Liquidity Management in Latin America: Change and Opportunity

By Gilles Roger, Regional Head of Liquidity and Investments in Latin America, HSBC

Two commercially-important countries in Latin America – Mexico and Argentina – have recently announced various significant regulatory changes. Gilles Roger, Regional Head of Liquidity and Investments in Latin America, at HSBC explains how these changes are in both cases potential opportunities for treasuries to enhance their liquidity management.

Mexico: Centralized Operational Account

Mexico has recently introduced an important regulatory requirement for the country’s public sector banking arrangements that will take effect during 2018. Major public entities in Mexico, such as health and infrastructure construction, receive an annual program assignment together with associated budget. Previously all the sub-entities (such as provincial sub-entities) beneath each major entity would all open their own individual physical bank accounts. From 2018, this will change and only the major entities will hold physical accounts for treasury management. Sub-entities will be assigned ‘registration’ accounts, which are similar in some respects to virtual accounts.

However, virtual accounts are defined in Mexico as accounts that can be opened without any documentation and typically used for payments on behalf of (POBO) and/or receivables on behalf of (ROBO), and are not permitted by regulation in the country. Therefore, the new registration accounts are effectively a new type of account that participating banks have to create that provide very specific functionality.

Sub-entities will directly manage their own registration accounts for collections and payments, but all movements across their accounts will actually be reflected both in their main entity’s physical account and the individual registration account. Each group of registration accounts and the associated physical account must by regulation be in the name of a single legal entity, so it is not possible to mix legal entities within an account structure.

The government’s stated objective in introducing this new type of bank account structure is twofold: obtaining tighter control of public spending, while also reducing the level of operational activity relating to account management. By implication, the changes are also likely to reduce opportunities for corruption.

The scale of this change is considerable, when one considers that some major entities will have as many as 2000 sub- entities. HSBC has been active in preparing a customised local solution that will provide a new registration account offering that complies with the regulation for public entities. However, HSBC appreciates that these new accounts would also offer the same efficiency and control advantages for corporates.

Therefore, an HSBC pilot project for corporate client registration accounts is planned for later in 2018 after public entities have already started using them. While registration accounts are not quite as flexible as virtual accounts, they could nevertheless prove transformative for both public entities and corporates over the next few years.

Argentina: interest on current and savings accounts

Argentina’s economy continues to improve, with inflation and poverty declining, while GDP rises [1][2]. Among various other changes, this promising situation has prompted the Argentine government to allow banks to pay interest on current and deposit accounts. Previously this was forbidden, with the only alternatives being term deposits (which were subject to various restrictions that meant that they were not universally available) and non-interest-bearing current accounts.

As yet, no banks have started to offer interest paying current or deposit accounts, partly because lending remains subdued and so their liquidity needs are commensurately low. This is particularly true of banks with high liquidity ratios such as HSBC.

Another outcome of the improving Argentine economy and its ongoing deregulation (such as the removal of currency controls and the floating of the peso) is the prospect of trade volumes rising and the country becoming more active across more trade corridors. Argentina’s government has also shown considerable interest in engaging in trade negotiations and is adopting a more active role in international policy. It has expedited negotiations for new free trade agreements with the Pacific Alliance countries and the European Union (EU), as well as bidding successfully for the hosting of the 11th World Trade Organization Ministerial Conference and the G20 Presidency [3].

Assuming all these positive trends persist, and trade volumes increase to support the generation of higher levels of surplus cash, then the need for more efficient liquidity management will also increase. Although current regulations preclude Argentine entities from participating in cross-border liquidity management, this situation may change in due course in view of the government’s current regulatory trajectory. Even if it does not, this does not diminish the more general requirement for better regional visibility of liquidity and bank balances.

This means that banks’ ability to provide their clients with consistent regional bank account visibility is becoming increasingly important - especially if that is also available alongside global visibility across other regions.

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Mexico: cross-border cash concentration

When compared with Argentina, Mexico is relatively relaxed from a regulatory perspective in relation to liquidity management. Therefore, cross-border cash concentration is an important discipline for international companies with subsidiary entities operating in the country.

As a consequence, there is considerable demand from international companies active in Mexico for liquidity management solutions that support both liquidity visibility and mobility on a regional, as well as global, basis. Furthermore, these companies also need liquidity management solutions that can report and deliver visibility seamlessly across multiple banks in-country, regionally, and globally. The same extensibility requirement on multiple levels also applies as regards the actual concentration of liquidity.

In the case of Mexico, the number of banks that can deliver on all these points is extremely limited. While most banks in the country have some form of liquidity solution, these are typically only national (or at best regional) in scope. By contrast, HSBC’s global liquidity engine covers all these bases.

Conclusion: understand and anticipate

Regulatory shifts in Latin America are a fact of life for corporate treasuries: the recent changes outlined above in just two countries in the region underline this point. However, coping with this situation is considerably easier if treasury can rely on a banking partner who is alert to regulatory changes and their possible future trajectories. Then, based upon a consultative relationship, future-proofing liquidity management processes and structures becomes relatively straightforward and treasury is able to adapt promptly to regulatory change – rather than having to play catch up after the event.