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4 ways to optimise currency management in times of crisis
14-06-2022 | treasuryXL | Kantox | LinkedIn |
Did you know that CurrencyCast season 2 of Kantox is now available? In the first episode of the season, we look at four must-have tools to help you optimise your currency management and protect your business from risk in times of crisis. To see all episodes of CurrencyCast, click this link.
Credits: Kantox
Source
This week’s CurrencyCast looked at the four Currency Management Automation tools you need to navigate 2022’s predictable unpredictability. Here are our key takeaways:
(1) Put cash and currency management on the same page
The tool? The first Currency Management Automation tool is automated swap execution.
Why? Because, in times of pandemic and war, “Cash is King “. A recent risk treasury survey by HSBC finds that as many as 82% of CFOs say that cash management has been the most crucial issue during the last three years—and that is unlikely to change any time soon. The point is that cash management and FX risk management need to go hand in hand, especially in the current context.
How? By automatically executing the swap transactions that are necessary to adjust hedging positions to the settlement of the underlying commercial transactions, as cash flow moments do not always coincide. Failing to automate these cash adjustments properly hinders the whole risk management process. Yet, in FX risk management, cash management related tasks need as much attention —and as much automation— as other tasks of the FX workflow, like pricing with an FX rate, collecting and processing exposure information, or executing hedges.
(2) Optimise the impact of shifting interest rates
The tool? The second Currency Management Automation tool is a robust FX rate feeder that enables commercial teams to price with the appropriate exchange rate, whether it’s the spot or the six-month forward rate, with all the required pricing markups per client segment and currency pair.
Why? Because interest rates are shifting in many places as we speak. As interest rates change, so does the difference between exchange rates with different value dates, also known as forward points. On the one hand, if your company is based in a strong currency area like Europe or North America and you are selling into Emerging Markets, your commercial teams may need to price with the forward rate to avoid unnecessary losses on the carry. On the other hand, you can take advantage of ‘favourable’ forward points to price more competitively without hurting your budgeted profit margins.
How? Most Treasury Management Systems (TMS) are not equipped with what we call at Kantox a ‘strong FX rate feeder’ that would enable commercial teams to quote with the appropriate exchange rate, in this case, the forward rate. For that, you need a software solution that, working alongside your existing systems, provides your commercial teams with all the FX rates they need for pricing purposes.
(3) Prepare for disrupted supply chains
The tool? The third Currency Management Automation tool is an FX hedging program that allows you to delay —as much as possible, and according to your own tolerance of risk— the execution of hedges.
Why? Right now, as we speak, global supply chains are in turmoil. Commodity prices are seeing wild swings, and the economic outlook remains uncertain. This may lead to lower visibility regarding your cash flow forecasts and your forecasted exposure to currency risk.
How? One of the most fascinating tools that we have developed at Kantox —about which we will devote a future episode of CurrencyCast— allows treasurers to create a buffer from a ‘worst-case scenario’ FX rate that you wish to protect, if your aim is to keep steady prices during an entire campaign/budget period, and you can reprice at the onset of a new period.
This buffer, created by means of conditional FX orders, provides the flexibility to leverage information from incoming firm sales/purchase orders that are hedged. Forecast accuracy is usually correlated with time. As the campaign progresses, that flexibility allows you to gain more visibility into what is typically considered the less visible part of your exposure.
Delaying hedge execution also will enable you to:
(1) Create savings on the carry if forward points are not in your favour
(2) Set aside less cash than would otherwise be the case in terms of margin and collateral requirements
(4) Protect your profit margins and cash flows
The tool? Last but not least, the fourth Currency Management Automation tool needed to tackle 2022’s predictable unpredictability is —quite obviously— a strong FX hedging program.
Why? Because you need to protect your budgeted operating profit margins and company cash flows from currency risk. You may also desire to reduce the variability of your performance as measured in your financial statements. By allowing your firm to confidently buy and sell in the currency of your suppliers and customers, you take advantage of the margin-enhancing benefits of ‘embracing currencies’.
There is an additional benefit that may prove particularly relevant these days. In the event of a sharp devaluation of your customer’s currency, if you only sell in a handful of currencies such as EUR or USD, your customer may be tempted to unilaterally wait for a better exchange rate to settle their bills. You don’t want to be in that position — and you do it by selling in local currencies in the first place.
How? With the help of a family of automated hedging programs and combinations of hedging programs designed to systematically protect your firm from currency risk. These can be personalised whatever the pricing patterns of your business — whether you face dynamic prices or you desire to keep steady prices during an entire campaign period, or you wish to keep prices as stable as possible during a set of campaign periods linked together.
Treasury in transition – explore the agenda for EuroFinance International Treasury Management
13-06-2022 | Eurofinance | treasuryXL | LinkedIn
Featuring keynote speakers, Guy Verhofstadt and Göran Carstedt…
The 31st annual EuroFinance International Treasury Management returns in-person this September 21st-23rd in Vienna. With treasury changing like never before, join more than 2000 attendees, including 150 world-class speakers for transformative insights and the year’s best networking.
Learn from the experiences of more than 150 best-in-class treasurers including:
– Abraham Geldenhuys, VP and group treasurer, Kongsberg Automotive
– Yang Xu, SVP, corporate development and global treasurer, Kraft Heinz
– Alex Ashby, Head of treasury – Markets, Tesco
– Debbie Kaya, Senior director of treasury, Cisco Systems, Inc.
– Daniel Melski, VP finance and treasurer, Church & Dwight Co., Inc.
– Angel Cheung, Assistant treasurer, John Lewis Partnership
For more information and to register, visit: https://www.eurofinance.com/international
TreasuryXL contacts can claim a 10% discount with code: MKTG/TXL10 on top of the early-bird price which expires on July 29th – a combined saving of over €2000. Register here today.
We hope to welcome you in Vienna.
The EuroFinance Team
About EuroFinance
EuroFinance, part of The Economist Group, is a leading global provider of treasury, cash management and risk events, research and training. With over 30 years of experience, our mission is to bring together the brightest minds and most influential voices in treasury. Through in-depth research with 1,000 corporate treasury professionals every year, we have a unique insight into the trends and developments within the profession and an unrivalled global viewpoint.
Contacts
Marianne Ford
Senior Marketing Manager
EuroFinance
Economist Impact
[email protected]
Navigating emerging markets with a corporate treasury hat
09-06-2022 | Vasu Reddy | treasuryXL | LinkedIn |
Unlike many developed markets, like the US, which has 50 states, a single currency, single banking platform, one government, one central bank and monetary policy with no cash and currency restrictions, a developed global banking footprint and infrastructure Sub-Sharan Africa has the inverse, 25 countries, 25 different currencies and banking platforms, 25 different Central banks including monetary policies, 21 of which has strict Exchange control rules requiring prior approvals and document submissions for repatriation.
Article written by Vasu Reddy
What makes Corporate Treasury difficult in Africa
Doing business in Africa is an extremely long marathon and not for the faint-hearted. When your day-to-day activities are always faced with different risks and complexities, unforeseen and uncertain changes, and challenges in regulation and commercial environments with moving targets, one needs to be focused on the bigger picture about survival and growing the business and investment in the long term growth.
Overseeing a region spanning 25 countries with the Finance hubs being South Africa, Nigeria, Angola, Ghana, and Kenya and the latter being a Centre of Excellence for the rest of Sub-Saharan Africa, my main responsibilities included providing strategic and operational Treasury leadership with a focus on developing cash, liquidity and banking strategies, Developing and maintaining Banking relationships, Funding/capital and Debt structuring, Bank negotiation, Bank facility/documentation finalization, foreign exchange and Exposure management, Credit and Market Risk, Trade and Transaction solutions, Commercial/Project financing and Exchange Control and bank regulatory/compliance. Reporting into Corporate Treasury offshore with a dotted line into Africa CFO based in Kenya.
Apart from resilience and grit, one must operate adopting the “Lean” principles to ensure that the Leader navigates with focus, inclusiveness, integrity, transparency, and collaboration leveraging on operational excellence, world-class fit for purpose innovative solutions, technologies, and relationships leading the cross-functional diverse teams across multiple geographies and cultures across the different business verticals and functional areas operating in complex and challenging markets within a matrix organization that is impactful and exceeds business objectives.
Vasu joined GE from Chevron Oil Inc, South Africa where he was the Senior Treasury Manager, covering South & Central Africa for 7 years, and before that was at Land and Development Bank of SA before spending 6 years at Woolworths Holdings Ltd in various Treasury and Accounting roles. He is a highly experienced professional with 25 years’ Treasury, banking and Finance experience having worked in Multinational companies in Retail, Banking, Oil & Gas sectors, and diversified industries and capital.
Vasu’s academic background includes a Bachelor of Commerce (Accounting) degree, an Honours degree in Financial Management from the University of Cape Town, Postgraduate Diploma in Accounting from the University of KwaZulu Natal, South Africa. Vasu has completed the Leadership Executive Program (LEP) at the Graduate School of Business, Cape Town. Vasu has attended Advanced leadership courses at the GE Institute of Management, Crontonville, New York. Vasu is a member of the Association of Corporate Treasurers, South Africa, and a Certified Treasury professional with the Association of Financial Professionals, USA. He has been on various Treasury Community webinars and panel discussions/presentations at the Euro Finance, London.
The move into Treasury from Accounting seemed exciting with each day being different since it is more forward-looking and has external bank collaborations rather than the mere recording of past transactions. Although Treasury could be characterized as a more specialized function to some finance professionals, It entailed being pro-active, forward-looking, engaging with banks and financial institutions, keeping abreast of market dynamics, and providing advice and information on critical business decision making on a real-time basis which would have major impacts on the future business profitability.
Surviving the Challenges
Africa is a tough market to operate in and will always be considered an “emerging market” due to the infrastructure challenges and political climate, however, it would seem lucrative due to its ever-growing population and need for products and services. Many large Corporates including South African listed Multinationals looked to Africa for Growth expansion wanting to grow their businesses and increase shareholder value, to only experience huge challenges ranging from Supply-chain disruptions and delays, slow business responses, High costs of doing business, poor credit rating customers and banks, strict and changing regulation, lack of Foreign currency for repatriation resulting in huge trapped cash, delays with Central bank approvals, poor technology, and manual intervention, lack of global banking presence, lack of customer deal financing, political risks, highly cyclical commodity-driven markets that lack diversification for currency flow and with lots of red tape with no focus on developing policies to encourage and welcome foreign investment.
As a Treasurer/CFO, one should understand that these challenges will not disappear any time soon. One needs to always be proactive, thinking consistently “out of the box”, and consistently exploring innovative ways to pivot. When global corporations execute deals in Africa, end-to-end due diligence needs to be performed not just on pure profitability and return on investment but considering the holistic cash repatriation risks and costs including detailed country analysis involved per deal. This is due to the common shortage of foreign currency liquidity that is required to repatriate cash for imports, inter-co loans settlements, dividends, etc. In most markets, the flow of currency and exchange rate is controlled by the Central Bank. In 2015, with the oil price crash, and in 2020 with the Covid 19 pandemic, the trapped cash balances increased due to the US Dollar currency shortage because of poor foreign flows. Corporates needed to work proactively with their multiple banking partners to source foreign currency liquidity, where in some cases we had to ringfence our export proceeds with the banking partner and place orders strategically in the foreign currency queue to secure foreign currency which was used to settle the outgoing foreign currency payments in countries like Nigeria and Angola. Other alternatives involved banking multiple partners who bank the large exporters that have access to foreign currency liquidity in countries such as Mozambique and Ethiopia, however considering that proper credit risk analysis was performed on these banks. Other alternatives in 2015 involved working with Export Finance Agencies to provide a guarantee to the local Government through refinancing of exports from the UK to Angola where this foreign currency liquidity via an inward loan to the Government would be used for repatriation and the Debt with the local government will be sold Offshore with the proceeds being received offshore. Due to its complexity, the local government was not open to execution
Partnership and Playing by Rules
Since reputation risk and compliance is more apparent now than ever with Multinationals, it is paramount to ensure that the rules are strictly adhered to by the regulatory authorities since the operations in Africa were always seen as a long-term investment to grow the current businesses, considering that Africa presented incredulous growth opportunities for the foreseeable future. Regular meetings with Central Banks were held by Treasury and with Governments by Senior leadership to forge a collaborative partnership with a focus on investments in localization through manufacturing and assembling sites, job creation, and help in building infrastructure.
Another critical Treasury partnership is the global, regional, and local banks. Large Multinationals have a preferred bank partner list based on their global relationships, balance sheet size, market presence, and risk and credit rating. The challenge is that not all the Global banks have a presence in all African countries, In Ethiopia, the local market is closed to foreign banks. The preferred option was the order to an initial bank with a Global bank, then a regional bank, and lastly a local bank or if required by a localization law. An example in mind is Ghana, where you were required to have an account with an indigenous bank if you wanted to bid for local business. The advantages of partnering with the Global banks offered multiple layers of contact points for escalation and efficiency, prompt service responses, interest optimization options and economies of scale benefits, universal language on trade finance, guarantees and facilities including bank mandates, negotiable price to book fees, straight to bank processing, access to US Dollar flows, etc.
Technology and Digitization
Digitization and automation are pivotal for the future of Treasury and especially in Africa as this will ensure simplification, efficiency and effectiveness, cost reduction, faster response, and a more controlled and structured banking environment with fewer errors and risk of fraud. This should be coupled with AI to centralize processes as much as possible. Africa’s banking processes and platforms have room for development on technology advancements and the Covid’19 pandemic has forced most countries to rethink investing in technology and upscaling.
Ears close to the ground
Due to the diverse and extremely challenging banking operations, one requires strong technical competence, effective communication skills, consistently researching innovative ideas, and close relationships. One will find it challenging to manage the African operations with an “Arm-Chair” Treasurer sitting offshore. You would need to be close to the business operations, and functional teams like tax, legal, and banking teams on the ground. Whether one is researching a structured inter-co loan via a cross-currency swap, local hedge solution mitigating Zimbabwe hyperinflation, securing foreign currency in Mozambique, buying/selling Angolan Government bonds to maximize yield, obtaining Central bank approval on cash pooling arrangements in South Africa, or dividends repatriation or understanding the different Dollar rates offered in the Nigerian controlled market, one needs to have consistent and regular discussions with the banking partners and stay abreast of changes in each local market. One needs to also keep the local and global business leaders in the loop of changes and progress to manage expectations as some folks believe that if it can be done in New York, surely it can be executed in Africa as well.
Vasu Reddy
Corporate Treasury, Finance Executive