Managing Treasury in a New Climate
by Helen Sanders, Editor, in conversation with Oscar Mazza, Head of Latin America Sales, Treasury and Trade Solutions, Citi
It doesn’t seem so long ago that the media was full of references to the ‘BRIC’ miracle, with companies flocking to take advantage of rapid growth opportunities and rich natural resources. Today, while Mexico and the Caribbean continue to grow, fuelled by US trade and tourism respectively, South America in particular is in the midst of a decline that threatens many of the economic achievements of the past decade. In this month’s feature, it is a pleasure to introduce Oscar Mazza, Head of Latin America Sales Treasury and Trade Solutions, Citi who joins me to discuss some of the cash and treasury management trends that he sees in Latin America.
Commodity and currency volatility
Clearly, the impact of falling commodity prices has had a major impact on many commodity-dependent economies in Latin America. Why has Latin America been so badly hit?
The fall in commodity prices and the global economic slowdown are having an enormous impact on companies headquartered in, or doing business in Latin America. While this is a global phenomenon, Latin America has been particularly hard hit bearing in mind the high proportion of commodity exports: 98% in the case of Venezuela for example, with countries such as Argentina, Brazil, Colombia, Peru and others between 67 and 85%. Similarly, manufacturing in the region is also closely related to commodities. The exception to some extent is Mexico: while there is still a commodity price impact, the economy is more closely correlated with the United States than other markets in the region, so growth rates of 2 – 2.5% are expected this year.
The impact too of the fall in the value of currencies in Latin America, and devaluation in some countries should not be underestimated. A USD-based company in Brazil may have seen the relative value of BRL revenues fall by nearly 35% in 2015 alone, with further potential to fall.
Impact on corporate strategy
With no widespread market expectation that commodity prices, particularly oil and gas, will rise significantly in the short to medium term, foreign corporations (and indeed banks) have been forced to decide on the level of investment they are willing to make in the region, particularly given the fall in the relative value of local currency revenues. Presumably, companies that choose to remain are changing their strategy from the heady days when oil prices were $100 a barrel?
Governments and regulators are in a very difficult position as they seek to protect their national economies and citizens.
Corporates are no longer looking at Latin America as a potential high-growth market and instead are aiming to protect market share whilst minimising investment. Both top-line revenue and profitability have been significantly impacted by the fall in both commodity prices and currency value, which is definitely leading to a change in strategy. Opportunities to grow revenues are limited, so companies are looking to cut costs and drive efficiencies in order to maintain profitability or minimise losses.
The issue of managing costs and maintaining stability is not an issue restricted to corporations: governments of economies that are largely commodity-driven must also face the issue of how to achieve growth, and secure funds to continue public spending.
Governments and regulators are in a very difficult position as they seek to protect their national economies and citizens. Government income has been reduced, and countries face fiscal deficits and negative balance of payments. In this environment, they need to raise debt, which is becoming more difficult as credit ratings are only just in investment grade territory with a negative outlook. Having invested in public infrastructure and services, it is difficult for governments to reduce investment and remove services, but this will inevitably lead to further deficits.