Taming the Risk Dragon
by Helen Sanders, Editor
Treasurers globally have prioritised risk management over recent years, adopting a more rigorous approach to identifying, monitoring and managing exposures. In many cases, particularly since the global financial crisis, treasurers and CFOs have recognised that risk management policies cannot be simply left in the drawer and the dust brushed off every few years. Risk is a living, breathing beast that demands constant attention. In most ‘traditional’ economies, such as Europe and North America, it is less challenging to tame the company’s financial risks, not least as a limited number of currencies are involved that are easily convertible. Similarly, risk intelligence on customers and suppliers is generally accessible.
As companies of all sizes extend their activities in emerging markets of Asia, Latin America, Middle East & North Africa and, in the future, sub-Saharan Africa, the beast’s fire-breathing potential becomes far more apparent. This article, featuring comment and insight from Dennis Sweeney, Managing Director and Treasury Solutions Executive, Bank of America Merrill Lynch, considers some of the additional risk management issues that treasurers need to consider when expanding their business activities into ‘emerging’ markets.
The fire-breathing beast(s)
As growth in developed economies continues to be reluctant at best, corporations in all industries and of all sizes are looking further afield for growth opportunities, as we have discussed in a number of articles in TMI recently. Asia and Latin America are the most familiar target regions, but Africa is also starting to blossom for both sales and sourcing. Pursuing a growth strategy in these regions is a different proposition entirely to the more familiar territories of Europe and North America. Dennis Sweeney, Bank of America Merrill Lynch emphasises the importance of managing risk management as part of a corporate expansion strategy,
“The size of emerging and developing economies is driving the world’s economic growth and by some measures could overtake that of advanced economies for the first time in 2013. Before taking steps into an emerging market, companies should know the risks, understand the culture, and make use of local and global expertise.”
“Managing risk in emerging markets brings a unique set of challenges, such as currency controls, restrictions on investment flows and diverse regulatory, market and tax infrastructures.”
To these issues can be added cultural differences, a less developed physical and communications and power infrastructure, geographic scale and varying sophistication in payment and collection methods, amongst many others. Furthermore, whereas financial management in Europe has become more integrated, not least due to the single currency, Payment Services Directive (PSD) and SEPA (Single Euro Payments Area), every country in emerging regions has its own specific challenges and opportunities. So, it appears, we are dealing with not one fire-breathing risk dragon, but many….
Know your opponent
So, where should a treasurer or CFO start when planning a risk management approach in a new market? The first requirement is to find a credible banking partner to make sure that the company can make payments, collect cash and possibly obtain access to local financing and investment. Ideally, this should be a bank with which the company already has a relationship to enable integration with existing processes and technology platforms for visibility and control over cash. This can prove problematic, of course. There are many examples where banks have a branch in a country, but this does not necessarily mean that they are in a position to manage payments and collections, particularly in countries that have a high dependency on manual payment methods where a branch network may be required. Dennis Sweeney notes,
“When a company moves into a new market, treasurers and finance managers may not have the same support base as in more familiar markets. For example, their global banking partner(s) may not have a presence there, or they lack access to the local clearing system. Therefore, the first move, in particular, can be challenging as companies develop relationships and expertise.”