Funding

Corporate Treasury Approaches to Managing Geopolitical Risk

Report date: 
8 Mar 2024

Commentary

Geopolitical risk, or simply political risk, is a major challenge for treasurers. We had all become used to viewing Iran, North Korea and Myanmar as off limits, and handling issues in Venezuela and Argentina. But the Russian invasion of Ukraine and escalating trade tensions between the US, the EU and China have made the world a more dangerous place.

This call was scheduled at the request of one member, who was looking for ways to measure political risk, or at least get external indicators they can use to convince management to tread carefully. More on that below. But we quickly moved to discussing what to do, once you have identified the risk. After all, if management wants to do business in a risky country, treasury has to make it happen. 

Generally, peers participated in senior level discussions on strategy and objectives, but felt their main contribution was through managing the balance sheet:

  • Cash repatriation: the main way treasurers can reduce immediate risk is by repatriating restricted and trapped cash. This often involves a cost: withholding tax in the case of dividends, or creating accounting losses on currency conversion. Tax departments and CFOs have to be persuaded this is the right thing to do. Several participants regularly circulate the amount of trapped cash by country to the business, and even the board of directors: this helps change attitudes.
  • Change the business model: this is more difficult, but it can involve moving to invoicing in hard currency to reduce FX risk, or moving to selling through remarketers. One participant has moved from a single manufacturing location in China to multiple production sites in different regions. This was partly due to COVID disruptions and supply chain concerns, but it also addresses the potential exposure due to increasing tensions with China. 
  • Change the funding structure: in some markets, participants have moved from funding via intercompany loans from offshore locations to onshore external borrowing. This reduces the net exposure – provided the company is willing to walk away from the local debt in a crisis. In turn, that raises a series of issues – but at least, it gives more options. It is often more expensive.
  • Manage the accounting exposure: some

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Topics covered in this report: 
Cash Repatriation, Funding, Political Risk
Service providers discussed in this report: 
BNP Paribas, Economist Intelligence Unit, Brown & Brown, Bloomberg

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India Corporate Treasury Update

Report date: 
20 Feb 2024

Commentary

Calls on India are always well attended: there is never a shortage of items to discuss. It is already a very large market, and it continues to grow – so all international companies are motivated to manage its many complexities. 

Complexity is something at which India excels: the regulations are many, varied, and never easy to navigate. It can be difficult to know exactly what they are: as often happens, we spent a lot of time trying to establish what is, and what is not, allowed. At the same time, the country has come a long way. Many things which used to be forbidden are now allowed: cash can be brought into and out of the country with relative ease, though not without red tape. The authorities are relatively flexible and business friendly. India is in the vanguard of efforts to move away from cash for retail transactions: this may be mostly for tax reasons, but it reflects the country’s leading position in technology.

At the same time, it remains a very large country, with significant regional variations, including language, climate, culture and religion – so differences will continue to exist. Our conversation covered the following points:

  • The economy continues to perform well, though competition is fierce – and, in some areas, India continues to favour national champions.
  • Operations: most peers had different legal entities in India involved in different activities: manufacturing, R&D, shared service centres, marketing, etc. Intercompany lending within the country, while permitted, can be complicated.
  • Onshore versus centralised treasury: many MNCs have local treasury teams, due to the regulations and complexity. This is beginning to change: several participants are starting to bring India into their centralised structures. 
  • Similarly, most peers are only using international banks in the country, and shutting down relationships with local banks. One participant attributed this in part to a regulatory requirement to link lending activity to transactional business – especially as the foreign banks can now provide complete services.
  • Another peer

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Topics covered in this report: 
Bank Relationships, FX, Hedging FX, Payments - cross border, Intercompany loans, Cash Pooling - domestic, Cash Repatriation, Payments - domestic, Funding
Service providers discussed in this report: 
Citi, HSBC, JP Morgan, Bank of America, Standard Chartered, BNP Paribas, Deutsche Bank

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Turkey Corporate Treasury Update

Report date: 
20 Nov 2023

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
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Topics covered in this report: 
Bank Relationships, Hedging FX, Funding, Cash Pooling - cross border, Cross border sweeping, Dividends
Service providers discussed in this report: 
BNP Paribas, Deutsche Bank, Citi, HSBC, TEB, ING, Yapi Kredi

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