Treasury in Latin America: Diversity and Growth

Treasury operations and processes in Latin America can differ wildly from country to country depending on a whole host of factors, such as economic integrity, local regulatory factors and technology infrastructure, to name a few. This week on gtnews we have published six new articles that examine a variety of Latin American treasury issues, covering regional and country-specific developments.

Latin America is one of the more complex places in the world in which to manage cash, liquidity and risk. However, strides are being made across the region to improve payment infrastructures. This topic is covered by Nancy Russell, from NLRussell Associates, in her article, Payment Systems in Latin America: Advances and Opportunities. She describes how advances in national payment systems have progressed since 2000, pointing out that central banks in more than half the countries in the region have now implemented real-time gross settlement (RTGS) systems. “These countries include: Argentina (1997), Bolivia (2003), Brazil (2002), Chile (2004), Colombia (1995), Costa Rica (1999), Ecuador (2004), Guatemala (2006), Mexico (1995 and 2004) and Peru (2000). Several other central banks in Central and South America are also planning to implement RTGS systems in the next few years,” explains Russell.

Argentina, Brazil and Chile have also established private sector high-value clearing-houses: Interbanking in Argentina (1998), Camara de Pagamentos Interbancaria de Pagamentos (CIP-Sitraf) in Brazil (2002) and Camara de Compensacion Interbancaria (Combanc) in Chile (2005). These are supervised and regulated by their respective central banks and use a similar model to the Clearinghouse Interbank Payments System (CHIPS) in the US. As they use prefunding, bilateral and multilateral netting, banks are better able to manage their liquidity costs. End of day settlement of net positions is affected through participants’ accounts at the central banks using their respective RTGS systems.

Many countries in Latin America have established automated clearing-house (ACH) systems, most of which are privately owned and operated but authorised and regulated by the central banks. The exceptions to this are Colombia, Costa Rica, Ecuador and Venezuela, where the central banks serve as operator of the ACH systems. In Colombia, besides the government-run ACH, there is a second privately operated system that is owned by the banks – ACH Colombia.

Countries that have implemented ACH systems for interbank electronic credit transfers and/or direct debits include: Argentina (2002), Bolivia (2006), Chile (1999), Colombia (1999), Costa Rica (2001), Ecuador (2002), Honduras (2007), Mexico (1996), Panama (1998), Peru (2001) and Venezuela (2007). “Guatemala’s new ACH system is in the testing phase and expected to become operational during the second half of 2008,” adds Russell.

While many Latin American countries have advanced their payments infrastructure, Russell also points out that additional opportunities still exist. Local governments and companies operating in the region, including multinational companies with subsidiary operations in the region, need to assess and review their in-country cash management operations on a regular basis to make sure that they are taking advantage of the most efficient payment and collection methods available. For multinational companies, for example, it is important to evaluate local country and regional cash management banking partners on a regular basis. “Despite the challenges and with all the positive changes in the region, there are almost always opportunities to increase the use of electronic payment methods and to reduce costs,” notes Russell.

Collecting the Cash

As a corporate operating in Latin America, how can you actually get your hands on the cash a customer owes you? This subject is tackled by Fernando Lardiés,
from Banco Santander, in his article, The Puzzle of Collections in Latin America. Lardiés argues that a practical collections approach to the region means that you need to look at other collections instruments beyond just electronic payment instruments. “The widespread use of cheques makes the automation of collection processes more complicated, when compared, for instance, with Europe (with honorable exceptions like France). In some countries digital cheque truncation is possible (Brazil, Mexico, Argentina), but in others (Chile, Venezuela, Colombia) this is not yet the case.”

Many countries in Latin America have restrictions in their legal and regulatory environments, particularly in regard to credit/debit taxes and restrictions on the movement of funds. This makes it difficult to replicate the cash management practices that are seen in other regions, mainly cash pooling combined with collection processes conducted in parallel by different banks. Latin America also still has a high reliance on retail branch networks. Most people prefer to pay their debts in person at a bank branch, although they could just as easily use an electronic transfer or, in some countries, even have their accounts directly debited.

Banco Santander’s Lardiés points out that banks with a local presence in a number of countries can offer corporates common communication interfaces and protocols, in case a corporate seeks centralised or standardised collection handling. “The underlying local collection instruments might have whatever specific features are needed in each country, but a common communication protocol can be designed jointly by the corporate and the bank based on open standards,” suggests Lardiés. He uses the example of EDIFACT DIRDEB and CREMUL, which provide the flexibility to handle different local collection instruments under a standard umbrella solution.

Corporate Cards Evolving in Mexico

Corporate card schemes and programmes are evolving all over the world from different levels of sophistication and this is particularly the case in Latin America. As a payment instrument, the corporate card has had difficulties breaking into a market that is so dominated by cash and cheques. However, as David Chevrel from Aconite reports in his article, The Corporate Payment Cards Market in Mexico, this is changing in Mexico.

There are four bank issuers in Mexico, three of which offer corporate credit cards, one that offers debit cards and one financial services company, which markets several corporate products, including gasoline, purchases and meeting cards. In order to qualify for these services, companies must have an impeccable record and hold accounts with these institutions in order to benefit from these services.

The problem that corporate card programmes were faced with was that, until a couple of years ago, credit and debit cards were not accepted by many vendors, such as petrol stations. This influenced companies against giving cards to their executives and meant that they had to provide them with paper bonds or other means of payment. Today, however, cards are accepted in most of the stations, which has been an important catalyst in the spread of corporate payment cards. The cost of petrol is tax deductible and corporate cards have simplified the process of calculating these deductions, saving management time in administrative and financial departments. “The opportunity to reduce costs related to calculating tax deductions should help drive corporate card growth in Mexico,” explains Aconite’s Chevrel, pointing out that access to a tool that simplifies this process is important to corporates of all sizes.

Chevrel also uses the results of the Aberdeen Group’s study to show how further growth in the use of corporate cards will come from outside of the travel and entertainment area. The study showed that, in Latin America, 83% of companies plan to use cards for advertising and marketing services and 53% are looking to expand commercial card use to non-travel categories as a means of driving growth.

Do Argentina’s Numbers Add Up?

While the corporate card market in Mexico appears to be looking up, another article issues a warning for the economic health of another Latin American country. In his article, Back to the Future for Argentina’s Economy, Martin Krause from ESEADE Graduate School, argues that the current commodities export boom is overshadowing deep-rooted problems in the economy of Argentina. The country is now enjoying the benefits of high prices for the commodities it exports – it shows twin surpluses and US$50bn in reserves at the Central Bank. “This has led many to believe the country is immune to an international crisis… though probably not one of its own making,” says Krause.

The bad economic indicators that Krause points to start with inflation. It is only three years since Argentina went through the largest debt restructuring in its history, yet price inflation seems to be running out of control and debt concerns have returned. Price and debt are also related through the new bonds the country issued after the default. They are adjusted to a price index, but one that ultimately relies on the consumer price index (CPI). “The government has found no better way to deal with increasing inflation than cheating on the index. No wonder the country risk has been going up since February 2007, the time when it started to become evident that the government was tampering with the statistical process and removing independent officials at the statistical agency,” comments Krause.

So what are the numbers behind this bad economic position? During the last year of de la Rúa’s government in 2001, foreign debt was 54% of GDP (US$144.2bn). Today it is over 56% of GDP (US$144.7bn). Why is this the case if the economy has been growing at an average rate of 8% during the last few years? “The answer lies in the deep devaluation that reduced GDP in dollars, a figure that it is now only recovering in dollar terms. If we also include the amount of debt due to holdouts, the number goes to US$170bn, 67% of GDP,” states Krause.

ESEADE’s Krause goes on to suggest that Argentina is paying the price for its close ties with the Chavez government in Venezuela and its failure to access the international capital markets, which could particularly help in solving the holdouts issue. He uses Argentina’s neighbour, Brazil, as an example of what could be achieved by following a different economic model: “Brazil has achieved investment grade, receives more than US$30bn of foreign direct investment (FDI) every year and has just placed a 10-year bond for US$500m at a rate of 5.3%.”

Soy Source of Optimism

As ESEADE’s Krause has mentioned, if it were not for the rising prices of Argentina’s commodity exports, the country’s economy would be looking ill. Ana Belluscio takes an in-depth look at one of the unlikely economic heroes in her article, Secure Profits For Argentina’s Soy Investment Funds. By using its roots as an agricultural country, Argentina has found a new way to use an old practice for profit. The catalyst behind this has been the growth of soybean sowing pools. These are headed by experts (who usually have fields themselves) who organise procedures, seek tenants to rent fields and prepare planting, spraying, harvesting and sales plans. Once the business plan is defined, they seek external investors (private capital, whether from individuals or corporations) that agree to invest in return for a percentage share in the profits. These small number of large soybean sowing pools now own over 80% of the soy market’s share. “Since they handle large planting areas and production volumes, these pools can negotiate better prices with suppliers of raw materials and services, thereby increasing the profit margin for investors,” points out Belluscio.

The sowing pools usually offer investors closed operating systems, meaning that they can only withdraw their invested capital (plus earnings) once the crop is sold. The open system, where investors can withdraw their capital at any given time of the process, is not common in Argentina. This method obviously helps to add certainty to the financial process for investors in this commodity and can prevent a ‘run’ on soybeans.

“The cultivation of soybeans produces statistically a net profit of approximately US$2.15 per US$1 invested (2006 statistics) whereas, comparatively, the net profit of corn culture is US$0.45 per US$1 invested,” explains Belluscio, which shows why soybeans are such a popular commodity to invest in.
And the soybean is set to become even more popular – as alternative fuel sources become highly sought-after, the development of soy biodiesel from soybean oil is sure to lead to an escalating soy demand for the future. As soy demand increases around the world, from the European Union to China, and international prices for soybeans continue to rise, there will be greater gains for soybean sowing pool investors.

Trade Finance in Latin America

In his article, Factoring and Trade Finance Services Continue to Increase in Latin America, Jack Villacis, from Surecomp, casts an eye over trade finance services in the region. Villacis talks about how he has seen an evolution in trade financing requirements in Latin America where local companies are no longer producing exclusively for their own markets but are now fighting for global presence and market share. Surecomp’s Villacis describes how, in terms of trade finance banking products and practices, Latin American corporates still depend heavily on letters of credit (LCs). “This is a result of the need to mitigate risk, as well as the need for immediate access to funds, explains Villacis. For many years, exporters as well as importers relied heavily on trade-related loans to finance their working capital needs and it still is a common practice in Latin America for most LCs and collections to be converted into trade-related loans.

Other improvements in the Latin American trade finance market include greater automation, compliance, anti-money laundering (AML) initiatives and Internet banking. Many regional banks have started the process of either improving or implementing automated trade finance departments and factoring. Currently, banks are investing heavily in technology thanks to the fall of import and export barriers and the need to enhance systems comparatively with their North American and European counterparts. Villacis says that countries including Argentina, Panama and Costa Rica are beginning to catch up with the rest of the world in terms of Internet-based trade finance technology. In contrast, he states that Bolivia, Uruguay, Paraguay and El Salvador remain slow in offering these products, with banks and corporates appearing to be reluctant to undertake the required changes.

Conclusion

One point that is clear from all six of the Latin America articles published on gtnews this week is that, if you don’t recognise the differences that exist between individual countries in terms of economy, cash management processes, regulatory regimes and legal requirements, you will struggle to do business here. Entering the Latin America ‘market’ is not the same as entering western Europe or north America, for example, where there has been greater harmonisation of systems and practice. Individual countries here are at radically different stages of development and maturity so it is sensible to have a country-by-country strategy built into your more general regional business plans.

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