New York-based Fernando Iraola is responsible for global coordination of Bank of America Merrill Lynch’s client coverage for Latin America-based clients and multinationals. His work includes developing and executing the bank’s end-to-end strategy for regional transaction services business.
Head of Latin America GTS & Corporate Banking and Global co-head of Large Corporate GTS ex-APAC
From a corporate treasury perspective, what will be the key themes of 2019 across the Americas?
Up until now we have been benefitting from a growth environment from an Americas perspective, particularly in the US. That dynamic is unfortunately starting to shift.
Globally, in 2019, we could start experiencing slower growth, in the US, and certainly in Asia, particularly China. That trajectory may well drive a different agenda from a corporate treasury perspective within the Americas.
There has been a build-up of vast pockets of liquidity here. Extremely cheap liquidity has been available for corporate treasuries to finance either M&A, capex or share buyback programmes. But liquidity availability is slowly starting to shrink in the US as the Central Bank is no longer providing liquidity to the system.
Because the cost of funding associated with leverage is increasing, and there is a potential slowdown in economic growth, de-leveraging has to be part of the gameplan from a corporate treasury standpoint. Businesses must protect their credit ratings.
Furthermore, industries that have been dynamic in the M&A space in the recent past, for example, need to start trending that downwards. I believe that they should be focusing on generating free cash flow that could be put to work reducing debt. In fact, one thing that has never gone away is the need for working capital optimisation, to drive that free cash flow generation. I think 2019 will be a year of working capital optimisation for all treasurers, whether in the Americas or Latin America.
In the current rising interest rate cycle, putting money to work has been a bit easier for treasurers. However, if the Fed’s interest rate hikes do come to an end, treasurers will need to work harder to make sure they are managing their liquidity effectively.
But there is a need for corporate treasury to continue driving efficiencies across the board, which leads us to the theme of technology and how best to leverage it when the demand to ‘do more with less’ continues unabated.
To this end, I think treasurers need to be working with technology partners and financial institutions that can help them navigate change. Of course, Bank of America Merrill Lynch will continue to invest in and deliver technology-driven solutions to its clients. But, as a key differentiator, we will also offer a higher ‘human touch’. In fact, this synthesis forms the cornerstone of our global Intelligent Treasury strategy; we will deliver treasury insights that are leveraged in technology but driven by our experts and our global, regional and local industry expertise across the board.
What can treasuries operating in LatAm expect this year?
A key theme for treasurers in LatAm in 2019 will be risk management, whether it is FX strategy, hedging strategy, managing interest rate volatility or the risk management angle on managing liquidity.
We continue to see multinationals setting up shared service centres or centralising vast portions of their treasury operations in Latin America. Colombia, Panama, Costa Rica, Argentina and Brazil have continued to be beneficiaries of investments towards those types of activities. It’s driven by lower cost locations but also by a large talent pool of treasury services and operations. However, when multinationals consider LatAm for growth, observing regional volatility is unavoidable.
That said, Brazil in particular has been improving as a consequence of recent political transition. We are entering 2019 with optimism for how the markets will react to its government’s reform agenda, although we are mindful of the risks of it not executing on that agenda. For now, emerging market flows are coming back to Brazil, and we are expecting more economic activity here to be an opening for multinationals.
The e-commerce space in Brazil and across the region is fascinating. It continues to present huge opportunities for multinationals, particularly to those in the shared economy as they continue to build their capabilities in the region.
We are entering an era of political change in other markets too. Argentina, which is still tackling 47% inflation, is facing presidential elections in 2019. And there will be elections in parts of Central America too. But there are economies in Central America and the Caribbean – such as Panama, the Dominican Republic and Costa Rica – that continue to perform well, presenting pockets of opportunity.
Meanwhile, Mexico is entering 2019 on an uncertain note, given the country’s political environment. However, one piece of very good news recently was the conclusion of the revised free trade agreement (NAFTA) between the US, Mexico and Canada (USMCA). It goes some way to ensuring that certain economic flows will remain steady.
How do you see USMCA affecting corporate treasury operations?
NAFTA is still in force. When and if USMCA becomes official, most current NAFTA rules and procedures will remain in effect. However, whilst it may not change how corporate treasurers interact across the region, it could provide a lot more stability from a foreign exchange perspective, which will be beneficial for corporate treasury operations, provided there are no serious political challenges to drive volatility.
So far, with no rule changes for importers or exporters, corporate treasurers should not be thinking differently in terms of managing their treasury operations. However, some sectors are poised to gain more from USMCA, notably the automotive sector because it won’t take much for it to comply with new requirements around local production and local components.
What should corporate treasurers in the wider region be most mindful of in 2019?
Volatility in the markets globally means focusing on working capital optimisation; this remains paramount for 2019. There is also a potential shift of supply chains from higher labour cost and complex markets, to markets where either the labour cost or complexity is more favourable.
As China becomes more expensive in supply-chain terms, and as it faces geopolitical challenges, it could help foreign direct investments into LatAm. If supply chains shift from Asia into the USMCA region, there will be increased potential for economic growth and stability for this part of the world.