The risk is baked into the investment policy. That’s the state of many corporate investment polices concerned with Latin America, according to input from The NeuGroup’s Latin American Treasurers’ Peer Group (LATMPG). In a recent conference call, members discussed the risks as well as other cash and investment issues in the region, including pooling structures and dealing with cash in problematic countries.
Since Latin America is still considered a risky place to do business, many corporate policies take that riskiness into account when setting investments limits; sovereign ratings are the de facto cap. Some policies call for consolidating cash at the parent level for investment, leaving minimum leeway at the local level. Others call for very strict limits at multiple levels, including country, counterparty and instrument levels based on risk. But all have the same result: small local investments and straight forward instruments with a limited number of counterparties.
As for pooling cash, most companies have notional of physical pooling structures, depending on their legal entity structures and the country involved. As they pool cash for investments, they also try to minimize FX exposure/hedge cost by converting into US dollars (even if that increases FX exposure at the subsidiary level, which often is left unhedged due to cost or on the principle that on a portfolio basis, exposures may offset each other).
But exceptions are the rule in countries where moving cash is restricted by the government (Venezuela, Argentina) or expensive (Brazil). In Venezuela, most companies have trapped cash and some exceed their counterparty limits due to the lack of acceptable counterparties. At some point, for example an acceptable bank will stop taking deposits so the company includes an exception in its policy that allows deposits with banks or in instruments – including government issued instruments – that would not have been acceptable under other circumstances. In Brazil, the Tax on Financial Operations or IOF, makes short-term cash movements uneconomical. If you have excess cash, even for short periods of time, there are offerings like CDBs, LCIs and LCAs that offer a decent return and are used by some members. However, other members have not been able to obtain approvals for such investments.
The key in getting exceptions in the policy is to ask for them ahead of time. Having a formal once-a-year approval process for exceptions may reduce the time you spend explaining the special circumstances and coming back for individual approvals. Those annual approvals can include how much the regional treasurer is allowed to borrow locally.
An annual process is also the most common way to decide on appropriate local cash levels to support operations. Most members set limits at the beginning of the year as part of the planning process. Others decide on a case-by-case basis throughout the year based on operational or capital structure requirements.
Despite the plentiful hoop jumping they go through to do business in Latin America, LATMPG member companies are committed to the region, seeing the benefits outweighing the costs; this despite the increasingly complex environment in Venezuela and other countries that appear to take similar populist paths, albeit less dramatically. Multinationals are in it for the long haul.