for balance sheet hedges, most participants (but not all!) hedged irrespective of cost – though there are always exceptions, especially for