Argentina

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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Commentary

All international companies put a lot of effort into avoiding having cash trapped in emerging countries. But, despite our best efforts, there are still situations where cash accumulates in places from which it can’t be repatriated. This quickly becomes a lose/lose situation for the MNC: often the countries involved have high rates of inflation, and usually provide low rates of return on bank deposits – or even no return at all. So the cash loses its economic value, while counterparty risk quickly becomes an issue, over and above the sovereign risk concerns. Further, depending on the company’s accounting policies, exchange losses can negatively impact reported profits, as the local currency depreciates.

The purpose of this call was to discuss how to make the best of this bad situation – to look for ways of managing the issue.

• Generally, there was consensus that standard risk management approaches continue to apply. No-one is prepared to ignore their usual principles.
• However, there was consensus that some flexibility may be appropriate. The question is – how much?
• The first problem is bank deposits: all participants preferred to continue to use international banks, even if they often provide lower rates than local ones. The counterparty risk issues with local banks were not viewed as sufficient to offset any increased return.
• Most participants were in favour of putting pressure on the international banks to increase rates: in Latin America,  the European banks were generally viewed as being more responsive than their American counterparts, with Santander being used frequently: BBVA was