Cash & Liquidity Management

Managing emerging market liquidity

Published: May 2014

Expanding in emerging markets may offer businesses unprecedented opportunity for growth, but most making that move know that there are increased risks too which, if left untended, could impair their bottom line. What can be done?

Amit Agarwal portrait

Amit Agarwal

EMEA Head of Liquidity Management Services

Emre Karter portrait

Emre Karter

Central and Eastern Europe Cluster Head, Treasury and Trade Solutions

Dimitrios Raptis portrait

Dimitrios Raptis

EMEA Head of Market Management, Liquidity Management Services

Whilst some challenges facing corporate treasurers are similar to those experienced in developed markets, emerging market volatility tends to be more intense, with heightened political and market risk. And depending upon which market(s) a multinational company (MNC) is operating in, it may also find that the regulatory environment is subject to change at short notice, with restrictions on free flow of liquidity and capital being quite typical.

Risk factors

Much of the emerging market growth over the past few years has been fuelled by significant in-flow of capital from developed markets in the form of portfolio and foreign direct investment (FDI). With the tapering of quantitative easing (QE) in the US, emerging market liquidity has been put under pressure. In turn, this is impacting local currencies’ exchange and interest rates as many investors head back to safety.

Turkey provides an interesting example here, says Amit Agarwal, EMEA Head of Liquidity Management Services, Citi, since the country has certain particularities such as a current account deficit, a slowdown in domestic demand, and recent political uncertainty. In an attempt to stem the decline of Turkish Lira, the country’s central bank raised its benchmark rate by a significant 400 basis points earlier this year. But Turkey is not alone – other emerging markets such as South Africa, Brazil, India and Indonesia are also facing similar currency pressures. This volatility in currency and interest rates entails risks for international corporates with a local presence and needs to be managed carefully at Group level – on a country-by-country basis. After all, while emerging markets are often spoken about en masse, they are actually very idiosyncratic. Treasurers therefore need to monitor and adjust their liquidity strategy, in line with the specific risks each operating geography presents, in order to manage counterparty and liquidity risks effectively, while also optimising excess balances.

Tapering also accounted for pressure on local currencies in Russia and Kazakhstan in the beginning of 2014. In response to a gradual devaluation of Russian rouble that started in January 2014, the National bank of Kazakhstan announced a sharp devaluation of Kazakhstan tenge on 12th February, resulting in significant tenge short-term rate volatility. The move also saw major local players as well as consumers switching to foreign currency says Emre Karter, Central and Eastern Europe Cluster Head for Citi’s Treasury and Trade Solutions.

Although a growth market for many multinationals, Russia is facing a number of challenges on the back of a slowing economy, notes Karter. “More needs to be done in terms of structural reforms and infrastructure investments for the economy to perform at its potential; the latest geopolitical issues only compound the growth challenges.” This combination of depreciation of the Russian rouble triggered by tapering, macroeconomic challenges and geopolitical tensions, led policy makers to hike base rates by 150 basis points in March 2014. Treasurers of multinationals operating locally should therefore consider the possibility of an increased cost of funding and intensified FX risk. Against this backdrop, revisiting intercompany arrangements and liquidity projects could also be extremely beneficial, points out Karter.

Liquidity challenges

The kind of interest-rate volatility seen in Turkey, Kazakhstan, and Russia, for example, is a persistent risk for businesses engaged with emerging markets. On the other hand, investors can take advantage of these spikes as long as they have flexibility in their short-term investment approach. But, as Dimitrios Raptis, EMEA Head of Market Management, Liquidity for Citi, points out, many corporates may have funding needs in local currencies or are strategically running short positions utilising credit facilities locally. As such, rate rises will immediately impact the interest expense on their balance sheet and will inevitably imply a higher cost of doing business locally. At the same time, the devaluation of positive balances that may participate in notional pooling structures will also have an adverse impact on the total efficiency of the arrangement, diminishing the overall pooling benefit.

An additional common liquidity challenge for corporates expanding in emerging markets arises from the multiple banking relationships and accounts that they need to open and manage, since very few banks have a consistent geographical presence across all countries. The challenge is that these scattered pockets of cash may create fragmented positions and idle balances.

Another common pain point for treasurers is the level of liquidity they need to commit locally because of the lack of an easily accessible or efficient local clearing system. Fortunately though, central banks and governments in emerging markets are becoming increasingly aware of this challenge. In Russia for instance, says Karter, a number of efforts have already been made by the regulator to optimise the local payments infrastructure, starting in 2008 with the introduction of a real-time gross settlement system (RTGS) for rouble transactions. Despite these developments, however, “an MNC treasurer still would need to keep a close eye on the allocation of intraday liquidity as the majority of settlements in local currency are still done in the batch system.” This results in a transaction initiated in the morning reaching a beneficiary much later in the day. Under these circumstances, accurate forecasting and liquidity optimisation “takes on a new level of importance,” Raptis notes. However, maintaining full visibility over cash under such circumstances is difficult, if not impossible. So what is a treasurer to do?

As a company expands into an emerging market, and that market becomes more important to it, there comes a time when it should revisit the organisational structure of its treasury, advises Agarwal. Increasingly, for global MNCs, the combination of a centralised and regionalised structure is adopted, where the head-office is responsible for policy and the regional treasury centres enact those policies operationally. The location of regional centres is thus critical. A strong presence in emerging markets will require representation in those territories to take care of funding the business on the ground, forecasting, identifying risk exposures and co-ordinating local bank relationships.

Whether centralised or de-centralised, without a firm grasp of all the relevant local regulatory requirements (and indeed cultural indicators) it is not possible to devise a truly effective strategy for each location. “This is where the role of the banking partner with a long-standing physical presence in each emerging market becomes critical,” states Raptis.


Even in a fully-centralised treasury environment, the near-constant state of market and political flux in certain countries demands strong local cash and liquidity management. Full cash visibility and the capacity to consolidate and fully fund in-country (local currency flows) are essential, but if a treasurer is able to move liquidity it should be incorporated into the company’s regional or global liquidity pools. Of course, where exchange controls are in place, technological capabilities can be limited by regulatory requirements and would eventually force the implementation of local or hybrid solutions.

One such option here is to centralise liquidity locally with a large international bank. “Companies tend to operate with various local banking partners, because some local needs can only be met by these providers,” says Karter. “From a risk management and liquidity perspective, using proprietary bank liquidity management tools enables companies to centralise liquidity on an overnight basis with their relationship bank in that country.” Treasurers should also consider domestic cash pools, where permissible, and look at interest-optimisation techniques. In respect of the latter, a number of banks, including Citi, offer quasi cash-pooling options that benefit grossed long and short balances (a true notional pool enables balance-sheet netting which is not permitted in many emerging market jurisdictions).

Where notional pooling is allowed and trapped cash is not an issue, corporates should be looking for a multi-layer, cross border concentration structure integrated with regional pooling mechanisms that are scalable and can support the organisation’s growth plans. This means that the solutions should be able to include as many currencies as possible and entities incorporated in as many jurisdictions as possible, Raptis advises. By incorporating surplus balances of emerging markets’ currencies into a notional pool it could enable the pooling owner to capitalise on the interest increases and effectively offset overdrafts in low yield hard currencies. However, he explains, this model must be delivered by the bank as a “fully integrated end-to-end solution” able to incorporate elements such as local AR/AP, short-term investments and any third party banks and also consolidate visibility from different locations and for different pockets of balances. A key parameter is the customisation of the integrated investment solution that should optimise treasurers’ excess liquidity without the need to go longer on tenors. Such a solution will minimise the risk for the corporate and will enable them to capitalise on interest rates spikes.

Structural considerations

There are certain structural solutions that can also help to optimise emerging market liquidity, notes Agarwal. Where transferring liquidity between subsidiaries can potentially trap cash, establishing a netting centre can help by accelerating or delaying the transaction as appropriate, alleviating the volume of trapped cash. Similarly, if a business with a manufacturing entity in a country with currency restrictions procures significant volumes of material from suppliers in developed markets, it may create a procurement centre in a developed-market location. This enables payment acceleration coming out of the manufacturer and slower payment to the suppliers.

However, if the supplier is located in a ‘trapped-cash’ country, it may benefit the buyer to pay more quickly. By offering shortened payment terms, it may be possible to negotiate lower procurement costs, explains Agarwal. The reverse of this is to offer longer-terms to buyers, potentially facilitating increased sales revenues. Alternatively, if a sales entity buys from a manufacturing entity, where both are part of the same group but located in a currency-restricted geography, a re-invoicing centre located in a developed country may be used to leverage inter-company flows.

These are just some of the solutions available to help treasurers manage liquidity in an emerging market context. The international banking infrastructure necessarily sits astride all cash flow movements, even if an in-house bank is in place. As a partner in the journey “towards optimised liquidity”, Agarwal believes that a major international bank “with an extensive footprint in the emerging markets” has an important role to play. Indeed, given the risks and opportunities found in these markets, arguably the role of the bank is essential.

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