Letters of Credit (LC)

Corporate Treasury & FX in Egypt

Report date: 
29 Oct 2024

Commentary

Several countries with the worst financial crises have decided to implement painful measures to improve their economies. We recently covered Turkey; this report is about Egypt, and Argentina will follow soon.

The measures are well known: significant devaluation (usually more than 40%), and raising interest rates to punitive levels - 30% to 50% is the norm. The impact on the domestic consumer is significant, but the early signs are that there is some improvement. Inflation levels are generally coming down, foreign exchange shortages have begun to ease, and foreign businesses are starting to have greater confidence, though all remain cautious.

This is certainly the case in Egypt: participants on the call all reported business levels which were difficult but not dire, and less difficulty repatriating funds. Inflation has been 36%, coming down to a reported 26% in September 2024 – but with a peak of 70% to 90% on some key food staples.

Sadly, geopolitics cannot be ignored. Turkey and Egypt live in a troubled neighbourhood: Egypt has a border with Gaza - a massive influx of refugees could destabilise the country. Its own recent history is one of constant conflict between more radical religious elements and governments which tend to be authoritarian, but relatively secular and pro business. Importantly, the United Arab Emirates and Saudi Arabia were cited by participants as a major source of foreign investment, which has considerably helped with the foreign exchange situation. In particular, the UAE has signed a multi billion dollar agreement for the development of a significant area on the Mediterranean Sea – the precise amount is not certain, but it appears to be at least USD 15bn, with total value potentially being above USD 100bn.

There is a problem on the southern border as well: Ethiopia is building a dam on the Nile. Egypt takes a very dim view of this – but it is not receiving much publicity.

What does this mean in practical terms?

  • Pressure to use documentary credits (LCs) has....
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Topics covered in this report: 
Bank Relationships, FX, Hedging FX, Letters of Credit (LC), Customs, Factoring, Cash Repatriation
Service providers discussed in this report: 
Standard Chartered, HSBC, QNB, Citi, SWIFT, Commercial International Bank Egypt

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Treasury & FX in Bangladesh, Pakistan & Sri Lanka

Report date: 
20 Jan 2023

Commentary

Pakistan, Bangladesh, Sri Lanka – three countries with sizeable populations and even bigger economic and social problems. They are difficult places to do business at the best of times – but they have become even more problematic with recent world events, limiting tourism receipts in Sri Lanka and restricting the apparel export business in Bangladesh.

The themes across the three countries were remarkably consistent, though there are variations in the detail:

  • For all our participants, these are important markets, so they are staying there, even though it is very difficult to get currency out. However, one participant is in the process of divesting their entity in Pakistan.
  • FX has always been an issue in these countries, but it has got worse recently. However, the prospect of an IMF package has led to some improvement in Sri Lanka.
  • Officially, none of the countries has strict exchange control regulations, but in practice, they are restricting the outflows of hard currency by a series of administrative measures. Goods imports tend to be prioritised over services, royalties and dividends.
  • In Pakistan, central bank approval is required for all
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Topics covered in this report: 
Hedging FX, Cash Repatriation, Dividends, Royalties, Funding, Intercompany invoices, Letters of Credit (LC), Bank Relationships, Investing, Imports, intercompany netting
Service providers discussed in this report: 
HSBC, Standard Chartered, Deutsche Bank, Citi, Sampath Bank, Habib Bank, Commercial Bank (Sri Lanka)

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FX & Treasury in Egypt

Report date: 
1 Nov 2022

Commentary

Egypt is a challenging environment – but one which seems to work overall. The country went through a bad period in 2015/2017, when foreign currency was auctioned, and in very scarce supply. The situation then improved, but has recently deteriorated again. This is hardly surprising, given the role tourism plays in the economy, and the combined impacts of COVID and the Ukraine war.

The situation reported by all participants is that there are no formal exchange controls, but banks are rationing hard currency according to a priority system, under which essential goods, such as food and pharmaceutical goods, get paid first, and items such as services, royalties and intercompany debt are satisfied last – if there is any currency left. The way in which this is implemented varies from bank to bank, so it is vitally important to maintain good relationships with your banks. The common themes were:

  • Most participants sell hardware offshore in hard currency, and provide services onshore billed in Egyptian pounds. This has worked well, but the distributors are finding it increasingly difficult to get access to the hard currency.
  • Some are requiring LCs, on the grounds these improve the chances of getting hard currency when payment is due. However, banks are reluctant to issue them, and they can be very expensive.
  • Egypt is in advanced negotiations with the IMF over an aid package, which should ease the payment issues. This is expected to be accompanied by a devaluation: this is further complicating the FX
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Topics covered in this report: 
FX, Hedging FX, Letters of Credit (LC), Funding, Cash Repatriation
Service providers discussed in this report: 
Citi, HSBC

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Treasury & Banking in Ethiopia

Report date: 
22 Mar 2022

Commentary

Ethiopia is a deeply troubled country: it was the site of a major famine in the 1980s, and has a long history of civil and other wars, which have resulted in some former regions now being independent states. It has also had a series of revolutions, and turmoil continues to this day.

In these circumstances, business is – unsurprisingly – difficult, with foreign currency being difficult to access. Despite this, participants generally have successful businesses, with a remarkable consistency in approach and problems:

  • Most businesses provide infrastructure type hardware products. Typically, the hardware is sold outside the country, and paid for in hard currency. Warranty and maintenance services have to be provided onshore and billed in local currency – it is very difficult to remit the profits back to HQ, and trapped cash builds up.
  • The hardware imports are usually covered by LCs – but these can be expensive (up to 11%), and difficult to obtain. It is also not unusual for their settlement to be late, by up to nine months is one case.
  • No international banks operate in the country. This leads to the following issues:
    • The local banks often do not speak English, and have a tendency not to turn up for meetings when they have been arranged.
    • This often results in a need for face to face meetings, which can be challenging, with current travel restrictions
    • There is a need to recruit and maintain local staff to manage the resulting relationships – most treasurers do not like doing this.
    • Most processes are...please sign in to continue reading
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Topics covered in this report: 
Banking, Corporate Treasury, FX, Cash Repatriation, Letters of Credit (LC), Intercompany invoices, Sovereign Bonds
Service providers discussed in this report: 
Mashreq Bank, Nib International Bank, Wegagen Bank, Zemen Bank, Commercial Bank of Ethiopia, Awash Bank, Dashen Bank, Bunna Bank, Behran International Bank

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