Growth Challenges in the Emerging Markets
The narrative around emerging markets (EMs) has not changed much over the years, with a general feeling that operating in EMs offers the potential for growth but also the possibility of greater risks and challenges for organisations.
An educational session on the second afternoon of the Association for Financial Professionals’ (AFP) annual conference 2014 in Washington DC provided context around the developments in EMs in recent years and included a corporate case study.
Kicking off proceedings, Jiro Okochi, chief executive (CEO) and co-founder of software-as-a-service (SaaS) provider Reval, cited Morgan Stanley Capital International’s, aka MSCI, Emerging Market Index as a way to demonstrate the changing face of emerging markets. When the Index was launched in 1988, there were only 10 countries on the index, which represented less than 1% of world market capital. Today Okochi pointed to the fact that the Index has grown to cover over 800 securities across 23 markets, accounting for approximately 11% of world market capital.
Despite their vast growth, EMs are still daunting to many. However, treasurers should definitely care more about these markets today. Okochi pointed out that approximately one in four mergers and acquisitions (M&A) today involves an emerging market company. Of these deals, around 60% involve Brazil, Russia, India or China (BRIC) companies.
Trapped cash becomes a big issue, particularly for US multinationals. Okochi quoted Euromoney research from March 2014 that showed these companies have US$1.95 trillion in deferred earnings outside of US soil. The research showed that China, India and Russia are the most problematic locations for trapped cash, with issues such as penalties, fees and taxes keeping cash from being repatriated.
Taking Care of Basics
Looking at the overarching objectives for corporates entering emerging markets, Sharon Petrey, treasury and risk subject matter expert at Reval pointed out that there is really nothing new, but it is important to take care of the basics.
From a strategic point of view, she said treasurers should think about how they can ensure access to sufficient funding, maintain sufficient in-country liquidity, manage risk and optimise local cash. From an operational standpoint, Petrey said that treasurers are focused on the overall ease of operations. One way to achieve this is to streamline and optimise banking structures, which can go a long way to providing treasurers with the visibility that they crave.
Providing a personal perspective, Ken Shuyama, director of International Treasury with Stanley Black & Decker said that globalisation increases complexity, unpredictability and risk for treasury. He added that it is critical treasury works with other business functions, such as tax, legal and accounting,
before entering an EM, in order that there are no nasty surprises when you begin operations.
In terms of lessons learned, Shuyama said that it is critical to take care of existing operations at the same time as expanding into emerging markets. He recommended simplifying and reducing complexity, while also enhancing processes by leveraging technology.
For growth in new markets, Shuyama had the following advice for treasurers:
Regarding counterparty risk, Shuyama said that organisations expanding into emerging markets tend to have to use at least one local bank as part of their group. While the failure of a local bank may not affect the overall group, it could be very significant for the local entity. He advised that treasurers need to plan for this eventuality.