Emerging market depreciation tests the mettle of treasurers

During a year of heightened emerging market risk, FX exposure and trapped cash are concerns for treasury. Bija Knowles and Graham Buck report.

Plunges in the Brazilian real, Turkish lira and Argentine peso highlight the critical importance of FX hedging and trapped cash, treasurers told the International Treasury Management conference in Geneva.

Mandana Sadigh, Mattel

According to Mandana Sadigh, treasurer at US toymaker Mattel, a large part of her treasury operation’s role lies in understanding global macroeconomics as about 50% of Mattel’s $4.9 billion annual revenue comes from outside the United States.

“A large part of Mattel’s revenue growth comes from markets outside of the US, including markets such as Brazil, Russia, and Turkey with high levels of volatility with regards to FX,” said Sadigh. “It’s important that we understand the impact of these FX movements on our business”.

“The Turkish lira recently declined by about 40% in just a few days, something that the business couldn’t have prepared for”, Sadigh added.

Danone’s Brice Desmaretz, corporate finance & dealing room director at Paris-based food-products corporation Danone touched on the complexity of hedging some emerging market currencies and emphasised the necessity of prudent classification and risk assessment.

Desmaretz said: “We are fed a lot of information from our banks so we have a very detailed view of FX risks, which can be helpful to the business.” He added that treasurers may help to bring a cold blooded analysis to locals facing turmoil in emerging markets.

Marco Schuchmann, Asics

According to Danone’s 2017 annual report, the company owned foreign currency hedges against UK sterling, the Mexican peso, Russian rouble, Brazilian real and Chinese renminbi and other currencies with a notional value of €1.8 billion, an 17% increase on the previous year.

Related to the problem of FX risk management, is the challenge of trapped cash in emerging markets. According to Marco Schuchmann, group treasurer for Europe at Japanese footwear manufacturer Asics, this has been a bugbear for the company in South Africa

“I’m currently struggling to get cash out of South Africa”, Schuchmann said. “The entity in question is registered as a local SA entity but this means it’s a nightmare to get cash out and entails supplying authorities with a large amount of documentation, which is very difficult and cumbersome. We are now working on de-registering this company and registering it as a non-SA company. It will be a very long process. We have also had problems getting cash out of India.”