Multicurrency Accounts: Liquidity Management for Brazilian Treasurers
In the 1980s and 1990s, Brazil was a poster child for high inflation rates, economic instability, and a challenging business environment. However, changes in both economic policy and the regulatory environment over the past decade, and the last five years in particular, have created a more favorable environment for business and investment and enabled Brazilian companies and multinational corporations (MNCs) based there, to seize new international trade opportunities.
In fact, Brazilian exports doubled between 2002 and 2005, growing from US$60.3bn to US$118.3bn, and represented almost 20 per cent of GDP last year (source Bacen). What’s more, this growth is expected to continue at double-digit rates over the next few years.
The majority of Brazil’s export growth has come from, and is expected to continue to come from, previously untapped markets in Asia, the Middle East and Latin America, as well as a broader array of European countries. Unlike the recent past, when trading was conducted predominantly with North America- and UK-based business partners, Brazilian companies today face a broader, often unfamiliar, world of new business and financial opportunities.
Corporate treasurers and financial managers for these companies are experiencing new challenges as they navigate unfamiliar offshore banking environments, foreign currency receivables structures, FX risk, and liquidity management issues – all within the changing regulatory constraints of the Brazilian government for repatriating their offshore receipts.
The good news is that the Brazilian central bank (Banco Central do Brasil – BCB) last year began loosening foreign exchange rules for exports, providing not only more opportunities for trade agreements, but more flexibility for companies to manage their foreign currency conversions and liquidity. In addition, corporate treasurers who choose banking partners with broad and deep FX capabilities on the ground in Brazil and around the globe can now tap more sophisticated products and services for managing, maximizing, and simplifying their multicurrency receivables and liquidity decisions.
One such solution is the use of multicurrency accounts, which can typically be offered by the Brazilian branch of a bank through its London branch. Companies based in Brazil, bound by BCB’s rules, unlike those based in most other countries, are required to credit their export receivables into a Brazilian bank’s account abroad. Therefore, multicurrency accounts created in London are actually owned by the Brazilian banks but are dedicated to individual customers’ export receivables.
The multicurrency account structure works whereby a given client of a Brazilian-based bank opens a sub-account of its header account in a London branch of the same bank for each currency in which the client receive funds. This structure gives companies the ability to manage receivables in up to 35 currencies within Brazilian regulatory constraints governing foreign exchange conversions to Brazilian reais. The key benefits of this type of multicurrency account are that it eliminates the need to create bank accounts or relationships for each currency, provides exporters with faster, more complete and accurate visibility of their receivables in a single currency, and enhances their overall FX and cross-border cash management. In the European market, they are yield accounts that earn interest in the overnight market, with the interest being credited to the accounts monthly.
Under new Brazilian regulations, companies have more flexibility than in the past to manage their cash balances and the liquidity of funds received outside the country. They now have up to 210 days from the shipment’s date to convert the interest earned on their funds to Brazilian reais and to repatriate it, compared to a maximum tenor of 90 days, (180 days under certain conditions) in the past. Similarly, export payments collected after goods have been shipped, or services have been delivered, must be converted and repatriated within 210 days (90 days if payment is made prior to shipping).
Thanks to the adoption of electronic banking technology, companies in Brazil can access real-time cash balances, statements, and information about the transactions in their multicurrency accounts online. In addition, they gain more control over their foreign exchange closures, since they can also initiate and authorize electronic transfers online between two Brazilian banks’ foreign accounts if there is a need to close FX transactions with another bank in Brazil (based on requisite authorization and security controls by the holder of the Brazilian account).
Since introducing multicurrency accounts to Brazilian exporters in July 2005, we have seen a significant increase in the number of companies moving to this model. Volkswagen Brazil, for example, had already centralized US dollar export receivables through its New York account and was realizing the benefits of online, real-time information reporting, electronic funds transfers for FX closure at other banks, and the ability to receive same-currency export receivables funds in a single account. However, the company’s euro receivables process involved manually processing receivables from thousands of customers’ credits to its Brazilian banks’ accounts. This generated delays in identifying and matching received payment orders, which in turn delayed both the closure of FX contracts and utilization of funds.
Wanting to standardize its process across all currencies and to have the ability to automate the transfer of export receivables to close its FX position with other banks, Volkswagen opted to use a London-based multicurrency account structure. “The main benefits of the multicurrency account in euro is the automation and standardization of our export receivables process, in addition to being able to earn interest on our export receivables,” explained Robson Silvestre, who is responsible for Volkswagen’s treasury back office. “But more important, it is key to optimizing our international cash management.”
What we do expect for the near future is a major contribution to country GDP coming from exports. Trade balance surplus is one of the responsible factors together with a conservative fiscal policy for the sustainable current situation of Brazil’s balance of payment. Approximately US$40bn are being generated yearly as net additional reserves to the country which allowed Brazil to pre-pay almost 100 per cent of its external debt in 2005. When we analyze the historic moment when most of the current trade and FX regulation were created (in the 1960s and 1970s) the situation was the opposite in terms of country risk and a strongly regulated environment was imperative to protect the currency and control the economy. From now on, any economic forecast for the country presents a positive trend and our international role, together with the other three BRIC countries (China, Russia and India) encompasses growth of foreign direct investment, consistent trade surplus, large gain of scale and possibility to centralize manufacturing and service processes for part of the global economy. In this new scenario, the Brazilian central bank is aiming to update the trade and FX regulations to support the new role of the country in a global economy. The changes we saw last year were just the first step in a long devlopment process that needs to take place.