Cash & Liquidity ManagementCash ManagementPracticeLiquidity Management in Latin America: The Art of the Possible

Liquidity Management in Latin America: The Art of the Possible

Today, many more multinational companies (MNCs) are exploring the potential to optimize their liquidity across Latin America. True, the impediments that continue to exist in the region make efficiencies achieved in North America and Europe a difficult-to-reach benchmark within the Latin American environment. But still, many companies are making useful improvements in the management of their day-to-day liquidity and in the process, unlocking working capital in the region.

What are the obstacles?

MNC’s certainly continue to face significant challenges in respect of liquidity management in Latin America.

Some local banking environments are less than efficient and even where the financial and banking infrastructure is advanced, local regulations may still be restrictive (as in Brazil). The impediments to liquidity management across the region include FX controls, taxes, a lack of overnight investment options, and so on. However, with the volatility in Latin American currencies and interest rates, companies create many unnecessary exposures and costs if they fail to properly manage their local liquidity and funding needs in the region.

Step one: optimise your structures in-country

As a first step, companies should look for opportunities to improve cash efficiency in-country.

At a local level, concentrating money between legal entities, through zero balancing or notional pooling, is impeded by the debit tax regimes that continue to exist today in many countries. Also, as a result of the same debit tax regimes, moving funds between financial institutions for balance concentration purposes (as is commonly done in North America and Europe) is not market practice in this region.

Hence, rationalizing local bank relationships and concentrating business with a limited number of banks can result in significant cost benefits. These benefits are derived from fewer debit tax transactions, off-setting of debit balances with surplus funds, and better negotiated conditions for investment alternatives.

Getting the right balance between local banks and international banks will be necessary since local banks may provide added value through their extended branch networks; additionally, local bank relationships with your subsidiaries may be longstanding, and severing them may be met with resistance by your local finance staff.

However, using an international institution with a strong regional network makes sense in Latin America as in other regions. Centralizing collections and payments as much as possible with a strong international bank will be the aim – managing these within the same financial institution is often much more cost effective than the alternatives.

Working with an international bank may also be preferable from a risk perspective; counterparty risk profiles may be an issue when dealing with some local banks.

Step two: centralize at a regional level in US Dollars, using off-shore structures

At a regional level, trying to concentrate cash on a North American or European model is also fraught with challenges. On this level too, debit taxes, withholding taxes, and foreign exchange restrictions create complexities for MNCs. As a result, companies may be in the frustrating position of having surpluses (surplus cash earning zero returns) in some places, while requiring funding in other places (expensive bank funding).

One solution is to put USD and local currency balances (converted to USD) in an off-shore location and establish a notional pool structure. By holding USD cash pools off-shore, companies can optimize their Latin American subsidiaries’ liquidity and funding needs and benefit from the off-setting surplus and deficit positions within the region, while also reducing currency exposures.

Today, both zero balancing and notional pooling are available at a regional level, with the choice made by each company depending on taxation and other considerations. As a result, a number of MNCs are choosing to convert excess local cash (beyond that required for immediate operational purposes), to an off-shore location. Some companies prefer to hold such cash in New York. Other companies prefer the advantages of maintaining their cash in a tax-favourable locale that is outside the US, but efficient and well-regulated and still in the same time-zone; Curacao in the Netherlands Antilles, a part of the Dutch Kingdom, is one such location.

A practical case study

A major European consumer products company established a regional cash pool with ABN AMRO for Latin America. The company appreciated the advantages of Curacao as an off-shore location because of its favourable tax environment, legal and regulatory status as part of the Netherlands. In addition, the company preferred the establishment of a notional cash pool (i.e. funds held on separate accounts with interest optimisation), rather than a zero balance sweep. Key reasons for this included ease of administration and the fact that funds between legal entities do not co-mingle.

Each of the company legal entities based in four Latin countries established a USD account in Curacao. At regular intervals, the company converts domestic local currency positions into USD and moves this off-shore. Alternatively, deficit positions in-country are funded through the off-shore pool. The master account in the pool is held in the name of a Finance Vehicle, and receives the benefit of the interest off-set. This benefit is then re-distributed based on the company’s guidelines.

Conclusion

The value of cash as a strategic asset is now fully recognized by company boards and the analyst community, bringing effective liquidity management to the top of the agenda at many multinationals. This fact, combined with increasing opportunities in previously challenging markets, makes it worthwhile for the treasurer to re-assess the possibilities for liquidity management in all geographies where the company operates. In many of these, as in Latin America, exercising the art of the possible will deliver rewards.

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