by Helen Sanders, Editor, in conversation with Oscar Mazza, Head of Latin America Sales, Treasury and Trade Solutions, Citi
It doesn’t seem so long ago that the media was full of references to the ‘BRIC’ miracle, with companies flocking to take advantage of rapid growth opportunities and rich natural resources. Today, while Mexico and the Caribbean continue to grow, fuelled by US trade and tourism respectively, South America in particular is in the midst of a decline that threatens many of the economic achievements of the past decade. In this month’s feature, it is a pleasure to introduce Oscar Mazza, Head of Latin America Sales Treasury and Trade Solutions, Citi who joins me to discuss some of the cash and treasury management trends that he sees in Latin America.
Commodity and currency volatility
Clearly, the impact of falling commodity prices has had a major impact on many commodity-dependent economies in Latin America. Why has Latin America been so badly hit?
The fall in commodity prices and the global economic slowdown are having an enormous impact on companies headquartered in, or doing business in Latin America. While this is a global phenomenon, Latin America has been particularly hard hit bearing in mind the high proportion of commodity exports: 98% in the case of Venezuela for example, with countries such as Argentina, Brazil, Colombia, Peru and others between 67 and 85%. Similarly, manufacturing in the region is also closely related to commodities. The exception to some extent is Mexico: while there is still a commodity price impact, the economy is more closely correlated with the United States than other markets in the region, so growth rates of 2 – 2.5% are expected this year.
The impact too of the fall in the value of currencies in Latin America, and devaluation in some countries should not be underestimated. A USD-based company in Brazil may have seen the relative value of BRL revenues fall by nearly 35% in 2015 alone, with further potential to fall.
Impact on corporate strategy
With no widespread market expectation that commodity prices, particularly oil and gas, will rise significantly in the short to medium term, foreign corporations (and indeed banks) have been forced to decide on the level of investment they are willing to make in the region, particularly given the fall in the relative value of local currency revenues. Presumably, companies that choose to remain are changing their strategy from the heady days when oil prices were $100 a barrel?
Governments and regulators are in a very difficult position as they seek to protect their national economies and citizens.
Corporates are no longer looking at Latin America as a potential high-growth market and instead are aiming to protect market share whilst minimising investment. Both top-line revenue and profitability have been significantly impacted by the fall in both commodity prices and currency value, which is definitely leading to a change in strategy. Opportunities to grow revenues are limited, so companies are looking to cut costs and drive efficiencies in order to maintain profitability or minimise losses.
The issue of managing costs and maintaining stability is not an issue restricted to corporations: governments of economies that are largely commodity-driven must also face the issue of how to achieve growth, and secure funds to continue public spending.
Governments and regulators are in a very difficult position as they seek to protect their national economies and citizens. Government income has been reduced, and countries face fiscal deficits and negative balance of payments. In this environment, they need to raise debt, which is becoming more difficult as credit ratings are only just in investment grade territory with a negative outlook. Having invested in public infrastructure and services, it is difficult for governments to reduce investment and remove services, but this will inevitably lead to further deficits. [[[PAGE]]]
Change in government and central bank policy will also have an impact on corporations operating in the respective country, whether local or foreign corporations. What additional complexity do they face?
Fiscal pressures are resulting in some capital and commercial flow restrictions, particularly on short-term flows or those that could be considered speculative. Tax changes and increasing regulatory complexity are also forcing companies to adapt the way that they do business in line with these changes. For example, Brazil is now introducing a transaction tax, which is already in place in countries such as Colombia and Argentina.
Changing bank commitment
What about banks? We know that some major international banks have exited Latin America as a whole, or individual markets, in recent months: what are the implications of this?
All organisations doing business in Latin America are reviewing their level of investment in the region, and banks are no exception. We have already seen some major banks withdrawing from some markets as they review their global strategy, which results in considerable issues for their clients. These market exits are encouraging companies to diversify their banking panel further, including local banks as well as international banks.
The renewed focus on local and regional banks, as well as global banks, is a phenomenon that we are seeing in other markets too. Companies need the assurance that their chosen partner bank, particularly for core daily activities such as transaction banking, has a long-term commitment to the market. Furthermore, they are keen to balance specialist local solutions and expertise available from local/regional banks on one hand with the ability to achieve regional or global synergies offered by global banks on the other.
Centralisation of cash and treasury management, whether regionally or globally, is already well-established amongst multinational corporations as part of a wider global initiative. Now that higher value activities have been centralised, such as liquidity and risk management, companies are turning their attention to lower value transactions, such as payments and collections.
Local and regional banks are typically better equipped to support local payments and collections than international banks as they have the branch network and local clearing access that some international banks lack. However, the growth of electronic payments, standardisation of formats and alignment of global treasury processes means that international banks that can demonstrate commitment, local expertise and cohesive solutions also play a valuable contribution to an efficient treasury operation in Latin America.
Yes, we’re seeing these as key bank selection criteria, and companies in Latin America are seeking – and are able – to leverage the same innovations and efficiencies in cash management and trade finance as those in other regions. Liquidity management can be more challenging given tax issues, capital and currency restrictions. The high cost of conversion between currencies also reduces the viability of solutions such as cash pooling, although there are differences between markets.
Innovation in treasury
While treasurers and their colleagues across the business may find it difficult to invest in their enterprise, Latin America continues to be a region in which innovation is thriving, albeit in a different way to other regions.
Where we are seeing innovation is in the role of the treasury function in Latin America.
Where we are seeing innovation is in the role of the treasury function in Latin America. Increasingly, treasury is bringing together different departments, such as procurement, sales and HR, to align scorecard metrics and facilitate a more systematic approach to managing working capital and supply chain efficiency. This is also changing the way that customers adopt new banking solutions, with a wider range of stakeholders involved, who bring different experiences and expertise. Although the sales cycle is inevitably longer, the result is that solutions are more closely aligned across the business, and there is a more integrated approach to transaction and reporting flows, and working capital optimisation.
This focus on supply chain integration and working capital is an issue that has been discussed by corporations around the world, but the business imperative is stronger in Latin America than any other region, firstly because of low growth rates (which is also an issue shared by other regions) but exacerbated by the commodity and currency issues, higher inflation, and high cost of borrowing. To what extent is this driving changes in the way that corporations work with their banks?
This enhanced focus on engagement and collaboration which is being driven by treasury is definitely impacting on the way that companies communicate with their banks. Today more than ever before, we are setting up host-to-host connections with our corporate customers i.e., connecting customers’ internal ERP (enterprise resource planning) and/or TMS (treasury management systems) directly with our own systems. This allows an unparalleled level of security, timeliness and automation in the transaction and information flow between Citi and our customers.
A related issue in which Latin America is to some extent taking a lead is on how to resolve the dilemma of proprietary versus independent (e.g., ‘fintech’) solutions. In regions where the potential value of cash management and trade finance services (for example) is higher, the relationship or balance between the two can be uneasy. In Latin America, where the total value available to providers of financial technology solutions has fallen, there would seem to be greater appetite for collaboration and delivering value to customers through the most appropriate means for their business. Is this your experience at Citi?[[[PAGE]]]
Absolutely. In addition to delivering our own solutions, we recognise that a great deal of innovation is taking place outside the bank, particularly in the development of supply chain portals and marketplaces. We are highly respectful of these developments and recognise the value that they offer to the consumer and corporate communities; therefore, rather than trying to replicate these innovations, we are embedding our solutions into these emerging platforms to increase convenience and access. The industry leaders in these fields are very often our customers, so by supporting and facilitating their success, there is further value to our business.
What about mobile solutions? We are hearing a great deal about the potential for mobile solutions in other regions such as Asia and Africa, initially in the B2C space and expanding into B2B. To what extent are these developments taking shape in Latin America?
Although innovation is a key theme in Latin America to support corporate efficiency and cost objectives, we are seeing less focus on mobile solutions than in some other markets. In the B2B space, mobile banking is popular as a means for achieving convenient access to bank account and transaction information. As a payments channel, however, there is a lot of expectation but mobile payments are not yet having a major impact in the B2B space.
With no immediate signs that commodity and currency values, and therefore growth in the region, are likely to recover, how do you expect current trends to evolve over the coming year or two?
The current situation is likely to continue over the medium term, with ongoing commodity, currency, tax and regulatory volatility, all of which pose challenges for corporations and banks doing business in the region. While there may be some normalisation, there is also the potential for further currency devaluation. Therefore, treasury needs to remain aware and adaptable, just as it has proved to be since the 2008-9 crisis. The integration we are seeing across the business, particularly in the order-to-cash cycle, is likely to continue further as companies seek to reduce their working capital levels. Banks such as Citi have an important role to play through instruments to extend supplier terms without compromising the supply chain, and tools to accelerate collections.
