In an ideal world, treasury teams would avoid trapped cash altogether, but the markets with the biggest revenue-growth opportunities like large parts of Asia and Latin America tend to be where cash is difficult or expensive to move across borders. In some respects, trapped cash is corollary to international expansion.
In the current high interest rate environment, the opportunity cost of not making the most of the cash surplus available within an organisation is exacerbated. It is, therefore, important for treasury teams to comprehend fully the considerations associated with maintaining large, trapped cash balances and the best ways to manage them.
The first issue is cost. Having fragmented and trapped cash positions offshore – not mobilising them for internal funding needs such as repaying debt at headquarter-level – may result in higher, more expensive, external funding requirements. In the longer term, having earnings trapped and not re-investing them or distributing them as dividends tend to be frowned upon by lenders and investors.
The second issue is risk. If cash is held in local currency and the currency depreciates (which is common as emerging markets strive to remain competitive), the business may incur losses when the cash is finally repatriated. Country risk is also a consideration as trapped cash tends to accumulate in developing economies where political and regulatory stability can be a concern.
The good news, though, is that cash is never fully trapped and there are various ways to repatriate it, but the timing and the use of proceeds must justify the cost and effort of repatriation.
A first step for a treasurer would be to get real-time visibility on cash balances globally, coupled with the ability to monitor balances at country and currency levels, to make well-informed decisions. An efficient forecasting process will also help treasury teams anticipate future funding needs and determine when and how much cash to repatriate. Treasurers can leverage technology solutions offered by banks or treasury management systems to digitise and automate the cash visibility and forecasting process.
Once the decision criteria to trigger repatriation and the cash visibility infrastructure are in place, treasurers would want to make the most of their trapped cash until repatriation. A company expanding in a restricted market can use the cash to fund local investments. Yield on trapped cash can be optimised through holistic deposit solutions that factor in global balances, enabling businesses to earn better rates in open economies by considering balances held in restricted markets. Agreeing on payment terms favourable to suppliers in exchange for discounts can be another use case of trapped cash.
Lastly, the deregulation trend in the last few years visible in evolutions like China’s cross-border cash-pooling schemes; incentives from Malaysia and Thailand to attract regional treasury centers and the emergence of Gift City in India, is encouraging. It’s possible trapped cash may become less of an issue in the future.
In the meantime, partnering with international banks with global capabilities and local expertise can help you better manage your trapped cash.
