Treasury Today Country Profiles in association with Citi

Managing risk in emerging markets

Photo of a biker doing risky tricks

After a quick recovery and with strong forecasts for economic growth, emerging markets are once again presenting attractive opportunities for multinational corporations. The challenge for the corporate treasurer is to manage the vast array of risks that are part and parcel of operating in emerging markets.

Recovering, but still risky

Many emerging markets are significantly outpacing developed countries in terms of growth, and have recovered from the global economic downturn much more quickly than many major markets. As such, they can offer untold opportunities to the multinational corporation. However, they also hold significant risk. The task of the corporate treasurer is to mitigate and manage such risks in order to ensure that the company can realise opportunities without facing undue risk.

As companies enter emerging markets, they must evaluate and manage a whole range of risks. The challenge is complicated by:

  • different time zones,

  • different cultures,

  • different political and regulatory environments,

  • different languages, and so on.

A company must often rely on local people and local business partners when looking to obtain access to the market and control these risks, but that too involves careful management and can present its own challenges.

Regulators are more keenly examining emerging market risk, and certainly the regulatory risk of entering emerging markets has increased, as has the need to ensure money is used for its intended purposes and not for illicit activities. There has been an upswing in anti-money-laundering legislation, tightening of financial control requirements, and increased enforcement of anti-corruption legislation.

In addition, there is the political risk associated with a given country. Political uncertainties, changing legal positions for foreign companies, labour market changes, and so on, are not always immediately obvious and not so simple to manage. There can, for example, be sudden tax or political developments that make doing business less favourable.

In summary, a company must acquire a tremendous amount of local market knowledge when entering a new country, and all of that has an impact on businesses seeking to work in emerging markets.

Defining emerging markets

Emerging markets are defined as those countries experiencing rapid growth and industrialisation that may have less maturity than developed nations in terms of capital markets, regulatory regimes and legal frameworks.

There are many different views on what countries constitute an emerging market. The S&P Emerging Broad Market Index (BMI), which is a global emerging market equity index and a constituent in the S&P Global BMI, includes 21 countries:

  1. Brazil.

  2. Chile.

  3. China.

  4. Czech Republic.

  5. Egypt.

  6. Hungary.

  7. India.

  8. Indonesia.

  9. Israel.

  10. Malaysia.

  11. Mexico.

  12. Morocco.

  13. Peru.

  14. The Philippines.

  15. Poland.

  16. Russia.

  17. South Africa.

  18. South Korea.

  19. Taiwan.

  20. Thailand.

  21. Turkey.

By far the largest and fastest-growing of these economies are China and India.

Less-developed and often – although not always – with less mature legal and regulatory frameworks are the constituent countries of the S&P Frontier BMI. They comprise:

  1. Argentina.

  2. Bahrain.

  3. Bangladesh.

  4. Botswana.

  5. Bulgaria.

  6. Colombia.

  7. Cote D’Ivoire.

  8. Croatia.

  9. Ecuador.

  10. Estonia.

  11. Ghana.

  12. Jamaica.

  13. Jordan.

  14. Kazakhstan.

  15. Kenya.

  16. Kuwait.

  17. Latvia.

  18. Lebanon.

  19. Lithuania.

  20. Mauritius.

  21. Namibia.

  22. Nigeria.

  23. Oman.

  24. Pakistan.

  25. Panama.

  26. Qatar.

  27. Romania.

  28. Slovakia.

  29. Slovenia.

  30. Sri Lanka.

  31. Trinidad & Tobago.

  32. Tunisia.

  33. UAE.

  34. Ukraine.

  35. Vietnam.

  36. Zambia.

Foreign Direct Investment

Foreign Direct Investment is the amount of foreign ownership of assets within a country – in particular, assets that produce goods or services, such as mines, factories, call centres, and so on.

Given that many emerging and frontier markets have recovered quite quickly from the economic slowdown and are now experiencing stronger growth than many developed markets, FDI inflows into emerging markets is expected to increase this year and next. According to World Bank figures, FDI flows into emerging countries are projected to increase by more than 20% this year over 2009, and by more than 10% in 2011.

The costs of risk management

Companies are spending more money on mitigating risk going into developing markets because there is a discernible increase in concern over the impact and likelihood of regulatory risks and enforcement. According to PricewaterhouseCoopers, corporate discretionary spending on risk mitigation to offset perceived regulatory risk has grown by billions of dollars over the last decade, and that is set to continue to rise.

Every risk has a cost to manage, and the treasurer must therefore be centrally involved in risk management efforts, in part because they must finance risk mitigation for the company. This includes the physical security risk, regulatory risk, transactional risks in conducting business within that market, counterparty risks and so on. Plus there is the risk of the unknown and the unexpected, which must also be managed.

Given the nature of business, the risks a company may encounter will vary depending on the country. China, for example, has a very different risk profile compared to Russia or India.

“You do not need to be in an exotic location to face all the difficulties of managing treasury in remote locations…”

Raffi Basmadjian, Head of Group Cash Management and Treasury IT at France Telecom, points out that some of the challenges faced by a corporate treasurer in emerging markets apply even to more developed markets. “You do not need to be in an exotic location to face all the difficulties of managing treasury in remote locations,” he says. “Obviously, the exotic countries are often heavily regulated, and their banks are not always technically up to date, but in terms of variety of cultures or languages, one will face these types of difficulties the very first day one enters into the MNC treasury world, even in Western Europe.”

One of the most challenging risks to manage – and one that has become of increasing concern to corporate treasurers and CFOs – is the risk inherent in finding a local partner to help navigate a new market.

Risk and reward through local partners

As a foreign company entering a new market, the fastest and easiest way to get up to speed quickly is through a local business partner. This can facilitate the creation of successful enterprises and provide much-needed experience to help reduce many local risks – such as political and regulatory risk.

“We feel strongly about partnering with local businesses as this has demonstrated better results…”

Multinational publishing company Wolters Kluwer, as an example, has operations in over 40 countries across the globe, including emerging markets. Pieter Roeloffs, Vice President of Mergers & Acquisitions at Wolters Kluwer, explains their position: “In our industry, there is a difference when seeking partners in emerging markets in comparison to partner opportunities in developed countries such as the US and Europe, where we also do a lot of business.”

George Dessing, Vice President and Corporate Treasurer at Wolters Kluwer, adds: “We feel very strongly about partnering with local businesses, as this has demonstrated better results in the past and that continues in the current setting also.”

However, it is essential to create clear-cut service level agreements and to manage the partnership actively in order to mitigate risk in the relationship. “For developing markets, there is a tendency to find yourself more often investing in a plan, team, or idea – rather than in already well-developed, sophisticated businesses – which may be in an early stage in emerging countries,” says Dessing. In addition, the overall economic growth outlook is often different for an emerging market than for a developed market.

For these reasons, Dessing notes, it is important to seek even better economic protection in structuring investments in these types of assets than would be necessary for more developed economies or more mature companies, in order to match financial criteria of the partnership to an acceptable risk exposure.

Roeloffs adds that it is critical to ensure that the company and its local partner have fully-aligned business interests in the context of the partnership. He says: “Looking at managing risk from a business development perspective, one common denominator for all developing economies is that it is critical to seek and to get buy-in on the joint plan by future partners. A business deal and/or a new venture can only work successfully if there is a mutual business benefit for both parties.” Ensuring a match between parties, and correct incentives, can provide just as much risk mitigation as installing administrative controls.

Protecting against corruption

Working with a local partner comes with its own set of risks – not least the risk of fraud or corrupt practices enacted by that partner. Given the increasing focus placed by developed economies, such as the US and Europe, on cracking down on corruption, this is a critical piece of the risk puzzle for companies operating in less-developed markets.

In the UK, the new Bribery Act is set to take effect this year, which significantly increases the onus on companies to monitor third-party partners and perform risk-based due diligence. In addition, companies subject to the act should include anti-bribery and corruption policies and provisions within third-party contracts.

Companies should actively manage and audit their partners to ensure compliance with those policies. This is critical, as the Bribery Act allows only one defence for companies that fail to prevent bribery by third party-partners: demonstrating that the company made every reasonable effort to ensure adequate procedures were in place to prevent it.

In the US there has been a significant increase in enforcement under the Foreign Corrupt Practices Act (FCPA). The latest changes under the Dodd-Frank bill will only increase enforcement and make the corporate anti-corruption compliance burden heavier. The addition of cash rewards to whistleblowers that provide the SEC with information on violations will increase the incentive for individuals to inform on companies with even a hint of corruption risk.

According to PwC, almost 70% of FCPA cases involve misbehaviour on the part of a third party working on behalf of the company charged, and the main risk is the use of bribery to facilitate entry of a company’s products into the market. Over the last two years more than $2.5 billion has been levied under the FCPA against companies engaged in misbehaviour in the emerging markets.

Part of the problem, however, arises from the tension between the imperatives on the business side to grow and get into that market, and the imperatives on the control side – from the treasurer and controller, for example – to manage the risks.

As such, partner selection is critical, as Basmadjian at France Telecom points out: “Selecting the right, absolutely secure, counterparty in the countries we invest in, particularly in emerging countries, is not always easy.”

Securing the supply chain

In addition to managing partners on the distribution side, there is also the need to manage risks in the supply chain. For companies that are looking not only to set up a stream of commerce – getting goods into the marketplace – but also to set up local manufacturing capabilities, the same risks apply as with other counterparties and there is the additional risk of ensuring the flow of goods and services along the supply chain.

It is therefore critical to have a strong supply chain, which means performing due diligence and selecting reliable, financially sound partners, and evaluating those relationships regularly to mitigate any developing risks that could cause a breakdown or bottleneck in the supply chain.

Using global solutions for treasury operations

In addition to managing the broader operational risks specific to a particular market, treasurers must also manage the daily risks specific to the treasury function.

As Basmadjian points out, more than anything else, in treasury the sharing of information is key. This is true for any type of multinational operation, and applies equally to emerging markets as it does to more developed countries.

Basmadjian says: “How much am I going to pay and receive? What currency will it be in? In what account and on what value date? From this standpoint, the bigger the geographical footprint, the more numerous the subsidiaries are, the more difficult it is to manage treasury.”

Many companies are moving toward greater centralisation and streamlining of operations in order to deal with these challenges across countries and markets. They may use different models for different parts of the business. They may choose to set up a shared service centre to handle transaction processing for a particular region or country, but may manage compliance in-house. On the other hand, smaller operations or markets, with complex regulatory regimes that make shared services difficult, may choose to outsource transaction processing locally.

“…the bigger the geographical footprint, the more numerous the subsidiaries are, the more difficult it is to manage treasury.”

Basmadjian notes that France Telecom, for example, is using various mechanisms to deal with the challenges of global operations. The company has a treasury and payment factory shared service centre, which manages transaction processing for 55 subsidiaries in addition to the head company. Basmadjian says, “We manage the treasury operations ourselves on behalf of the subsidiaries. It helps to have a consistent treasury management operation across the group.”

France Telecom also uses global netting and has a cash pool – with 191 participating entities – to help co-ordinate treasury processes and resources across the group. Centralisation and automation of as many processes as possible can help a globally diverse company to reduce risk in daily treasury function within emerging markets by folding it into larger company operations.


Another piece of France Telecom’s treasury risk management picture is its globally-implemented system infrastructure. The group provides subsidiaries with a set of tools made available on an ASP basis, including access to the treasury management system and e-banking systems through the internet and via SWIFT. Says Basmadjian: “The more the subsidiaries are using the TMS of the group, the easier it is to have the accurate information on a timely basis.”

The company also has in place a set of policies making clear the responsibilities between local and central levels of operations and reporting policies that allow central treasury to monitor the way treasury is managed across the group. Finally, it uses periodic audit by the finance audit team to ensure compliance of local operations with group policies and procedures.

Basmadjian adds, “In order to make sure that we will keep the control against problems that may arise we apply a strict and conservative policy and we have controls to ensure that the policy is in force at the local level.”

However, even with a centralised model there is still the need to comply with the broad range of local regulations and tax laws.

Managing compliance

Although there is less of a need for in-country finance and treasury staff for those companies with relatively centralised treasury and finance operations, it is nevertheless important to prepare for and manage compliance and reporting early on in the process of prepping for entry into a new market.

It is essential to develop clear processes and policies for local regulatory compliance, and to give these the seriousness of consideration and rigour that would be used for compliance in developed markets. Whether outsourced or managed in-house, it is also important to have strong service level agreements and regularly review and audit compliance functions.

Given the numerous risks that a company faces when operating in diverse locations, another key requirement is accurate information on what the company will face and how to deal with what is presented.

The broad spectrum of risks that are natural to operating in emerging markets speaks to the need for treasurers and corporate decision-makers to have information available early in the business cycle in order to engage in proper planning. If managed well, emerging markets can present vast growth potential to the multinational corporate. Opportunities abound, but so too do the risks.