Latin Finance - June 2008 - 49

treasury and cash management incurred no tax, will be taxed at 0.38%. Also, foreign exchange transactions related to the import of services and export of goods and services, which incurred no IOF tax previously, will now be taxed at the rate of 0.38%. Despite numerous currency changes and periods of maxi devaluations (devaluation in the currency by 20% or greater at one time) over the past two decades, exchange controls, and the strongly left leaning government of Luiz Inacio Lula da Silva, Brazil has one of the most robust financial sectors and efficient banking systems in all of Latin America. check. In contrast, countries like Mexico and Brazil, the credit terms tend to be lower and the efficiency of the banking system allows electronic collections and payments that improve working capital ratios. Liquidity management also presents a risk challenge. Excess cash in fact is more problematic than being in a cash deficit. Again, referring to Venezuela as the most egregious example, excess cash can be trapped in country for months or years due to the cumbersome process of repatriation, which exposes the cash to risks of subsequent maxi-devaluations of the currency. Older techniques such as the use of cross-border swaps, or buying local debt through bank bond offerings has fallen out of favor due to both tax and legal ramifications. For exporters, keeping these collection proceeds offshore may or may not be an available option, although for Brazil this amount has increased to 100% from the previously imposed restriction of 30%. In Argentina, there is a specified amount of time required before export proceeds must be remitted or converted, but it is possible to hold time deposits in USD, EUR or other currencies, which is a technique that can be used as Peru Peru is a good example of a country that has significantly improved their risk profile and liberalized their economy. As a result, their GDP growth has been 5%-10% per annum for most of the past decade. The threat of devaluation is only a memory from the late 1980s and early 1990s. During that period, Peru experienced a disastrous bout of hyperinflation and currency devaluation, caused primarily by the populistspending binge by the former and now current President Alan Garcia. Not unlike the current system in Venezuela, Peru maintained an artificially low ‘official’ exchange rate called the Mercado Único de Cambios, or MUC, which accomplished little more than to allow the politicians and bureaucrats to loot the public treasury of hundreds of millions of dollars. In today’s far more stable economy and political regime, the exchange rate for the Nuevo Sol (PEN) is free floating. Risk Management Strategies Developing an approach to managing and hedging risk in Latin America is largely dependant on the maturity of the domestic financial markets and the ability to access the international markets. In highly regulated economies – such as Venezuela – these are limited. The most basic tools for the risk manager include “natural hedging” and active working-capital management. Sourcing goods and services locally for companies with large domestic markets is effective as a natural hedge and also works as an inventory management tool especially if key raw materials have to be imported and restrictive foreign exchange regulations are in place. This is one of the significant contributors to the difficulties in Venezuela today. Closely watching DSOs (Days Sales Outstanding) and controlling payables are standard techniques, but difficult to perfect in many countries. DSOs remain high for most companies in Argentina as inflation is running at about 15% - 25% and access to credit is limited. You may get paid, but with a post dated 2008 LATINFINANCE 49 guide

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Latin Finance - June 2008

Table of Contents for the Digital Edition of Latin Finance - June 2008