Fewer capital injections and intercompany loans to subs, more frequent dividends, and local borrowing helps ring-fence risk and reduce interdependency in markets where corporates face restricted currencies and geopolitical threats. Partnering with global banks with deep knowledge of each country’s regulations and risks can pay off.
The Russia-Ukraine conflict that erupted in 2022 shocked treasury and finance leaders into a heightened awareness of geopolitical risk, a shock compounded by the aftereffects of a pandemic that had exposed overreliance by corporations on global supply chains running through China. War in the Middle East and rising tensions between the U.S. and China over the past year have only added to the pressure on financial risk managers to seek new ways to mitigate threats that are almost impossible to forecast.
“The problem with geopolitical risk is there’s no way to predict what’s going to happen, when it’s going to happen and what the reaction is going to be,” a member of NeuGroup for Mega-Cap Treasurers said recently. “So, it’s completely random, arbitrary and unpredictable. It’s probably the hardest thing that we’re dealing with.”
Suman Chaki, Deutsche Bank’s Global Head of Cash Management Sales and Solutions, has observed treasurers and their teams devoting more time to mitigating these risks. “While geopolitical risks were always a part of the treasurer’s consideration, recent events and ongoing global developments have established a higher likelihood of the significant unforeseen disruptions it can create,” he said.
“The risks are heightened in the more restricted markets which also happen to be the growth markets for global MNCs across most industries,” he added. “Treasurers might need to evaluate if their current liquidity and funding structures, which were traditionally based on cost and balance sheet efficiencies, are still fully fit for purpose in a changing world order where increasing geopolitical risks will need more consideration.”
In the NeuGroup 2024 Finance and Treasury Agenda Survey, respondents named geopolitical conditions their fourth biggest risk, behind interest rates, cyber risk and the economy. Geopolitics could easily leap a spot or two in the 2025 survey—related, in part, to the high probability of increased U.S. tariffs on imports from China.
“Are the products in scope or out of scope?” said the mega-cap treasurer, naming potential issues and questions that arise from tariffs. “What does that mean for demand? If demand is changed, what does that mean for hedging? What does that mean then for the dollar?” And if interest rates rise, “that messes with our capital structure and our funding plans. It messes with the costs of our suppliers and their funding. It just goes on and on to every part of the business.”
A 2024 geopolitical risk survey by WTW showed that 72% of respondents experienced losses due to political risk and nearly half reported a political risk loss in excess of $50 million. The types of losses include currency transfer restrictions or inconvertibility, trade sanctions or import/export embargoes, expropriation, and political violence or forced abandonment.
Suman Chaki, Deutsche Bank
Rethinking liquidity structures. Mr. Chaki is among those who argue that the hard lessons corporates learned after losing access to their funds (and banks) in Russia—and the plunge in the ruble against the dollar—should push more treasurers to question the risks embedded in centralized, global liquidity and funding structures that rely on capital injections and intercompany loans from parents to foreign subsidiaries, especially in growing markets within Asia.
“If, for example, I needed funding in China, what did I do in the past?” Mr. Chaki asked from his office in New York. “I borrowed centrally from Germany or from the U.S., where I had the best pricing, using the relationship banks in my revolving credit facility, and I did intercompany funding. I would raise dollars here and fund when my China entity or my Russian entity needed money. Global treasury was centrally managed because I could get a better cost of funding.”
But in today’s world, that better cost of funding must be weighed against the risk of losing access to funds and—of equal or greater importance—swings in FX markets that damage or destroy the value of cash a corporation holds in local currencies that can drop sharply and unpredictably. “With the uncertainties of how those valuations change, it can really impact your balance sheet globally in the functional currency,” he noted.
New imperatives, local avenues. A strategy that will better contain geopolitical and macroeconomic risk is offered by an approach to derisking that Mr. Chaki describes as “local for local,” a phrase that gained use during the pandemic as companies tried to boost supply chain resiliency by producing goods in the same countries where they are sold.
“In the treasury construct, what local for local means is that companies are trying to explore more local avenues to fund their businesses,” he explained. “Treasury is starting to evaluate, ‘How do I better manage my local bank balance sheet with less dependency on the global balance sheet, on global capital markets, on global fund flow.’”
Those avenues are leading some corporates to direct subsidiaries in Asia and elsewhere to explore onshore funding options in local currencies from global or local banks—instead of using intercompany loans or equity injections from the parent. “Geopolitical risk has caused us to pull back from our global funding programs and implement local funding and risk management programs in select geographies,” said the corporate treasurer at one mega-cap multinational. “It’s like a pendulum: the world was globalizing; now it’s deglobalizing and we’re moving along that spectrum.”
This member and others interviewed for this article agreed that navigating both geopolitical and macroeconomic risks requires a support network that includes trusted bankers at institutions with teams around the world who are familiar with varying regulatory and legal requirements in dozens of countries in Asia and beyond, some exposed to geopolitical risk and others where capital controls and restricted currencies are the key challenge, including India.
“This is where a bank like ours with a Global Hausbank strategy, with our global footprint, advisory strength and deep onshore capabilities, is well-placed to support large multinational companies in their journey toward a more optimal strategy and structure in many of these restricted markets around the world,” Mr. Chaki said.
Beyond the geopolitical. Discussions of geopolitical risk at NeuGroup meetings among treasurers at dollar-functional companies often lead to talk about countries with restricted currencies where repatriating earnings is highly problematic. The pain is made worse in places including Argentina where local currencies devalue rapidly amid soaring inflation, meaning the corporate is losing money in dollar terms. Then there are countries with relatively stable, restricted currencies and thriving economies but significant regulatory obstacles to repatriating capital.
“I’m less worried about geopolitical crises with India, Indonesia and Vietnam and those places; it’s more the macroeconomic impacts,” said the treasurer of one mega-cap multinational exposed to risks all over the globe.
“For treasury, planning for geopolitical versus macroeconomic risks, and managing those risks, philosophically isn’t any different,” he added. “You’re trying to manage your exposure in those markets through various strategies, including minimizing the amount of capital you’re putting into them. And as you’re generating earnings and converting those to cash, trying to protect the value of that cash, including repatriating as quickly as you can to deal with sovereign risk.”
Mr. Chaki agreed and reiterated that corporates in need of capital should try to include onshore funding options in their financing mix. “Multinationals that better balance offshore and onshore funding, leverage digitization and automation of cross-border intercompany payments and repatriate dividends more frequently can optimize onshore cash in restricted markets. They also reduce macroeconomic risks—and operational trapped cash—in more volatile markets.”
What this means in practical terms may initially deter some corporates but should pay off in the long-term, he said. “In the onshore entities, maybe you leverage up yourself a bit more. Maybe you start paying a little bit more interest cost than you did in the past. Your profitability might even go down in the country, but that will lead to less capital retention. And that’s part of creating a capital structure and legal entity structure in such a way that your setup has less capital ‘stuck’ starting on day one.”
The economic value journey. An assistant treasurer at one NeuGroup member mega-cap corporation argued that focusing only on the cost of local funding and nominally higher borrowing rates ignores the losses in economic value a company suffers when a currency depreciates significantly. He cited the example of one country where it made sense for his company to pay double-digit interest costs for local borrowing.
“That was a significantly better economic alternative for the company because when inflation is 20% to 30%, when the currency devalued 30% every year, every dollar that would have been infused is losing value for the parent company. Local financing protects the economic value for the company, even if it is painful in the short-term, from a cost of funding perspective.”
Group treasurers, he said, have a responsibility to encourage regional finance teams to overcome their resistance and work with bankers onshore. “Treasurers have the onus of educating local finance management, showing that the decisions are holistic, keeping in mind the economic value and not just the P&L.”
To do that, he believes that multinationals first need to define minimum liquidity standards for every country—one size does not fit all. This minimum typically consists of working capital plus a small contingency to cover volatility in collections or inventory build, the NeuGroup member said.
Also critical: understanding repatriation costs and local regulations, and preparing financial statements in accordance with local GAAP requirements. At his company, he expects it could take five years “to get the standard level of cash that we need; however, in the end, it’s going to be a meaningful reduction. This is a journey, and we haven’t figured it all out.”
Bring cash home more often. Several treasurers interviewed for this article have increased the frequency of dividend payments in response to macroeconomic and geopolitical risk. For example, one now arranges dividends from risky markets by paying them more than once a year to mitigate the risk of devaluation or a change in a country’s dividend policy. Another NeuGroup member’s vision of the future includes four quarterly dividends from restricted countries.
That comes at a cost, part of which is taxes paid on dividends. Also, one treasurer said, “It costs money because you have to go through a closing of your books, do an interim set of financial statements. You have to go to the government and get their approval. It’s a lot of work, but you’re getting your money out faster than you otherwise would.”
But make no mistake, getting money out is time-consuming. One NeuGroup member said it takes his company, on average, nine to 12 months after earnings are generated to dividend cash out of a restricted country because of local regulations, company policies on closings and legal entity structures. “There are still markets in the world where the legal entity structure makes it extremely difficult, if not impossible, to get the money out of the country,” he said.
The importance of banks. This member hopes banking partners can help corporations make progress as they strive to move more money out of offshore subsidiaries and manage local financing independently. “I think the number one piece is simplifying the regulatory approvals in the process. Deutsche Bank, for example, has helped us in one country where the regulatory approval is extremely complex. They’ve stepped up to the plate,” he said.
The treasurer of another mega-cap corporate values his relationship with bankers who know their stuff. “What those banks do when they are well connected on the ground there and when they have good operations there is help you solve problems. The other thing is, I want to be the first call when they think something’s coming. So if they think the government is about to do something, I’m hoping they’re going to let me know before it even happens.”
Yet another treasurer put it this way: “We’re always relying upon the banks to understand what the art of the possible is. It may not always fit our risk profile, but what’s the art of the possible?”
One area of interest: cash pools. One member would like banks to work with countries like India and Brazil to allow cash pooling, something available in China and most of the other developed and emerging countries. Some companies weaning themselves from intercompany loans are turning to pools when a subsidiary faces a cash deficit. More broadly, this member would like a “menu of products that are available to repatriate money when dividends are not an option.”
Looking ahead. Of course, not every multinational will want or need to jump on the local-for-local bandwagon. “We generate sufficient cash in our local countries to fund operations, so we do not borrow locally,” one mega-cap treasurer said. “We then focus on quickly and efficiently getting cash out or gaining access to that cash and typically have mechanisms to do that.”
Other companies may be hesitant to give up the benefits of scale and lower costs of funding that have developed along with global supply chains and centralized funding structures. “These benefits of scale are what have created some of these risk issues,” another treasurer said. “The way you resolve that undoes the scale, but this can create a cost issue. This is going to be the challenge companies are going to face for the next five to seven years, trying to figure this out. That’s clearly a dilemma.”
Mr. Chaki said that companies with a need for working capital to fund growth in emerging economies that want to reduce their vulnerability to losing access to funds held overseas may need to compromise a bit on scale and cost and borrow some of the money they need locally. “In the past, people were not willing because only tax and cost considerations drove liquidity structures.”
The good news: “In China and elsewhere, access to local currency and options for availing local financing has significantly improved and deepened from a decade ago.” He cited the development of capital markets in countries with restricted currencies like India where the commercial paper market is mature and deep.
Another factor that will help corporates committed to tapping into growth markets in Asia and elsewhere are efforts by countries to make doing business less onerous. “Most of these countries are very keen to ensure that operational cash is a lot more mobile and can move much faster through automation and digitization and simplification of processes. They want to make it easier for global companies to do business, make it easier to do their trade payments cross-border,” Mr. Chaki said. One example: South Korea has improved its cross-border structure through a scheme called consolidated management of funds.
Having trusted global banks supporting them can only help corporates make the most of the evolving landscape amid geopolitical and macroeconomic risks, he said. “Deutsche Bank’s strong presence in many of these markets, our cross-border payments and FX capabilities, and significant investments in digitization will help our clients take complete, full advantage of these regulatory developments.”
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