Regional Focus

Risk and reward: making EM trade work

Published: May 2019


There are risks and opportunities when trading in the emerging markets. We look at two regions – Latin America and Africa – and ask local experts to assess what treasurers can expect, asking how best to prepare for continued trading in each.

Latin America

The current political and economic situation across Latin America (LatAm) is such that Jose Luis López-Sors, Head of GTB Americas, BBVA, finds it problematic to pin down a precise picture of regional opportunities for corporates. The lack of current clarity, it seems, is in part a mark of the heavy influence on the region by its northern neighbour.

Indeed, with the US seemingly in the throes of ending its current growth cycle, increasing the possibility of a recession there, López-Sors says countries closely linked to its performance, such as Mexico, are holding their breath. Yet in parts of South America, where for example the commodities cycle plays a huge part in the economy, a more positive outlook prevails, for now. “Overall, I’m positive,” he states. “There are growth opportunities in the region but most will have to watch very carefully what is going on in the US.”

With that in mind, he also draws attention to some notable home-grown risks. In particular, the fallout is ongoing from the highly damaging oil industry bribery affair in Brazil that went right to the top before being exposed as an international scourge. “If those cases continue at length, they present a serious growth risk that we have to follow,” says López-Sors.

Another grave risk he highlights is the possibility of more interest rate hikes in the US. If rates do rise, it will affect many LatAm economies, especially through the ensuing FX volatility which he refers to as a “nightmare” for the region’s corporate community.

Political risk is always a concern and upheaval in Venezuela is testament to this. However, troubled leadership changes in the biggest economies of Brazil and Mexico have settled, and although there are elections due in 2019 in other countries, López-Sors is generally confident that there is “not too much to worry about” over the ensuing 18 months.


Despite the uncertainty, López-Sors is keen to point out that the region is also one of commercial opportunity. One of the major beneficiaries of the pockets of economic growth seen in LatAm is the consumer sector, with a burgeoning aspirational middle class emerging. Commodities players – especially mining, fishing, and oil and gas – have been performing well too. Although mining has been impacted by adverse weather, the sector is generally “fruitful”, he notes.

From a purely business perspective, that fruitfulness can be attributed to reduced volatility in the last few months. “This is important because volatility is one of the main killers of growth,” says López-Sors. “Towards the end of 2018, we were expecting a very volatile market. The US Fed was still hiking rates, we’d seen political change in Mexico and Brazil, ongoing turmoil in Venezuela; 2019 was viewed in a very pessimistic way. But during the first three months we have in fact seen stability both in the fixed income equity market and especially in the FX market.”

Despite LatAm having no common currency, no unified central banking view and a broad sweep of regulatory approaches, many corporates are nonetheless regionalising their treasury activities to gain cost and operational efficiencies, says López-Sors. Indeed, a number of multinationals have been setting up shared service centres or centralising vast portions of their treasury operations regionally. Colombia, Panama, Costa Rica, Argentina and Brazil are among the main beneficiaries of related investments as corporates alight here with the promise of lower-cost locations and a large talent pool of treasury services and operations.

Trade deals

With the long-standing NAFTA agreement between the US, Canada and Mexico being revised into the US, Mexico and Canada Agreement (USMCA), it potentially ends a period of uncertainty for Mexico. NAFTA is still in force but when and if USMCA becomes official, most current NAFTA rules and procedures will remain in effect.

Whilst it may not change how corporate treasurers interact across the region, it at least signals further FX stability, helping certain economic flows to remain steady (notwithstanding the burden of any serious geopolitical challenges). Mexico’s steel and automotive sectors, where it intersects Asian trade, may be affected, but the overall impact of the change will be “very limited”, says López-Sors. “I’m not expecting it to be an issue.”

Tech aid

The role of technology in enabling the growth of any developing economy is critical. In LatAm, one of the challenges is to reach the huge numbers of the population that currently do not have access to banking. With it taking up to four weeks to open a personal account in many countries, one of the main bottlenecks is regulation.

Correspondingly, one of the main costs for banks is processing cash. However, says López-Sors, whilst the region’s regulators and tax authorities talk of helping, in most countries, a transaction tax is levied on every account movement. This has the effect of promoting the cash economy which in turn is making the transition to digital banking a very slow work in progress.

Treasury challenge

As certain LatAm economies develop, their weak infrastructure and energy sectors are becoming a brake on growth. Both need a huge amount of investment but whilst this presents “vast opportunities” for players in these sectors, the risks this creates for their treasurers is substantial as they source funding.

“The more that can be financed, the less equity is risked; improving financing when entering these economies is critical,” says López-Sors. “And where a business is investing money in an emerging economy, whether through equity or debt, it needs a strategy that allows for hedging as much FX and interest rate risks as possible.”

Interest rate hedging is relatively expensive in LatAm compared to the US. Of course, for currency hedging, the cheapest way is the natural hedge, if it’s available. However, López-Sors says the region’s FX markets are “very deep” with a lot of liquidity enabling every currency, except Venezuelan Bolívar, to be hedged. “It may be pricey, but at least treasurers can hedge all their exposures and in this market that is a very positive point.”

Starting questions

When entering the region, the corporate has to start a clear business programme for the target country, and be able to trust that it can be executed, says López-Sors. He says that it will also be essential to closely study local regulations; these can be very challenging not least because there is very little, if any, common ground from one country to the next.

This may affect the decision as to where treasury management activities will be established, as will the availability of appropriate skills. Whilst some corporates base their location decisions on internal legacy factors, there is an increasing tendency to establish treasury centres in the biggest countries. This puts Brazil and Mexico ahead of other strong contenders such as Chile, Panama, Argentina and Uruguay. Although López-Sors says the latter is “flavour of the month”, with a relatively stable economy, high standard of living, strategic location and free trade zones, Brazil is arguably the most complex location from a regulatory perspective making it a good reason for establishing a regional centre here. “You can manage other countries from here, but it’s very hard to do it the other way round.”

More information

For foreign multinationals seeking advice on entry into LatAm, it makes sense to talk to the international banks operating in the region, says López-Sors. Regional bodies are also a good a source of information. The Latin American Trade and Investment Association (LATIA) covers 19 LatAm countries, coordinates and promotes the region’s economic sector, and aims to attract foreign direct investment, boost exports and promote the internationalisation of LatAm companies.

The more that can be financed, the less equity is risked; improving financing when entering these economies is critical. And where a business is investing money in an emerging economy, whether through equity or debt, it needs a strategy that allows for hedging as much FX and interest rate risks as possible.

Jose Luis López-Sors, Head of GTB Americas, BBVA

Also of note is the Union of South American Nations (UNASUR), an intergovernmental union, formed along similar lines to the European Union. It integrates two existing customs unions and is perhaps the first step towards the establishment of a permanent bureaucratic body for the supranational union of its 12 current member countries.


A treasurer from outside the region wanting to understand and appreciate the continent, needs to grasp two key facts, says Thabo Makoko, Head of Transactional Services, Absa. Firstly, Africa has a population of 1.3 billion, rising at around 32 million annually. Secondly, the countries that define the continent have between them a widely differing mix of cultures, currencies and regulations, each characterised by varying degrees of economic nationalism and liberalism.

One of the main observations is that although just 30% of the adult population is banked, a large proportion of the remainder is still economically very active. The reason is simple: the direct and indirect costs of banking are a significant negative for many in environments where infrastructure necessary to enable access to regular banking is under-developed (access to roads, power, internet or avoidable data costs). All of these challenges may drive up the total; cost of banking and this is a problem for business.

Despite this, another key issue is the proliferation of banks in many countries (Kenya has 40+, Nigeria 18+, Ghana 10+) where the value propositions differ greatly. With some domestic players focusing solely on certain regions, rather than delivering a nationwide service, if a business wants to reach a particular part of that country, it will have to work with the dominant bank in that region. The first treasury challenge is therefore being forced into multiple banking relationships just to execute the business basics.

The impact of the African trade environment is felt four-fold by treasurers, notes Makoko. Firstly, most will almost certainly face liquidity challenges; visibility of cash can be difficult, especially with multiple banks to work with.

Secondly, the dynamic nature of regulation is hard to keep up with. The authorities can issue circulars on a regular basis, seemingly moving the goalposts and at times reversing previously communicated decisions. “For a treasurer sitting in Europe or the US, it seems uncoordinated; it can certainly be difficult to pick up regulatory trends across multiple countries,” warns Makoko.

Of course, a foreign business seeking to invest in the continent needs to know upfront how to extract value from its overseas activities – by repatriating funds or paying dividends, for example. But with such regulatory ‘dynamism’ across the board, he advises all to “stay close to the regulators”, making a point of understanding the “ever-changing framework” in which they operate. “If you don’t, you can quickly find yourself in trouble.”

For a treasurer sitting in Europe or the US, it seems uncoordinated; it can certainly be difficult to pick up regulatory trends across multiple countries.

Thabo Makoko, Head of Transactional Services, Absa

Although it is part of doing business here, and what all successful businesses understand, many companies underestimate the cost of compliance. “It is vital not just to build appropriate relationships but also to appear to be highly transparent and compliant,” says Makoko. “It is critical to engage with regulators and help them to understand what it is you are trying to achieve but also make sure everything is documented fully.”

A third issue is the lack of systemic integration between countries. Sending funds from Burundi to Gabon, for example, is surprisingly complex. Money may have to leave Africa and be channelled through a European partner bank before reaching its beneficiary. In this example, frustration can arise because correspondent banking relationships between some countries simply do not exist. It’s tempting to judge but, Makoko adds, “there is history and context to this”.

The model where international companies have come into the continent to buy raw materials, extracted it, produced their goods and imported back a finished product, has created relationships where African countries are urged to look outwards, he explains.

Chocolate trade is case in point. Many African counties do not produce cocoa but Ghana does. Ghana sells raw cocoa to European companies that export the finished product to African countries. Yet Ghana has also started producing finished products which are not sold in other African countries. African countries could buy cocoa or the complete product from Ghana, but existing trade structures prevail, and the banking systems reflect this. “This is starting to change,” says Makoko. “For example South African, Egyptian and Nigerian companies have been investing in different parts of the continent – and that trend is spreading.”

Big changes

The driver for this change is the rise of entrepreneurship, he believes. Spotting a neighbouring market and responding to it makes economic sense over and above reaching out to far flung opportunities. It’s often easier to build intra-Africa relationships, and this is resulting in increasing volumes of intra-Africa commercial travel.

Technology is a major facilitator too. The launch in 2004 of the Central Bank of West African (BCEOA) real-time gross settlement system (RTGS) removed the need for complex correspondent banking relationships, contributing to the integration of the economies of BCEAO member states.

The East African Cross-Border Payment System (EAPS) went live in 2013 doing the same for its members. The same year, the Southern African Development Community (SADC) rolled out in four countries with the Integrated Regional Electronic Settlement System (SIRESS) and today, some 40% of all Southern regional payments traverse this platform.

That said, the various RTGS in Africa are not currently interoperable. However, this too may be about to change. The Common Market for Eastern and Southern Africa (COMESA) is a free trade area with 21 member states. It has been operative since 1994 and is now talking about the creation of an “open trade hub”. It’s a mammoth project, and whilst Makoko estimates that it’s only about 20% there, “the conversation is clearly in the right place”.

With entrepreneurial direct investment in different African countries escalating, he strongly believes that “if this culture continues, is encouraged, celebrated, and backed by technology, it will begin to evolve”.

Moving forward

At the highest level, the African Union (consisting of all countries on the continent) is enabling across the board engagement between key stakeholders – including central bankers and leading business people – as they seek solutions to the ongoing challenges around facilitating trade.

This includes tackling seemingly mundane issues such as making easier visa-based travel for entrepreneurs seeking to travel to and make investments in different countries. Perhaps most exciting though, comments Makoko, is the advance of online trade as it starts to replace the complexity of physical infrastructure, open up new cross-border markets, and encourage the use of digital payments and banking of the unbanked.

With the extended reach facilitated through digital trade often built through commercial partnerships (especially between banks and Fintechs), there is great value in enabling different parties to talk, says Makoko. “We can begin to reduce the complexity of doing business but also allow the tapping of markets that would otherwise be neglected.”

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