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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
What is the expected conclusion of crypto volatility for Corporate Treasury?
08-06-2022 | treasuryXL | LinkedIn |
A couple of weeks ago we launched a poll on our LinkedIn page about the impact of crypto volatility on corporate treasury. The poll received 72 votes in total, which is a great number! Thanks to everyone who joined the poll.
We thank François de Witte, Pieter de Kiewit and Carlo de Meijer for sharing their views with us.
What is the expected conclusion of crypto volatility for Corporate Treasury?
The votes which were given by Treasurers
View of treasuryXL experts
Francois De Witte
It is quite clear that cryptos present a high-risk profile. The volatility is high, and it is not easy to hedge these risks. In addition, payment transactions in cryptos take more time and energy than existing payments systems like the instant payments.
Currently, cryptos are held within the blockchain and are based upon a consensus. As a corporate, you do not have a control over these assets. In addition, you do not have the stringent KYC and AML checks which you have in the classic payment systems. The KYC and AML controls occur only on the moment that an individual or a company buys cryptocurrencies with its bank account or card, or when the proceeds of the sales of cryptocurrencies are paid to their bank account.
For this reason, there is a clear need for more regulation. Although the 5th AML Directive covers certain crypto assets under the term “virtual currencies”, it does not provide a harmonized approach. This problem will be addressed by the proposal of the EU Commission for the Regulation of Markets in Crypto Assets (abbreviated as MiCAR), which aims to create an EU framework for crypto assets falling outside the scope of other existing EU financial regulation and is expected to enter into force by end 2024. Let’s hope that this will bring more clarity in this complex topic.
Pieter de Kiewit
Rejecting crypto currencies or even blockchain before fully understanding the concept is like holding on tohorse and wagon when seeing the first cars. And current inflation following the QE strategy of the ECB shows that stability is not guaranteed in the traditional system. At the same time, treasurers are there to manage risk and the current crypto landscape seems very risky. So let’s see what will happen.
Carlo de Meijer
Regulation of stablecoins has long been on the agenda of regulators worldwide. To date, however, the crypto sector in general and the stablecoin segment in particular remain largely unregulated.
Stablecoins continue to come under scrutiny from regulators, given the rapid growth of the $130 billion market and its potential to impact the broader financial system. As stablecoins are deemed increasingly important to the system by regulators, with the potential to disrupt payment and settlement transactions.
The recent collapse of stablecoin TerraUSD (UST) and the resulting fall of Bitcoin below the $28.000 level have provided an additional argument for speeding up the regulatory process and coming up with adequate regulatory measures.
With a growing number of traditional financial institutions, investors and also companies entering the Crypto and DeFi market, regulation becomes urgent to prevent such collapses in the future. Buyers need to understand the risks of these algorithmically stablecoins in particular. Therefore, standards are needed.
Without well thought-out regulation, the inherent volatility of cryptocurrencies in general but also of some types of stablecoins, will continue to make these stablecoins vulnerable to various risks, and make using these instruments for treasury purposes a difficult activity. The lack of transparency about what assets are being used and whether they have enough dollars to support all the digital coins in circulation also amplifies this consequence.
Closing Loops: Connecting FX Hedging and Cash Forecasts
08-06-2022 | treasuryXL | Cashforce | LinkedIn |
From forecasts to forex. The member said this is only possible because Cashforce can forecast at a high level of granularity. The AT said she was “really lucky” that the tools work together so well.
A closed loop. Nicolas Christiaen, Cashforce’s CEO, said that, before this project, the member’s process was “very disconnected,” but all it took was connecting the dots.
A step further. With the proposed system that the member has designed with Citi, the company could include its hedging policies as a rules-based program in CitiFX Pulse that can read this forecast.
Constant change. Automation is “an awful lot to bite off,” the member said, and recommends starting slow on this kind of process:
Article originally published by Neugroup here.