Hedging FX

Commentary

Amongst treasurers, Latin America does not have a great reputation. Even if we have come a long way from the past of military dictatorships and very difficult regulations, it remains more complicated than many other regions. Peru, Colombia and Chile all have seen significant turmoil in the recent past.

So – where do we stand today? It says a lot that, on this call, the peers’ main concern was about whether to use local or foreign banks, and whether the FX rates for foreign remittances were better onshore or offshore. 

Of course, there are causes for concern, especially about the direction of the economy in each country. Peers gave different views on this, especially in Colombia. But, generally, the problems companies face are manageable:

• The biggest complaint was about the financial transaction tax in Colombia: as its name suggests, the “cuatro por mil” is a 0.4% tax on every money transfer above a monthly threshold. This can represent a significant cost when cash is being moved between banks, even within the same entity. There is a workaround which involves the use of a fiduciary: this does not work for transfers with third parties, and it blocks the cash for 24 hours. Another alternative for cross border international payments between subsidiaries is to settle them offshore.
• All peers are working to improve working capital. Factoring and supplier finance solutions are available, but factoring is felt to be expensive. 
• Other avenues for improving working capital include trying to use more modern payment methods. There was a feeling that these countries are maybe less...

Commentary

After Turkey and Egypt, this session discussed Argentina: have the shock devaluation and the rise in interest rates had the desired effect of making the currency more convertible, and starting the economy on the – slow and painful – road to recovery?

As in the other two cases, the response was one of guarded optimism. Business appears to be holding up, and the flow of currency out of the country has been improving. Also, as in the other cases, the exchange rate has stabilised. This does not mean there are no issues and everything is plain sailing: the Argentine consumer is going through a very difficult period. But one – Argentinian – participant said the pain is being accepted, at least for the time being. Inflation has started to come down: to put it in perspective, in September 2024, it had come down to an annualised rate of 209%, against 237% in August (source: BBVA). The central bank’s goal is 18%, and participants are budgeting for something between 30% and 50% next year,

Of course, this is Argentina, so nothing is simple:

• Foreign currency remittances have improved – for current imports, i.e, ones since December 2023.
• Many imports from before 2023 still cannot be settled. Various options exist:
  • BOPREAL bonds: these are three series of US dollar denominated bonds issued by the Argentine government, which will mature in October 2027 (series 1), June 2025 (series 2) and May 2026 (series 3). At maturity, the dollars can be remitted to settle import invoices, or, for series 2 and 3, dividends. These bonds can be sold in the secondary market, for a haircut which is usually about 30%. There has been talk of a new series specifically for old invoices.
  • Blue chip swaps: these involve using pesos to buy USD bonds, which can then be sold in dollars. The haircut on selling these varies: it has been as high as.....

Commentary

Turkey has been in some form of economic crisis for a long time. CXC discussions on it always highlight the many challenges: high inflation, funding issues, FX shortages etc. At the same time, there has always been an array of workarounds: the country typically avoids official regulatory measures. For example, there have never been official exchange controls – it was just that banks had very limited access to foreign currency, and had to prioritise their customers.

Last year, following the elections, Turkey adopted some very conventional – and painful – economic policies. The currency devalued by 35% between June and July 2023 – from 19 to the USD to 26. The benchmark interest rate was fixed at 50%. Prior to this, there had been a series of unconventional measures: official interest rates were low, but banks were required to buy bonds issued by the Turkish government for between 60% and 200% of the value of any loan they made, effectively killing the loan market. With the new measures, the situation seems to have stabilised: foreign currency is now freely available, the exchange rate continues to decline, but is more stable. It is now significantly less difficult to obtain local funding. Inflation has reduced: it was at about 85%: it is now closer to 30%.

Interestingly, three other countries which have been in very difficult positions have adopted similar austerity measures: Argentina, Egypt and Nigeria have all been through significant devaluations and greatly increased interest rates. This leads to short term economic contraction, but seems to be having positive results for the fundamentals.  

How has this affected business and the people? The consensus on the call was that the situation was difficult, but improving. Some participants were wondering whether they should change their business model to reduce the risk, but all feel it is a country and an economy which is too important to ignore.

Specifics:

• Cash management operations have been normalised. One participant has excess foreign currency, which they place in an offshore bank account in Abu Dhabi – this process has been in place for some time.
• Banks are once again willing.....