Cash management in Latin America and Trend: Difference between pages

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imported>Doug Williamson
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Market conditions under which there is believed to be a greater probability that a subsequent price movement will be in the same direction as the previous period's price movement (rather than in the opposite direction).
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Extended trends lead to bubbles and crashes.
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|above        = Cash management
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== See also ==
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* [[Adaptive expectations]]
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* [[Bubble]]
 
* [[Correction]]
|header1 = Authors
* [[Crash]]
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* [[Efficient market hypothsis]]
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* [[Mean reversion]]
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* [[Overshooting]]
| label2 = Carlos Castro
* [[Random walk]]
|  data2 =
* [[Rational expectations]]
Latin America Cash Management Head, [http://www.citigroup.com/citi/ Citi]
* [[Trend analysis]]
| label2 = Carlos Castro
|  data2 =
Latin America Cash Management Head, [http://www.citigroup.com/citi/ Citi]
 
 
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==Introduction==
Latin America has changed beyond recognition in the past 15 years. After decades of political turmoil and sporadic economic growth, democracy, stability and social mobility have become entrenched across many countries – approximately 40 million low income Brazilians became middle class in the past decade1. Latin America’s renaissance was vividly displayed during the financial crisis, when sound public finances, sizeable foreign exchange reserves and cautious regulation helped the region perform relatively well. The sense of progress is inescapable: Chile became the first Latin America country to join the Organisation for Economic Co-operation and Development (OECD), a group of industrialised countries, in 2010.
In addition to the benefits resulting from greater political stability, economic liberalisation and long-term policy-making, Latin America’s success has been driven by a significant increase in trade. In particular, trade with Asia (and especially China) has soared: China overtook the US to become Brazil’s largest trading partner in 2009. Pacific-facing countries, such as Ecuador, Chile and Peru, have also steadily increased trade with Asia. Meanwhile, intra-regional trade has also grown, thanks to the regional expansion of domestic companies (known as multi-Latinas).
Latin America’s economy is expected to grow 1.9% this year because of lower commodity prices and slowing growth in China (which buys much of the region’s raw materials), according to the World Bank2. However, GDP growth is expected to rise to 2.9% in 2015 and 3.5% in 2016. Crucially, that average conceals many high performing economies – Peru’s GDP increased by an estimated 5.8% in 2013 and Panama is expected to grow 6.8% this year – while other countries, such as Argentina and Venezuela, are not expected to grow at all this year3.
 
==Treasurers’ priorities==
Latin America’s strong growth has attracted many multinational corporations to the region and prompted those already operating – as well as multi-Latinas – to expand their operations. Treasuries must cope with the challenges of supporting the business in an environment of growth and increasing complexity.
Efficient funding is an important priority for treasurers in Latin America: if a corporate operates in multiple markets across the region, it is essential to take decisions in a timely manner in order to optimise working capital and liquidity. Increased visibility over cash balances and accurate, frequent cash flow forecasting are essential to fulfil these objectives and enable the business to achieve its strategic goals. Better visibility and control of cash also reduce the need for external funding and enable idle cash to be deployed, resulting in increased balance sheet efficiency.
A second priority for treasurers in Latin America is managing market changes. These include the migration from paper-based to electronic processes as well as keeping abreast of regulatory change. There has been a huge range of new regulations since the financial crisis of 2008, such as Know Your Customer (KYC) requirements. Also, domestic regulations continue to evolve. For example, in Mexico a new fiscal law requires tax deductions of $150 or above to be made directly to the beneficiary rather than to a third party. Corporates must comply with relevant regulations wherever they operate.
Corporate treasurers’ third major priority in the region is treasury transformation, including intelligent centralisation and the changing role of the treasury. Increasingly, multinationals are using Shared Service Centres (SSCs): Costa Rica is a favoured location while Brazil and Colombia are also gaining in popularity. By centralising payment processes in a single location, for example, using a single Enterprise Resource Planning (ERP) tool, costs can be dramatically reduced through automation and decisions can be better informed and faster.
A fourth priority for treasurers in Latin America is the desire to leverage technology, by using data and analytics to improve decision-making (for liquidity management, for example) or convenience. The use of mobile technology makes it easier for treasury personnel to authorise transactions remotely, helping to increase productivity and efficiency. Corporates also want to use technology to enhance their ability to service their customers by accepting mobile payments, for example. Citi is working with a local consumer bank in the Dominican Republic and has built an eco-system to facilitate mobile collections for small grocery stores and other retail businesses to replace cash payments to their providers with mobile transactions.
 
==The cash management environment==
The chief characteristic of Latin America in terms of cash management is its diversity. Unlike in Europe, for example, each country has unique rules and regulations. While it is possible to manage some processes centrally, the requirements of every individual market must be addressed.
Some markets in Latin America offer important opportunities. Brazil, for example, uses a unique automated receivables instrument called Boleto for the vast majority of collections. Each bill has a bar code containing reconciliation information. Payments can be made at any bank and are sent electronically to a clearing house, which distributes the funds to the beneficiary’s bank. By facilitating the electronic reconciliation of payments with outstanding receivables, efficiency is increased.
In other markets, corporates must be aware of local requirements. Mexico’s real-time gross settlement Sistema de Pagos Electronicos Interbancarios (SPEI) operates in a similar way to many other high value payments systems, such as the US Federal Wire. However, it has multiple payment types that can make the process more complex. Another Mexican peculiarity is the requirement for tax payments to be made via a government website. Nevertheless, this functionality is incorporated directly into electronic banking platforms using an Application Programming Interface (API), which enables different pieces of software to work together.
In some countries, significant challenges exist to efficient cash management. In Argentina, restrictions on foreign exchange mean that every transaction requires explicit permission from the central bank. Moreover, the approval process is manual and time-consuming. One unusual feature of the payment environment in Argentina is the widespread use of standardised post-dated cheques for payments. These cheques are often discounted by banks for early payment.
In many countries within Latin America, it is becoming easier for companies to achieve their cash management objectives. In Peru, the payments system has advanced significantly in recent years, with Automated Clearing House (ACH) payments and transfers now reaching much more of the country than in the past, helping to reduce costs and risks. Meanwhile, Costa Rica’s low cost, high skill labour base, robust communications and power infrastructure and political stability have made it an increasingly popular location for SSCs.
 
==Payments==
While payment systems differ across Latin America, in general the region is mature, with most countries offering most types of payment instruments. As a result, corporates have been able to centralise payment processes, even as they expand the geographical scope of their activities. Transactions can be sent in a single file (using ERP standard formats or SWIFTNet’s FileAct service, for example) for payment in multiple currencies and countries.
Other payment trends include a continuing decrease in the use of paper cheques and a corresponding increase in electronic payments, while automation and minimal manual intervention remain a priority for companies. Enhanced control and fraud prevention measures are also increasingly important for corporates and are being facilitated by greater centralisation.
 
==Collections==
Collections in Latin America are more challenging to centralise than payments, although efforts by corporates to rationalise their banking relationships are accelerating and some activities are being moved to SSCs. While the shift from paper to electronic payment and collection channels continues, most countries do not have ACH debit. Even in those countries that do, market practice is against debiting consumers’ accounts. Consequently, automated collections remain problematic and therefore limited in volume.
Moreover, a large proportion of Latin Americans remain unbanked. Thus, in many instances collections remain cash based, which is costly, prone to fraud, high risk and requires companies to work with banks that have a large footprint. The search is on for a way to reach the large numbers of people not covered by existing banking infrastructure so that collections can be made more efficient and Days Sales Outstanding – a key element in working capital optimisation – can be improved. However, so far efforts by mobile companies to partner with financial institutions have produced limited results. Other collections trends include increased concerns related to risk management associated with corporates’ clients and bank counterparty risk.
Companies’ expectations regarding collections are increasing. Comprehensive coverage and generic information are no longer enough. Instead, corporates want a bank provider that has a deep understanding of the end-to-end collection process from Purchasing Order (PO) receipt to cash application. By taking a holistic view of the collections process, banks can uncover new efficiencies and identify processes that can be streamlined. 
 
==Liquidity management==
Over the past several years, market concerns and a flight to quality have caused organisations to place a greater emphasis on liquidity and capital preservation over yield. More generally, liquidity management has become critical given periods of scarce or expensive credit. As a result, corporates have sought to optimise their liquidity by reassessing their operating needs and cash management structures so they can maximise opportunities for investment of surplus cash.
Corporates operating in Latin America face several challenges in employing efficient liquidity structures. While the regulatory environment in Latin America is diverse, it is generally more restrictive than in some other regions. For example, regulations in Argentina and Venezuela mean cash is trapped in-country while companies active in Brazil are not able to move money automatically, making liquidity management more cumbersome. Notional pooling, which offsets debit and credit balances in different locations, is rarely possible within Latin America. In addition, while inter-company loans are permissible in most markets they are costly from a tax perspective and therefore seldom used. Such restrictions necessarily inform the liquidity management and investment strategies of corporates.
Generally, multinationals physically pool funds from Latin American countries (where possible) to the US. Corporates have increasingly sought to rationalise their banking relationship and accounts in order to facilitate more efficient pooling. Once regional balances are aggregated, they can be used for import payments while surplus liquidity can be invested: aggregation of funds can improve returns.
Typically, surplus cash is invested in a range of products, including deposits, money market funds, certificates of deposit and other instruments. Some surplus funds may be invested in local instruments or remain in local accounts in order to earn interest (which may be higher than would be available in the US). However, limited local investment alternatives can prevent companies getting high returns within accepted risk limits.
Crucially, investment decisions are typically made and managed centrally from corporations’ head offices, even if some local investments instruments are included in companies’ investment portfolio. Typically, funds that companies plan to use for strategic investment will be kept out of country until they are required.
 
==Risk management==
Latin America’s diversity means that risk management for corporates requires great attention to detail: each country presents different risks that must be understood, monitored and mitigated where necessary.
FX risk is also a clear concern in these markets, given restrictions on movements of funds and a history of devaluations. More generally, while US dollars are the main trading currency within the region, corporates operating across Latin America will need to use local currencies and will therefore require advice and solutions for FX hedging.
Other risks that need to be considered and addressed by corporates include:
* Credit and counterparty risk: buyers may not pay their debts.
* Financial crime: employees or others may embezzle funds or commit fraud.
* Interest rate risk: changes in interest rates can affect companies’ balance sheets and their ability to repay outstanding debt.
* Liquidity risk: assets, including investment instruments, may become untradeable during times of financial stress.
* Market risk: investments held as part of a liquidity management strategy (or strategic stakes in other companies) may change in value because of market volatility.
* Operational risk: breakdowns may occur in internal procedures, people and systems.
* Regulatory risk: the Foreign Account Tax Compliance Act will affect most multinationals. It imposes new registration, reporting and other obligations.
 
==A bright future==
The outlook for Latin America is extremely positive. The changes taking place in China’s economy, which is shifting from being manufacturing led to being consumption led, will have an impact on demand for Latin American commodities. However, many countries within the region have used the opportunities created by the natural resources boom wisely. Sizeable foreign exchange reserves have been built up – Mexico’s hit a record high in April4 – and many countries have implemented sound economic policies that withstood the formidable test of the financial crisis. Far-sighted social policies that will produce benefits for decades to come have also been introduced in many countries: access to education has dramatically increased.
The growing numbers of people moving out of poverty create huge opportunities: consumption of a wide variety of products and services is increasing significantly. In response, companies from around the world are investing in Latin America. Foreign Direct Investment (FDI) into the region (including the Caribbean) hit a new historic high in 2013 of $184.92bn, 5% more than in 2012 in nominal terms. Flows towards the region have grown steadily since 2003, with the exception of 2006 and 2009 5.
Latin America remains a diverse region with some significant operating and regulatory challenges. For companies to achieve their strategic goals in Latin America – and harness its growth and dynamism – they need to work with a bank with solid experience and deep knowledge of local and regional conditions. However, regional knowledge is not enough. It should be combined with a global perspective and class-leading solutions, so that multinationals – and multi-Latinas – can ensure their treasury is as efficient as possible and can be integrated into their global structures where required.
 
 
===References===
# Brazil Fact Sheet, The International Fund for Agricultural Development (United Nations), November 2011
# Global Economic Prospects, World Bank, June 2014 (figure includes Caribbean countries)
# Global Economic Prospects, World Bank, June 2014
# [http://www.tradingeconomics.com/mexico/foreign-exchange-reserves Trading Economics], using figures from Banco de México
# Foreign Direct Investment in Latin America and the Caribbean 2013, Economic Commission for Latin America (United Nations), May 2014
 
[[Category:Book_Export]]

Revision as of 09:09, 2 May 2018

Market conditions under which there is believed to be a greater probability that a subsequent price movement will be in the same direction as the previous period's price movement (rather than in the opposite direction).

Extended trends lead to bubbles and crashes.


See also