Unlocking Working Capital in Latin America: the Liquidity Challenges
ABN Amro brought together regional treasury managers in a roundtable to discuss the challenges – and potential solutions – of working capital and cash management in Latin America. Taking part in the discussion were: Ron Chakravarti (head of liquidity advisory for the Americas at ABN Amro), Antoine Arts (regional and international sales, cash flow advisory for Latin America at ABN Amro) and Pim van der Burg (managing director at ABN Amro, Curaçao ).
The roundtable discussion began by noting that global liquidity issues are a high priority for treasurers. A 2004 study from US-based consultants Treasury Strategies found this to be a key issue for the treasurers surveyed. This is hardly surprising, as multinational companies need flexible, efficient and transparent liquidity management across their operations, and the more global that liquidity, the better. Yet, for the most part, liquidity must still be managed on a regional basis with Asia and Latin America posing the greatest challenges and, potentially, given that most multi-nationals now have efficient liquidity management structures in place in the US and Europe, the greatest opportunities for incremental benefits. This article summarises the main topics discussed during the roundtable discussion.
During the roundtable, Chakravarti, at ABN Amro, advocated that a pragmatic two-tier approach would yield the best results. These two strategies would be to consolidate locally and to then optimise regionally. He said: “At a local level, concentrating money between legal entities, through zero balancing or notional pooling, is impeded by the debit tax regimes that exist today in many Latin American countries.” He added that, 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 generally not feasible. For these reasons, limiting the number of banking partners used for collections and payments is the first necessary step to greater efficiency. This allows companies to take advantage of cash consolidation, avoid unnecessary money movements and leverage increased purchasing power to get best value investments at the local level. Establishing robust cash forecasting will also help to improve management of both short-term funding needs and investment opportunities.
Investing locally is easier said than done and in several markets it is complicated by debit and investment taxes and lack of overnight investment options. Argentina, Brazil and Venezuela are the most restrictive markets – as a rule of thumb, exchange control regulations are an indicator of overnight investment options. If exchange controls are strict, local currency investment options will often also be restricted.
Arts, at ABN Amro, noted that Venezuela is particularly restricted with regards to local investment options. He said: “At the end of last year, though, the government introduced bonds which may be converted to US dollars and this constitutes the only available route to repatriate funds from Venezuela to Europe or the US. While this looks like an interesting option, conversion rates are unattractive. On a positive point, Venezuelan companies with funds offshore may hold offshore accounts without requiring special authorisation.”
Meanwhile, Argentina is seeing a gradual liberalisation of the environment so that it is now possible to dividend out up to $2m. In Brazil special authorisation is needed from the central bank to hold offshore accounts, and it is possible to move funds out of Brazil, but there are costs in the form of debit taxes and a local transaction tax, IOF.
An option for Venezuela, which was suggested during the roundtable discussion, was to collect from and pay suppliers offshore, since many companies would hold offshore dollar denominated accounts. This would reduce the need to hold cash in-country. In addition, it is possible to bring funds into Venezuela to cover payments that need to be made locally. A further option is to seek permission to move funds out of the country to cover a commercial or financial debt, depending on how finances are structured. For Brazil, as in Argentina, a maximum threshold is in place for dividending funds out, but a further restriction applies in that payments to foreign creditors can only be made up to a limit equivalent to the amount of funds brought into the country.
The ideal solution, according to Arts, at ABN Amro, is to establish a liquidity structure similar to those used in the US and Europe, enabling surplus cash to be concentrated or notionally pooled at regional level, and the maximum benefit derived from unused short-term funds. He added: “But here we have to deal not in dreams but the art of the possible. The good news is that it is possible to establish offshore US dollar cash pools and get tangible benefits from such arrangements, despite some of the restrictions and difficulties we have touched on.”
It is possible to do this using either zero balancing (cash concentration into a single pool account) or notional pooling (where funds are allocated to separate accounts with interest compensation calculated across the combined notional balances of those accounts). Arts believes there is particular interest in the notional pooling option. He said: “In general, currency conversion and cross-border transfer costs and taxes mean it is efficient to do this at biweekly intervals rather than daily, as is the norm in Europe and the US.”
New York may be the preferred location for such a pool since that is where dollars clear, and therefore, the optimum operational efficiency can be achieved. However, other offshore locations, such as Curaçao in the Dutch Antilles, offer attractive tax and legal benefits for some companies.
Van der Burg, at ABN Amro in Curaçao, observed that Curaçao’s regulatory framework is modelled on Dutch legislation and this has made it easier for the bank to establish a notional pooling structure there. He said: “In addition, we have determined legal and regulatory requirements for the different jurisdictions and legal entities that companies might be looking to include in a Curaçao pooling arrangement. There is considerable interest in this liquidity management option among treasurers managing the Latin American region, and we expect rising US dollar interest rates to increase the attention given to this.”
Arts added that the interest has also increased as a result of the gradual liberalisation in the region. Accounts are actually being established for entities in Venezuela and Argentina. He said: “It seems a lot more is possible now than even a few months ago.”
Some of the key elements of the accounting structure are that entities in the operating companies can open non-resident US dollar accounts in a suitable offshore location and the accounts can be notionally pooled. There is a separate master account – owned by one of the entities or perhaps by a treasury vehicle – which is the main primary settlement account for purposes of interest, credit and debit. Transfers to and from the pool accounts are initiated by the company, rather than automatically by the bank; this is the most efficient way to minimise transfer costs. The accounts can be monitored electronically. One aspect to consider is how much control to give to local operating companies to manage their pool accounts and how much control the treasury should take.
Case Study: the Benefits of a US Dollar Cash Pool in CuraçaoA major European consumer goods company set up a US dollar pool in Curaçao. The attractions for them were a favourable tax environment, a clear regulatory environment (based on Dutch legal practice) and low country risk, since Curaçao is part of the Dutch Kingdom of the Netherlands. The client did a fairly detailed analysis of the cost implications of such a structure and initially opened accounts for legal entities in four countries, but is now extending this to another two countries. In this case the master account is held by a finance vehicle – the regional treasury centre. Some entities are running negative balances on the pool accounts and others have positive balances, so it is a fully functioning, classic notional pool. The pool interest is re-allocated according to the company’s guidelines. A further benefit is the time zone; it is much more convenient for the company to maintain such a pool in the region as opposed to, say, in London. But which countries can participate in a cash pool in Curaçao and which countries can be cost-effectively included in such a structure? While Curaçao’s unique legal and tax environment is well-suited to establishing notional pools for entities from multiple countries, structures need to be designed with care. For example, Colombia can be included in a pool, but transfers from Curaçao to Colombia can have negative tax implications. The applicability, however, really does differ from company to company, depending on its tax status and structure – detailed tax advice should always be sought and reflected in documentation. Among the points to raise in those discussions are:
Beyond the tax implications, country risk is also an issue. For example, it might be preferable to accept a high withholding tax charge to avoid the consequences of a sudden devaluation or change in currency control, as has happened in the past. Cash flow forecasting is an important facilitator of effective liquidity management. Companies are now focusing a great deal of attention on more effective cash flow forecasting across global operations. In part, this is recognition that efforts to do so are worthwhile, given the resulting improvement in investment and funding management. Another driver for improving forecasting accuracy is the current focus on transparency and control – variances in cash flow forecasts can point to business changes or to control issues, such as fraud. |