Freeing trapped cash in Africa
Restrictions in many African countries can make it difficult for treasurers to move cash to where it’s needed. But proactive treasurers can make considerable progress in freeing up trapped cash.
For multinational companies operating in Africa, the issue of trapped cash looms large. Companies may generate healthy amounts of cash in a particular market – but if that market has restrictions or local exchange controls in place, it may be difficult to repatriate funds to another location. In some cases, these constraints can leave companies with hundreds of millions of dollars trapped in-country.
As highlighted last year, trapped cash is a perennial treasury challenge in Africa. Twelve months on, the problem hasn’t gone away – and anecdotally, treasurers report the challenges are getting worse, with documentary requirements becoming more onerous alongside continuing market volatility.
“The way things work for companies like ours is that once you invest in a country and it starts generating cash, you want to deploy that cash to other parts of the business that need investment,” explains the treasurer of a multinational consumer products company with operations in Africa. “But with trapped cash, you are not able to get that cash to the right country – and if you can’t use the cash, you can end up relying on borrowings unnecessarily.”
While treasurers agree that the challenges are substantial, the specific hurdles can vary considerably from country to country. In some African countries, the availability of foreign currency can prove difficult, particularly when plummeting oil prices lead to a liquidity crunch on US dollars in a particular country. In Egypt and Nigeria, for example, a lack of currency has at times prevented some companies from converting Egyptian pounds and naira to dollars and getting cash offshore, even if those companies have the documentation needed to pay invoices or issuing dividends.
Other countries have stringent foreign exchange regulations in place. In some countries, such as South Africa, foreign exchange trades have to be handled by local banks if a local entity needs to send US dollars overseas. Challenges can also occur in countries like Angola and Egypt, which have been known to restrict companies from purchasing US dollars, except when making cross-border payments for items such as food, medicine or medical equipment. Local banks may also be prioritised over foreign banks when it comes to availability of currency.
Addressing the issues
These restrictions can be a major headache for corporate treasurers. As well as being unable to include balances in cash pooling structures, and potentially having to increase borrowing, companies with trapped cash may see their local currency balances devalue in volatile conditions. At the same time, hedging FX risk can be both expensive and challenging, as Ben Poole reports in Testing the limits of FX risk management.
Zimbabwe is one country that has been particularly affected by devaluation: local quasi-currencies were traded at parity to US dollar until February 2019, when the Real-Time Gross Settlement (RTGS) Dollar was introduced. The new currency initially traded at 2.5 to the US dollar – effectively resulting in a 60% devaluation. With inflation reaching 300%, in November 2019 the central bank began issuing Zimbabwe dollar notes for the first time in a decade.
As Natalia Martynova, senior treasury manager for Americas and Sub-Saharan Africa at British American Tobacco, comments: “In the last couple of months, you might have seen your capital completely wiped out. The stakes are extremely challenging.”
There are steps that treasurers can take to overcome these issues, but different techniques will need to be used in different markets. In cases where local banks are prioritised over foreign banks for currency allocation, it can be worth engaging with local banks which may be able to provide some of their allocation to foreign companies. In other cases, it may be beneficial to invest in local investment products to increase yield and thereby combat the impact of a potential currency devaluation.
“This is where treasury goes beyond treasury,” says BAT’s Martynova. “If there are no banking instruments available to protect trapped funds, you start assessing the real estate market, or project financing. You need to look at more unusual ways of protecting your funds.”
Breaking it down
Manish Joshi is a Director at GE Capital’s treasury, where he oversees cash management and banking operations across Middle East, Turkey and Africa. To overcome the challenges, Joshi suggests that treasurers define the problem statement and break challenges down into smaller issues that can be worked through one at a time in order to achieve the end goal. Different techniques will need to be used in different markets. For example, in cases where local banks are prioritised over foreign banks for currency allocation, it may be worth engaging with local banks which may be able to provide some of their allocation to foreign companies.
“The stronger the relationship, the more proactive the bank will be,” adds the multinational consumer products company treasurer. “Local banks tend to be more proactive because they really want to grow their relationship with you.”
Above all, Joshi says there is no roadmap when it comes to finding solutions to the various challenges. “These structures were developed over the years through multiple iterations – even the banks said, ‘no, you cannot do this,’” he notes. “But we still went ahead and tested the waters with success, which enabled us to get things done and enhance our capabilities.”
Manish Joshi and Natalia Martynova will be speaking at our Effective Finance & Treasury in Africa event on the 3rd of March 2020