The NeuGroup’s Latin America Treasury Managers Peer Group discusses challenges doing business in a mercurial region.
Although Venezuela dominated discussions at a recent NeuGroup Latin American Treasurers’ Peer Group (LATMPG) meeting, there remain other big challenges to managing cash in the region. Argentina, amid the chaos, continues to present treasurers with plenty of obstacles. Also, working capital management and supply chain finance treasury continue to be popular topics with LatAm treasurers. Finally, the LATMPG is embarking on a project to assess all the bank offerings in the region.
Argentina Update
After a steady depreciation of the peso over the past several years, the Argentine government devalued by way of lesser market intervention in January, allowing the rate to hit close to 8 pesos per dollar (the blue chip swap rate hit close to 11 and the black market rate higher still).
One member of the group noted that the government controls pricing in certain segments, and that it is hard to maintain prices for less-controlled segments because of high levels of inflation (of course, privately estimated to be much higher than the official rates). Here were some other suggestions arising from discussion.
- Increase the import prices paid to parent (within acceptable transfer pricing limits). Prepay or pay before the payment term is up, if possible.
- Change the rules: Normal rules don’t apply if you want to stay open for business in a country like Argentina where sudden import restrictions can disrupt business. Allow the local subs to raise inventory, higher than other countries, to mitigate disruption risk.
Update on Working Capital and Cash Mobilization Projects
Supply-chain finance is still work in progress for many. Factoring of receivables is appealing to free up credit lines when there are overdue invoices to collect. Some discourage factoring but offer pre-payment discounts instead. Other takeaways:
- Two trends support SCF: In addition to tighter credit, a member pointed out that in Mexico, for example, the sophistication of customers is coinciding with more companies providing SCF services, and that there are two or three government-sponsored companies offering factoring there now.
- Brazil’s transfer pricing rules build up cash: UPS, using a cost-plus model of 5 percent now needs to comply with a 15 percent profit margin, which will cause cash to build up there.
- Brazil is expensive to do business in; is it profitable? Because of a high regulatory and tax burden, the cost of doing business is high. Sometimes tax incentives help but if tax incentives are the only way to stay out of the red in Brazil, then what?
LatAm Bank Assessment
The LATMPG has undertaken a project to list and assess all the banks they do business with in LatAm, and how well these global, regional and local banks do for them. The accompanying discussion yielded a few considerations:
- Local banks can be more short-term transactional than global banks who take a longer-term global view of the entire relationship. Have some diversity in the bank group: some global, some regional, some local.
- Consider “joint business plans” with your key banks. And have SLAs. The benefits can accrue for both the company and the bank. Negotiate certain points that will be tracked on a scorecard and have a meeting once a quarter. “It’s a good investment of time,” said a LATMPG member. The banks with whom you don’t have an SLA have a biannual review.
- Portal compatibility and host-to-host capabilities are key.
- Yes, local banks are needed for collections, payroll, taxes and for some customers.
- Who is good at documentation? That can really make a difference in troublesome countries.
- Speak up if your account manager is not good so you can push for a change.