Regional Focus

Treasury in Latin America

Published: Jan 2024

Latin America is characterised by its disparate economies and regulatory climates – and the treasury landscape likewise includes a variety of companies with differing needs. Industry experts explain how treasurers are navigating the challenges presented by the region, and harnessing technology to enhance their processes.

Colourful moutains in Latin America

From a banking perspective, Latin America is nothing if not diverse. “No two countries are the same,” comments Leonardo Gazzo, Corporate, Commercial, and Public Sector Sales Head, Latin America at Citi. “For example, we have fully dollarized economies; we have economies with dual currency, and we also have economies where you can only use local currency.” Likewise, different markets have different rules and regulations.

The treasury landscape is also characterised by a variety of companies with disparate needs, including both multinational and local corporates. The latter tend to be more decentralised, both in their physical locations and in their decision-making processes, whereas multinationals tend to follow a more standardised script in terms of their goals, processes and policies. As Gazzo notes, “Where technology is concerned, they tend to have more centralised ERP systems and standardised connectivity models.”

Another point of differentiation is between newer and more traditional companies. “New companies have been born centrally, so they have central needs and central management,” says Gazzo. “And in many cases, they need new technologies from banks to be able to succeed in their business model.”

Companies operating in Latin America face a number of challenges, including market volatility and the variety of economic conditions across the region. “The volatility in foreign exchange and interest rates could affect a company’s ability to borrow money,” says Annali Duarte, head of Global Transaction Services in Latin America at Bank of America. “It could also impact a company’s payables and receivables flows. In this environment, financial instruments such as hedges are important.”

The regulatory environment is also something of a challenge: as Duarte points out, some countries have restrictions on the convertibility of local currencies and cross-border transfers, as well as on holding foreign currency accounts onshore or leveraging intercompany loans. “Additionally, in some countries, overnight investment options may be limited due to financial transaction taxes,” she says. “Therefore, treasurers need to carefully review their investment strategy and establish appropriate cash flow forecasts to cover short term obligations.”

Fraud is another challenge, and as such Duarte recommends that treasurers need to be aware of best practices in order to protect themselves and avoid operational losses.

Optimising treasury and harnessing technology

According to Gazzo, centralisation continues to be an important trend in Latin America, together with a strong focus on working capital which has intensified in light of higher interest rates. “We’ve seen a lot of demand for supplier finance programmes,” he says. “In the past, supplier finance tended to be adopted only by certain industries, but now we see this more broadly, with a larger diversity of companies looking at how they can leverage these types of solutions to improve their working capital.”

Corporates in the region are also looking to leverage real-time technologies in order to streamline treasury processes, improve their businesses and compete effectively. “If you have a company that manages e-wallets, the instant aspect of how you move money from a wallet to an account is a key driver for success,” says Gazzo. “For example, if an airline needs to refund a passenger due to a delay, the traditional option would be to give a credit. Looking at these new options, companies may see opportunities to change that and give their customers better solutions.”

Where treasury activities are concerned, Gazzo notes that APIs and instant payments have been widely adopted in the region, and that companies are looking at how best to take advantage of this. “We now have instant payments in the largest markets: Mexico, Brazil and Argentina. Colombia is also looking at which of the models can be leveraged,” he comments.

Meanwhile, the high interest rate environment is naturally driving corporate treasuries to seek higher yields, notes Duarte. “They are maximising their cash surpluses into global pools and strategically optimising their liquidity management at a local, regional and even global level. Global pools are much more relevant in today’s environment.”

Automated investments can play an important role in helping companies centralise their cash, particularly in light of higher interest rates. In Brazil, for example, Citi has built a solution that focuses on offering a higher return on investment in line with local tax regulations. “Another point we are looking at is how companies can centralise their collections with multibank solutions so that they can manage investments centrally at the end of the day,” says Gazzo. “Our clients have had a lot of success leveraging this capability.”

Treasury centres and shared service centres

For companies setting up treasury centres in Latin America, Duarte says that common types of treasury centre include regional treasury centres that serve multiple countries in the region, as well as in-house banks that centralise financial activities for efficiency. “Additionally, shared service centres help consolidate back office functions, and payment factories streamline payment processes.”

Duarte says that companies across LATAM increasingly want to aggregate regional balances and automate cash mobilisation “so that operational risk – and frictional cash – are reduced.” She adds: “Complemented by Latin America’s proximity to the US, educated human capital and low labour costs have created a positive ecosystem for multinational corporations to set up treasury hubs in the region. These structures help multinational corporations manage liquidity, reduce risks, and achieve operational synergies across their Latin American and global operations.”

In addition, she notes that several countries have adopted digital document signatures, real-time payment and electronic tax payments, thereby speeding up the need to adopt new technology platforms.

Location, location, location

While local companies tend to locate treasury centres in their home countries, multinational corporations have more choice. “Mexico is a large country, and many companies are serving the US from Mexico as a shared service centre or treasury centre,” says Gazzo. “Costa Rica is very popular, and still attracts a lot of companies, and Argentina is another big market where there is a lot of English-speaking talent.” He adds that Colombia was not historically a popular treasury centre location, “but many companies have been setting up there in the last ten years.”

Duarte points out that Latin America has become an increasingly attractive investment destination for many US companies looking to de-risk their supply chains and expand their e-commerce strategies. “For Mexico, nearshoring represents the country’s best growth opportunity for the next ten years, and it’s already having an impact,” she says. “The nearshoring expansion has also benefited Central America and the Caribbean.

“For example, Puerto Rico is now a pharmaceutical hub for North America with approximately 80% of global companies in the sector with on-island investment. The Dominican Republic has established expertise in the textiles and medical device sectors, with Honduras and Guatemala also experiencing accelerated growth. Costa Rica is now central to technology and healthcare manufacturing.”

Last but not least, Duarte observes that cities such as Buenos Aires, Bogota, Mexico City, Monterrey, Guadalajara and San Jose CR have emerged as decentralised technology and treasury centre hubs which offer “integrated ERP platforms, the streamlining of funding and account control, and the elimination of operating inconsistencies through better liquidity forecasting and FX exposure.”

Implementing a new banking structure in LATAM

When it comes to managing treasury in Latin America, “There can be a lot of surprises,” says Séverine Le Blévennec, Global Head of Treasury at Aliaxis, which operates in ten countries across the region. In the last year, the company has implemented a new banking structure across the region, in a project which included running an RFP, carrying out KYC checks, opening accounts, setting up connectivity to a payment hub, and refinancing with new credit lines.

“To give an idea of the scope of the project, we had to provide/review/execute and sometimes notarise over 400 documents,” says Le Blévennec. “We also did an extensive review of our supplier master database: on one hand we reduced the number of suppliers in the region from 50,000 to 11,300 and on the other hand we had to add new fields in the ERP to capture all the required data where we then reviewed/populated 271,000 fields!”

She notes that the region is very paper based when it comes to collections, “so it wasn’t possible to have one bank per country with which we could do everything. So we took an approach whereby in each country we have one bank for all electronic transactions and another one for cash collections, local paper instruments as well as salary payments and benefits. It’s also a very dollarized economy, so we work with a bank that enables us to wire dollars to the US, and then have all our suppliers paid in USD using local payments in the US, which lowers the cost.”

The regulatory climate likewise presents a challenge, as does the lack of harmonisation where banking requirements are concerned. “It’s not like in EMEA, where you can fill out one bank account form for all the countries you work with,” Le Blévennec explains. “Every country has a different form, and in some countries you have to notarise a lot of documents, which is an additional burden. And electronic signatures are typically not accepted, so it takes more time to execute the documents.”

She adds that FX exposures can be significant across the region, which makes it more difficult to hedge FX risk, and “sometimes not really worth the cost”. In addition, country risk also needs to be addressed – and Latin America also tends to present more business volatility than other regions. “Some entities may have more volatile revenues, so you may need to do capital injections to go through certain periods,” she notes. “Before I joined Aliaxis, our stronger entities were lending to the weaker ones – but then that creates an FX exposure.”

Nevertheless, Le Blévennec notes that these challenges can be overcome with the help of strong banking partners that have a thorough understanding of the markets. “The benefits of our project have been really major: they include automation, better funding rates, reduced FX exposure, and a reduction of cyber risk as well,” she concludes.

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