International treasury trends

Organizational Planning
Facing up to Emerging
Market Risks
SUMMARY: Major multinationals are consolidating
treasury activities in developed markets and
leveraging technology to provide one interface for
treasury management (at least on a regional basis).
This consol idation will free up resources to assess
the sovereign and commercial risks unique to the
emerging markets of Eastern Europe and Central
Asia.
Dealing with the post-Cold War global economy
requires a two pronged approach to organizational
planning. Focusing on developed financial market
economies (and those soon to join their ranks)
allows the treasury function to consolidate its
resources around a singular service interface.
Developing regional blocs, North America in
particular, offer MNCs tremendous opportunities to
reorganize treasury. Thanks in part to the NAFT A,
"you can really handle Mexico and Canada out of
the US," notes one assistant treasurer.
The big question for many major corporates then
becomes to what extent they switch to centralized
management of funding and decision-making for
the rest of the hemisphere. Eventually, this question
will be asked in every part of the world that fits
their definition of a developed financial market
economies.
The Western Hemisphere has become the
natural starting point for US multinationals in
particular. As commercial and sovereign credit
ratings climb in several Latin American countries,
US capital markets are rapidly becoming the focus
of Latin American operations looking to raise
financing. If possible, it is clearly more attractive to
raise money in the US via commercial paper.
In the past, the arguments against centralized
funding, particularly for Latin American operating
companies, was that the country risk was too
significant for the parent to load up on exposure to
the region-a lesson learned from banks during the
debt crisis.
Now of course the perceived country risk in Latin
America has fallen dramatically, so that gradually
operating companies in Mexico and the more
stable Latin American countries will be funded
centrally from the US parent.
With Latin America being folded into the
centralized treasury operations, international
treasurers will be asked to focus more on the I
uncharted financi al markets of the world: those of
Eurasia. "I think that the critical to-do for the
international treasurer in the remainder of the 90s
is to make a geopolitical assessment of the world,"
notes Xerox's assistant treasurer for emerging
markets Jean-Pierre Bourtin. The goal is to "get a
good feel for the sovereign and commercial risk of
each foreign operating company or JV." As
corporates move forward wi th centralized funding:
the real challenge is going to be determining the
sovereign risk on intercompany loans and equity
injections.
Retooling international treasury
More geopolitical than treasury proper, the
international treasurer's role visa vie emerging
markets will require new skills. These skills will
need to be applied broadly: Including Africa and
the Eurasian continent, treasury can have 100 plus
countries to keep track of. In the eyes of some
treasurers, thi s will cause the international treasurer
to evolve from a master at derivatives- trying to ,
take five or ten basis points off a loan- to
someone who can look at a country and "assess
pretty quickly the sovereign and commercial risk. "
In other words, the international treasurer needs
to be able to comment intelligently on the growing
list of countri es- freed from Cold War
obscurity-that are attracting MNC investments.
Where mightthese investments be funded centrally
and where should the money be raised locally at
whatever cost? When operations reach a critical
mass in a given country, treasury expertise in the
field may be necessary to answer this question.
Many corporates are responding by shifting their
Latin American resources-less necessary under a
centralized financing regime for the Americas- to
new markets.
The risk of a mass appropriation of corporate
assets varies tremendously from one country to the
next, so it pays to be attentive. According to Mr.
Bourtin, for instance, many treasuries are
underestimating the varying degrees of risk in
doing business in Eastern Europe.
And like Latin America in 1983, three, four, or five
countries could collapse at once.
The bottom line, say most treasury professionals
familiar with the emerging markets, is that you will
not be able to grow your business with cash on
delivery and letters of credit alone. Sooner or later
This article shows readers
the need to pay much
closer attention to
country-/eve/ finance
issues, particularly in the
emerging markets. In a
series of articles to follow,
International Treasurer will
highlight key aspects of
treasury management for
some of these countries.
In countries you know
little about, it is often best
to start with an
assessment of sovereign
risk, including:
Political instability:
What is the \oca\
governments abi lity to
defend property rights?
Investment climate: Are
central and local
authorities receptive to
foreign ownersh ip and
participation in business
activities?
Remittance restrictions:
Which (future) regulations
place restrictions on
cross-border funds
movements?
Taxation: Are taxes
being used as a barrier or
to discourage particular
formsof investment
Expropriation: What is
the history of asset
seizures and national
ownership?
Political attitudes: What
business attitudes are
expressed by the political
parties, opposition groups
and rebel factions?
Criminality/Terrorism:
Many emerging markets
remind of the Wild
West-How safe are your
valuable human resources
and inventory amidst the
gun-slingers?
International Treasurer I March 7, 1994
every cqmpany is going to have to take
some country risk.
The question is how much. Treasurers,
therefore, had better get a real sense of
this fisk today," or they are going to face a
very unhappy board of directors down
the road," one warns. ''Think about it: this
is an exposure that can amount to tens of
millions in dollars of losses-overnight."

Country briefing
Emerging Market
Vietnam
SUMMARY: Foreign investment-both
direct and portfolio- is a key element of
market-led economic reforms being
introduced behind the former bamboo
curtain. like China, Vietnam is not going
to relinquish centralized economic
planning or political control. MNCs
entering this market should therefore be
prepared to deal with government
controls on their investments, regardless
of the published official rules.
Vietnam is no easy country to manage
from a treasury standpoint. It has a very
small foreign exchange market, hefty
import tariffs and heavy restrictions on
currency made available for corporate
remittances. The picture may change
for the better with new foreign
exchange regulations submitted to the
Council of Ministers. Market observers
hope that these regulations- expected
to be introduced some time this year
(perhaps within the next several
months)- will streamline the process
of exchanging foreign currency.
Repatriation of profits: Whatever is
approved on paper, treasurers should
expect intermittent government
interference in their access to foreign
currency. Near term, the availability of
foreign currency may improve- as the
government wishes to encourage
investment. Some economic observers,
however, expect a current account
shortage to develop in the 1-2 year time
horizon, which will lead to a foreign
currency cash crunch.
Short-term financing: Financing of all
International Treasurer I March 7, 1994
International treasury trends
Take advantage of your existing latin America expertise
A general trend for major corporales is to move emerging market treasury talent from Latin America
to other parts of the world. The basic premise of this trend is that while each country is different the
treasury management ingredients-i.e. fragile economies, high inflation, and government
intervention- are the same.
Does this mean that there is no learning curve? Not exactly. While the economic situations and
countervailing techniques are similar, the way people think and do business in each country may
be different. Understanding these differences may be critical to assessing the good country risks
from the bad. Treasurers will need to learn how to monitor local practices and draw on talent in the
field when necessary. "When operations reach a critical mass, it is still a good idea to have
someone on the ground," warns one treasury professional.
types is difficult in Vietnam. Most JVs are
heavily capitalized with intercompany
loans, as local credit lines are unreliable.
Foreign Exchange: The US dollar is a
widely used means of exchange in
Vietnam. The government has taken
steps to limit its use and would like to
make the Dong the only currency used
in the country. The spread between the
black market rate and the posted rates
(ca. 10,800 Dong: 1 USD) is said to be
quite close- in an apparent effort to
limit the growth of an underground
economy. The official exchange rate is
influenced somewhat by the exchange
center rates (similar to the misnamed
swap centers in China). There are
currently two centers: Hanoi and Ho Chi
Min City (Saigon), which operate 2-3
days a week and are not heavily used.
The Vietnamese central bank is
attempting to make the Dong
convertible. Medium to long-term
downward pressure on the currency
should be expected as a result of these
efforts as well as to promote exports.
Inflation will probably run between
8-9%, as the government wants to
maintain single digit rates. Actual
inflation is difficult to judge. No
accurate measurement yet exists for the
country's booming service sector.
Watch out for portfolio-fund-driven
inflation, if the pilot stock market program
takes off next year.
Cash management: Using Citibank as
a benchmark, there are signs that
centralized cash management at least
on a country-level may be a possibility.
Citibank, which has only a
representative office in the country, is
"changing its view on Vietnam" and
working to integrate the country into its
regional Asian cash management
services. Citibank's willingness to
implement cross-border cash pooling
(on a country-by-country basis) is
greater than any other bank in Asia. It
will be interesting to see how far it gets
with Vietnam.
American banks are generally behind
their foreign competitors (being banned
from active trade with the country) in
their ability to help corporates in
Vietnam. Proposed systems should be
weighed carefully against the potential
for a local or foreign bank to offer
important ancillary services (e.g. credit
lines) at an earlier point in time.
Treasurers given responsibilities over
Vietnamese cash flows are advised to
take a trip to the country to determine
the level of intercompany funding for
local operations. In many ways, it is like
China was a decade ago, but its is likely
catch up in a much shorter time period.
"It's all very much a moving picture,"
notes Frank Hawke, who is leading
Citibank's Indochina efforts, "and
improving at a fairly rapid rate."