Defining Treasury Policy for Emerging Markets
by Andrzej Polak, Assistant Treasurer, The Timken Company
Every treasury department operates within a set of treasury policies that define the conditions within which financing, investment, cash and risk management decisions must be made. These policies have come under scrutiny in recent years as the need to manage liquidity and risk has become more pressing, and in some cases, policies have been found to be inadequate in the face of extreme market conditions.
Another consideration for multinational companies is the issue that every jurisdiction in which they operate has distinct tax and regulatory requirements, different investment and financing conditions, and diverse currency issues. This is particularly the case in ‘emerging’ markets where the financial infrastructure may differ from more established economies. Consequently, while it is tempting to try to establish a consistent treasury policy that can be applied in all countries, the reality is that policies that are devised specifically according to the financial conditions in each market, whilst remaining within an overall liquidity and risk management framework, are likely to meet the needs of the business more specifically.
The decision for centralisation
A key decision before devising treasury policy is to determine the degree to which the treasury organisation will be centralised, in terms of both financial decision-making and execution. In many cases, multinational corporations operate a regional approach, with decision-making often devolved to local entities in more challenging countries such as emerging markets in Asia and Latin America.
In contrast, The Timken Company (NYSE: TKR) has made the decision that all treasury, cash and financial risk management decision-making will be conducted centrally, with execution at a regional level. This approach allows us to concentrate expertise at the headquarters level, in order that all financial decision-making at an in-country or regional level is undertaken in the interests of the group overall, such as balancing risks at a global level, and offsetting movements in emerging currencies against EUR/USD from a risk perspective. At the same time, we can ensure that local and regional treasury, cash and risk management needs are supported appropriately.
To achieve this, treasury maintains bank relationships with emerging market representatives from our global banking partners in order to remain abreast of developments and opportunities. This is becoming easier as some banks are starting to locate expertise on key emerging markets (e.g., Brazil, India and China) in financial centres such as New York. In addition, however, by leveraging regional execution capabilities, we are able to operate within time zones and observe cut-off times more easily.
Taking a centralised approach to treasury management does not imply only repatriating all cash and investing/ borrowing only in the company’s base currency. Instead, by centralising decision-making, we are able to take a global view of the needs of the business whilst leveraging opportunities in each region. This is not the same as speculation; indeed, our decision to take a globally integrated view of risk and cash is motivated by our desire to maintain a conservative approach to financial management, which includes taking into account the economic conditions in each market in which we operate.
Yield enhancement, risk reduction
The treasury approach outlined above was initially prompted following the financial crisis in 2008. Before then, countries such as Brazil were considered high-risk so we typically avoided investing cash locally. Post-2008, however, it became apparent that banks in Brazil had been largely insulated from the crisis compared with banks in the US and Europe. We therefore decided to explore local opportunities for investment as a way of diversifying our risk whilst also earning an improved yield on cash. We spent a great deal of time looking at the investment alternatives, and developed a local investment programme from scratch. This process was very valuable, and allowed treasury to understand the local clearing system, investment instruments and tax treatment in detail. For example, the credit rating of some banks in Brazil exceeds that of Brazilian sovereign debt.