BNP Paribas

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

What do companies really think about climate change? What are they really doing?

This call on ESG was lively and gave us some valuable insights. I strongly recommend reading the detailed report. 

Two years ago, when we last discussed this, the main takeaways were:

• Treasurers were interested in green bonds and financing, but very wary of the lack of clear standards
• Treasury has a role to play, for example in selecting banks with good green credentials – but this needs to be part of an enterprise wide approach, which was often lacking.
• The “E” part of the equation tends to receive more focus than the “S” and “G”.

This time, the discussion was very different. The reporting issues and the need for standards has received a lot of media attention recently – but our participants have mostly moved on. Interest in these products has waned: one participant said that, if investors consider the company to be green, the bonds will be priced accordingly, while another found it too hard to prove that the proceeds were being used in a green way. Green investments generally presented many issues, including tracking environmental credentials, and the need for unacceptably long tenors.

Instead, a picture emerged where:

• All the companies represented have a real commitment to improving sustainability
• Treasurers are finding it easier to collaborate with other functions for reporting, as ESG goals are becoming more central to corporate strategies. Though one participant finds the US focuses more on “S” and “G” than Europe. 
• From an “E” perspective, European banks were seen as being more proactive than their US counterparts with BNP Paribas, Scandinavian and Dutch banks name checked as thought leaders.
• Many companies are using VPPAs (Virtual Power Purchase Agreements) to help improve their carbon footprint. This tool, also known in the US as a REC

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

Commentary

Saudi Arabia occupies a pivotal, and highly unusual, place in global politics and the world economy. As the world’s largest exporter of oil, and the holder of the second largest reserves of oil and gas, it is an essential part of the global economy – and has traditionally been relatively aligned with western and capitalistic countries. At the same time, it is a profoundly religious absolute monarchy, which practices a particularly conservative brand of Islam. This has always placed limits on its co-operation with western countries – limits which are being tested even more than usual in the current environment.

The current situation is particularly complex, as was clear in the call. Saudi Arabia has always imposed severe restrictions on foreign companies and banks, requiring local partners, and imposing local signatories and approvers for most, if not all, transactions. Limitations on where foreigners could live, and what they could do, have meant that many expatriate employees preferred to live with their families in Dubai, and commute to Saudi for the work week. However, the country has recently launched “Vision 2030”, which aims to open up the country and prepare it for a post oil future. This ranges from promoting tourism, allowing women to drive cars, and potentially allowing alcohol sales in specific places, to mega projects such as building a new city in the desert. It also includes pushing MNCs to transfer their regional headquarters to the kingdom. At the same time, foreign ownership is now allowed, either using a Saudi sponsor (with fees), or by paying 20% taxes. 

These developments are viewed positively by the participants – though several cautioned that there are many conflicting undercurrents in Saudi society, and the situation can always change at short notice. In all cases, Saudi Arabia is a large, and profitable, market, to which all our participants are fully committed, irrespective of the operational challenges.

Treasury practicalities:

• Nearly all participants sell into Saudi from an offshore location, usually in USD. The currency is pegged to the USD, and there are no exchange controls, so things generally work well.
• Several participants have opened local branches or subsidiaries, either to provide services or to act as sales offices, or technical offices to manage regulatory issues.
• To participate in the mega projects being run by the government, it is a requirement to transfer any regional headquarters operation to the kingdom. There is direct competition with other countries in the region for this, particularly the UAE.
• Saudi regulations state that the bank signatories and transactions mus