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New hope for treasurers seeking to get cash out of Venezuela?
Government intervention into parallel swap market last May and then replacing the parallel structure on June 9 with a new System of Transactions in Foreign-Currency-Denominated Securities (SITME; see related story), left many multinational treasurers scrambling to determine how much of their cash they would be able to convert and repatriate from Venezuela. Now what?
August 09, 2010 -
Issues on International Treasurer’s radar screen this week.
Peer group discussion items formed the bulk of our editorial discussion. We started with a major theme emerging from the development of the Treasurers’ Group of Thirty (T30) fall meeting agenda. Interestingly, there was mixed reaction to topics involving the impact of Dodd-Frank implementation.
August 05, 2010 -
Plugging a hole in the fiscal budget by way of new taxes is not a surprise these days. What’s not surprising either is the corporate creativity in avoiding or minimizing them. Take for example Colombia’s recently created “equity tax,” which looks to collect revenues based on companies’ January 1, 2011 net worth.
July 07, 2010 -
FX Managers Aspire to Higher Performance Levels
Members of both FXMPG peer groups met in March to discuss a wide range of topics, all framed within an ongoing theme of assessing where each of their FX functions were on a “world-class” scale. The consensus was that FX is taking on the basic needs in treasury but has some ways to go. Also on the agendas of both meetings were discussions on:
1) Best Practices for Exposure Identification. Despite hurdles there is still a strong drive to uncover the hidden risk that lurks throughout the businesses.
Key Takeaway: In general, those happiest with their companies’ exposure ID process have a strong link between owning the process and
owning the FX gains and losses.
2) Cash-Flow Hedging: Justification and How To’s. Cash-flow hedging is a new demand in some companies, following on the heels of large changes like mergers. Exposure forecasting remains difficult for most.
Key Takeaway: M&A activity can make cash-flow hedging more complex, in large part because of hidden exposures that invariably pop up in the integration phase.
3) FX Program Primer. Two member companies walked the group through their respective FX programs.
Key Takeaway: In-depth presentations on exposure drivers, risk attitude and hedge approaches afforded members a view of the entirety of two programs, and greater context for comparisons of what can and cannot be replicated “at home.”
May 18, 2010 -
Companies’ rate choices in the post-deval environment will force regulators to issue firmer accounting guidance.
The impact of the January devaluation of the Venezuelan bolivar is beginning to be felt in the corporate community. The biggest question is what rate to use for financial statements. (See also, “Venezuela: A Survival Guide,” IT, February 2010.) In late February, members of The NeuGroup’s Latin American Treasury Managers’ Peer Group and both FX Managers’ Peer Groups convened a conference call to discuss the results of a recent survey of their own design, to which 15 companies responded. This afforded an opportunity to expand on a few points, e.g., which rate each company will use and why, what are the best parallel exchange rate sources, and to what extent members expect to use the parallel market as opposed to the official route via the Commission of
Administration of Currencies (CADIVI).
March 04, 2010 -
By Anne Friberg
Devaluation and hyperinflation may require radical changes to treasury strategies.
The news out of Venezuela in recent months has been unremittingly bad. Its strongman president, Hugo Chávez, moved to nationalize more banks as the economy deteriorated last year. Many of the remaining foreign direct investors fled, leaving the country’s infrastructure in parlous shape. Spiraling inflation from out-of-control government spending finally triggered a move to hyperinflationary accounting for MNCs doing business there on January 1. This was followed by a 50 percent devaluation of the bolivar for oil and imports deemed nonessential one week later.
February 28, 2010 -
Companies with operations in China typically have to fund their local affiliates by infusing them with capital and making intercompany loans; and if the local subs do not sell locally, then they may require a constant source of funding. Pushing more liquidity into China worries treasurers, given exchange rates and other risks, as well as the lack of available “vehicles” for investing any excess liquidity.
A report just authored by McKinsey & Co. provides some welcome news: the Chinese equity market, while still emerging, seems on course to becoming an important source of liquidity (and a platform for M&A) for both local and foreign firms. “A quiet revolution in China’s capital markets: Reforms that attracted little attention in the Western world mark a major step forward in the modernization of China’s capital markets,” was published by James Ahn and David Cogman in July. In this report, the two authors posited that recent and future reforms will give the market a big shot of energy: “These reforms will also encourage the development of the country’s M&A market by allowing industries to consolidate, improving corporate governance at state-owned enterprises, and expanding the capital markets.”
July 26, 2007 -
A little-noticed 2005 Federal Court case in Germany, primarily designed to encourage local investment, is now emerging as a potential factor affecting the ability of German affiliates of non-German MNCs to participate in regional pooling.
November 21, 2006 -
As Mexican courts again refused to order a total recount of the July 2 presidential elections, the peso held near a five-month high.
Analysts noted that regardless of the weeks of civil unrest and protests, the elections results are holding firm, lending strong support to the currency. The peso was little changed in mid-August, at P10.8065 to the dollar.
Coming out (even)stronger
Following a contested election on July 2, the PRD presidential candidate, Manual Lopez Obrador (Leftist), and his supporters have been escalating a series of acts of civil disobedience, from blocking busy intersections to the lobbies of foreign banks.
The goal was to force a total recount of the election results, which the PAN presidential candidate, Felipe Calderon (Conservative), won by a slim margin of by 243,934 votes, or a difference of 0.58 percent.
“As part of his dispute with the election results, Mr. Obrador has organized mass protests that resulted in an economic loss of over two billion pesos,” reported the local treasury manager for one foreign MNC.
Based in Mexico City, this practitioner noted that political upheaval is not entirely out of the ordinary in the country, and thus has had only a muted impact on the local business scene.
A stable outlook
Generally, Mexico remains in good financial shape. According to one treasury operations’ director, inflation is under control at 3 percent, with analysts forecasting small increments by the end of the year to 3.33 percent and a longer term inflation prediction from 2007-2010 of around 5.50 percent.
Overall, “the Mexican peso has performed well against a weaker US dollar with an expectation that it will end the year around P11.30 -11.42,” this treasury practitioner noted.
Working in the local economy’s favor is the continued high price of oil. The local economy is not dependent on oil, but overall, high oil prices are a net positive for Mexico and its currency. One company’s treasury team reported that the demonstrations and strikes have only caused minor inconvenience.
A risk management focus
In the end (and unless political uncertainty escalates), the bout of post-elections turmoil may have ended up as net positive for some some US companies with operations in the area.
“The election caused a pause in our hedging strategy as we had to re-evaluate instruments for longer-dated exposures,” reports the LatAm Treasurer of one US MNC. “Ultimately, we ended up with better rates than our original hedging plan estimates but it was a nail-bitter.”
The bottom line: Treasury needs to monitor the region carefully. “There is always concern in the region as it keeps moving more politically to the left. It shifts our work focus from growth initiatives to
August 15, 2006 -
Currency and capital controls will eventually go away in Asia, according to APEC’s recent and vaguely worded statement about regime liberalization. For the time being, however, restrictions will continue to fuel growth in the NDFs market; this two-part article (1) provides an update on the status of Asia currency NDF markets; and (2) explains some of the corporate FX risk management applications as well as potential risks to using NDFs to hedge Asian FX exposures.
September 20, 2004 -
Managers of FX risk are always on the lookout for signs of trouble ahead in emerging markets. Being able to foretell economic and currency woes gives treasury a chance to reduce exposures, even if actively hedging is not an option (for cost or capital/FX control reasons). But what’s the right set of data points to consider?
September 06, 2004 -
By Daniel L. Blumen and Susan A. Hillman, Treasury Alliance LLC
The best approach to efficient cash management in China is to operate via a single legal entity.
In meetings with treasurers in the US and abroad, the challenge of managing growing piles of cash in China is a common topic of concern. While excess cash may benefit from a future revaluation of the yuan, for the time being the “immobility” of cash in China, and the limited range of investment and cash management options, makes excess cash growth in China a problem for many MNCs.
While the two-tiered exchange rate system and regulatory controls make it difficult to get money out of China efficiently, there are steps treasurers can take to improve their cash availability and visibility in-country.
May 17, 2004 -
Reports of Japan’s “loss” of competitive edge may have been exaggerated: That’s the key message from Merrill Lynch’s Managing Director and Chief Japan Analyst, Jesper Koll. The implications for US MNCs are twofold:
(1) They will face growing competition from their Japan-based brethren; and
(2) The China/Japan axis and resulting shifting of the balance of power in the FX markets will create new financial risk management challenges.
March 22, 2004 -
By Susan A. Hillman, Treasury Alliance LLC and
Lionel Bonner Nobre, Grant Thornton LLP
While the banking infrastructure has been made super efficient, tax and FX regulations make liquidity planning often counter-intuitive.
Despite—or perhaps because of—a volatile economy and currency and an onerous regulatory/tax environment, Brazil has given rise to excellent financial professionals who operate with a banking system that has long been one of the most sophisticated and electronic in the world.
Yet the existing regulatory and tax constraints can make it difficult to manage local liquidity effectively. Excess cash can be a significant problem, as well as an unwanted exposure from the parent company perspective; meanwhile, funding deficits in the Brazilian operation’s cash flow is not a straightforward exercise.
March 22, 2004 -
While China may be years away from floating the renminbi, there are ongoing signs of progress, which in turn can help treasury chart its capital, cash and risk management strategies for the country.
September 22, 2003 -
China is unlikely to yield to US pressure to revalue its currency. But it showing signs of change, in allowing more, local banks to offer longer-term hedge contracts.
September 10, 2003 -
As US MNCs continue to sell and produce more in China, they are also facing issues related to the accumulation of local currency.
How to bring this money back home, and in US dollars, is a growing focus for companies with operations in China, given some of the capital-flow restrictions (see related story).
US companies operating in China suggest the following steps as ways to prepare the ground for the accumulation of local currency and eventual repatriation:
May 19, 2003 -
Looking past SARS, which unfortunately has become China topic “number one” of late, the question of how to get cash earned on foreign direct investment out of China is the major topic of concern for treasurers.
Indeed, the political/economic concerns sparked in the aftermath of the SARs health crisis have indirectly helped focus attention on cash at risk in the country. This concern is shared by all investors. For example, a recent survey of private equity/VC investors by PricewaterhouseCoopers (on the heals of new rules for foreign participation in investment funds) indicates that a top concern about investing in China is ensuring an exit strategy for investment gains.
One response for treasurers at firms with Chinese investments has been to plan for anticipated cash build-ups in structuring their entry investments (see p. 4). Another response should be planning for the inevitable liberalization of Chinese capital controls, including currency convertibility rules. These plans, akin to the “deval” plans some treasuries maintain for emerging markets (IT, 5/5/03), should emphasize cross-functional actions to not just minimize downside risks, but capitalize on upside opportunities.
May 19, 2003 -
The barriers to the movement of cash, either because of FX/capital controls, or tax regs are in the state of flux.
March 10, 2003 -
Russia no longer meets the US GAAP definition of a hyperinflationary economy. This means companies must reexamine their choice of functional currency in Russia, and perhaps even more broadly.
Companies seldom revisit their functional currency choices. Once that choice is made ( under the guidance of FAS 52), it’s mostly left untouched, with very few exceptions.
It so happens that Russia is currently providing some multinationals with the opportunity to revisit the choice. However, Russia aside, the underlying issues governing companies’ choice of functional currency are worth revisiting at a time when many companies are reviewing the performance targets of their FX risk management programs (see IT, 1/13/03 and article in the next issue of International Treasurer).
The basic problem . . .
January 27, 2003