Published: January 01, 2000
The diverse regulatory environment in Latin America can make efficient cash and liquidity management challenging. However, as Allison Barbosa discusses here, some recent regulatory relaxation combined with a pragmatic ground up approach has opened up the opportunities available.
From large multinationals to local companies, corporates across the board have traditionally regarded Latin America as a region where effective cash and liquidity management is something of a challenge. While regulatory restrictions are frequently cited as the main reason for this, other factors, such as the challenges associated with current infrastructure in remote areas, have also played a part. However, the liquidity environment in Latin America has been gradually evolving in recent years, opening up new possibilities for corporate treasurers looking to optimise their liquidity in the region.
Centralising liquidity management has long been an ambition for many global organisations, and events since 2008 have forced companies to focus on this area even more closely. As the availability of external liquidity sources (such as bank debt) has declined and the cost of funding has increased, corporations have increasingly seen the value of maximising their internal liquidity sources by adopting a centralised approach to liquidity management.
Technology now plays an important role in helping companies to optimise liquidity management while also ensuring that compliance, tax and regulatory requirements are fully met. This, combined with the wide network and functional capabilities of some banks, has meant that in regions such as Europe, where regulatory requirements are both relatively low and homogenous, companies have been able to create sophisticated solutions which allow them to centralise their cash and liquidity effectively. However, in other regions, such as Asia and Latin America, the tax, regulatory and infrastructure requirements mean that achieving this level of centralisation is more of a challenge.
This picture has gradually changed in recent years, however. Today companies willing to invest in more centralised liquidity management structures in Latin America have much to gain. As the region’s countries each have a different regulatory regime, a degree of flexibility is needed when building a structure, as Table 1 illustrates.[[[PAGE]]]
Table 1 - Liquidity structure regulations - click to enlarge
Because the liquidity landscape is so varied in Latin America, it is important to approach centralisation pragmatically. In many countries the most prudent approach is to build a liquidity structure gradually from the bottom up and maximise what is possible today – while at the same time putting in place foundations that can be built upon if and when further liberalisation takes place.
While the majority of Latin American countries do not permit a single global or regional liquidity structure, much can be done in the individual countries within the parameters of their tax requirements.
One of the most fundamental steps in this respect is rationalising banking relationships. Apart from reducing the fees and inefficiencies associated with maintaining multiple relationships, rationalisation opens the door to negotiating lower per transaction charges, as well as making ‘on book’ transfers within the same bank. This makes liquidity techniques such as interest optimisation possible and allows otherwise trapped cash balances to contribute by increasing the interest tier upon which compensation calculations are determined, resulting in improved overall return. In addition, bank rationalisation can help corporations avoid incurring tax charges on interbank transfers which may apply in certain countries.
Other possibilities include intra-entity liquidity techniques. Even though notional pooling or cross-entity sweeping may not be possible in many countries in Latin America, physical cash concentration structures are increasingly available.
By achieving efficiencies and centralisation at an entity level, and by rationalising bank relationships, a company has a sound basis for further liquidity management improvements.[[[PAGE]]]
Once the foundations of centralisation and automation are in place at an entity or indeed a country level, these can be leveraged where possible to support centralisation regionally – and potentially globally.
Finding tax-efficient ways to repatriate funds offshore has become a strong focus for many non-local corporations active in Latin America. With a significant proportion of inter-company and third-party trade conducted in USD, centralising cash offshore is an effective means of gaining liquidity efficiencies. While restrictions may apply to resident companies holding foreign currencies or offshore currency, there are opportunities to create efficient offshore pooling structures in banking centres such as New York, London and Singapore.
By holding USD cash pools offshore, companies can optimise their liquidity and funding needs in the region and benefit from higher total returns when incorporating the borrowing cost savings with the nominal yield on investment. Offshore pooling structures are particularly attractive to companies with smaller Latin American operations, as it may not be economically beneficial for them to centralise the region on its own. By including the Latin American entities in its regional structures, an organisation is well positioned to manage its global position, whether its treasury management organisation is centralised or decentralised.
Centralising liquidity management is currently a top priority for most multinationals as well as many smaller corporations. The possibilities in Latin America are continuing to grow, and effort expended now in optimising structures within the region will be an investment for the future.
Meanwhile, the evolving liquidity landscape has not gone unnoticed among the banking community. As a result, many Latin American markets are highly competitive when it comes to the provision of liquidity related banking solutions, such as investment and liquidity structures. In view of this, corporations that take a best practice approach to rationalising their Latin American banking relationships are likely to be rewarded with liquidity benefits today, as well as with liquidity opportunities in the future.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
