Emerging Market Growth Challenges for Treasury

The narrative around emerging markets has not changed much over the years, with a general feeling that operating in them offers the potential for growth but also the potential for greater risks and challenges for organisations. An educational session on the second afternoon of the Association for Financial Professionals’ (AFP) Annual Conference 2014 provided context around the developments in emerging markets in recent years and included a corporate case study.

Kicking off proceedings, Jiro Okochi, CEO and co-founder of Reval, cited the MSCI’s 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 it, 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, emerging markets 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 BRIC (Brazil, Russia, India and China) 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.

Looking at the overarching objectives for corporate treasurers 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 focussed 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 said it is critical that treasury works with other business functions, such as tax, legal and accounting, before entering an emerging market so that there are no nasty surprises when operations begin.

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:

  • Assess banking and credit needs and availability in the target country.
  • Understand the funding and repatriation requirements.
  • Pay close attention to risks, particularly currency, geopolitical and counterparty risks.

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.

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