In the Midst of Chaos, Treasury Guides Companies to a Safe Landing

  • By AFP Staff
  • Published: 3/9/2023
Foreign Exchange

When AFP’s Middle East and Africa (MEA) Treasury Advisory Council recently met, there was one thing on their minds: the financial uncertainty that threatens their region. Between the uncertainty in the region, the ongoing war between Russia and Ukraine, and rising inflation and interest rates, it is “chaotic.”

To start, a large number of Egyptian companies have relocated to the Gulf Cooperation Council (GCC), which is a political and economic alliance between Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman. Hisham Aboul Dahab, Group Corporate Treasurer, A-Mansour Automotive, commented that for any decision maker seated in any company or organization in Egypt to decide to move the business from one country to another is not an easy task. Why? “Because this is a 100-million-person consumption market,” he said.

Hisham went on to say that the current situation is not sustainable. “It’s only a matter of time,” he said. He added that some sort of restructuring may be required by hedging levels for these corporations in another location, and the Middle East is likely the closest place to do that, but some companies, particularly startups, are doing it in Holland or elsewhere.

When it comes to managing the risk of foreign exchange (FX) exposure, “Some companies that start operating in Saudi Arabia must strike a balance between a higher FX rate and the FX slots that will occur as a result of their inability to move pricing with the markup situation on the U.S. dollar,” said Hisham. “The market is still here, and you should limit your foreign currency exposure as much as possible.”

“I tend to agree with Hisham on the offshore solution,” said Ahmed Makhlof, CFO Egypt and North Africa, General Motors. “It is a temporary solution that may be beneficial in the current market chaos; however, it is not a long-term solution because Egyptian consumption is what attracts foreign investment. From a pricing standpoint, I would argue that we are currently, specifically this month, living in pricing chaos, and nobody knows how or where to price. There isn't even a comparison for the FX. And, if we're talking about NDFs, I'd argue that their share of the market is very small. I've had discussions with some of the economists who tell me the only benchmark we have is the NDF. Automotive is a highly competitive industry that you cannot and will not be able to price at the NDF. You will not be able to charge more than the support rate."

If you were an investor, is there an opportunity to jump into a high and risky market now? “It depends on how long this uncertainty will last,” said Amir Khater, Chief Financial Officer, TADMUR HOLDING W.L.L. “Looking at the investment now, it is appealing; however, if the uncertainty persists for an extended period, it loses its allure.”

Is the current situation temporary, or should we prepare ourselves for the long term? “There are two major events co-occurring that are having a significant impact on the MEA’s economy,” said Tom Hunt, CTP, Director of Treasury Services and Payments for AFP. “One is less controllable and more uncertain than the other, and that's the Ukraine conflict. We really don't know what the outcome will be, though it will continue to have a significant impact on supply chains and global trade.

“The other event that is a little bit more certain is the Fed interest rate changes. I know, at the upcoming meeting, they're expecting a small increase and that's probably foreshadowing what's to come. Some of you have talked about a pending recession. Here in the States, we're seeing lots of companies proceeding with substantial layoffs, especially in the tech sector. So, to answer your question, it's probably going to get easier as we see the U.S. sliding into a recession. The market sentiment is that it's coming. It’s just a matter of time.”

Assuming a recession is coming, how can treasurers start preparing? “Some U.S. companies are building in a forecasting model using some economic indicators,” said Hunt. “They might look at past GDP. They might look at CPI. They might look at other indicators, and they're building that into a fully functional liquidity planning process in conjunction with the FP&A functions. They’re trying to be more robust and more proactive, but nonetheless, it's not a perfect science trying to figure out what the future holds.”

“Number one is start thinking about how to run the business in this kind of environment,” said Ahmed. “And number two, treasury professionals should be focused on evaluating the impact this repetitive devaluation has on their company.”

Every company has an exposure distinct from the other companies. “We're talking about exposure for a payment term that banks have requested to be longer term,” said Makhlouf. “We cannot bring in foreign currency unless the payment terms are extended; we are being hit with higher payment terms on the other side.

“You plan your business on a certain level of profitability; you take all of these challenges and build them into your prices, and then you close the year and start repatriating funds to your foreign subsidiaries. And the valuation occurs after the end of the fiscal year, the repatriation of funds will be less than you promised. These are the kinds of risks treasurers should be focusing on, anticipating and forecasting, and informing the investors on what is happening in the market, and what they should expect from it.”

“Does it differ depending on the region, such as emerging markets versus developing markets versus developed markets?” asked Patrick Culkin, Executive Vice President, AFP. “Is there any kind of shift as to what the treasury's focus would be based on? Or are there any differences in the advice you would give to someone in your situation?”

“The prescription is very well known: Create an investor-friendly environment to attract more FDIs and real FDIs, and I'm not talking about money,” said Abouldahab. “What is happening and what we are reading nowadays is that some of the investors are running to more investment-friendly environments, such as Morocco — considered one of the most investor-friendly environments in the region. They provide some sort of incentives for FDIs, ranging from land to tax breaks, all of which are extremely effective. If only we could remove the effect of interest rates because interest rates are affected all over the world by the U.S. Fed's moves, and it cascades to other markets.”

Any organization should be looking to its treasury team to help move them in the right direction. If the organization is not moving, if they're not instituting an emergency action plan to deal with the situation, what can finance and treasury professionals do to help influence that within the organization, to drive to the greater good?

“One of the things that have been at the top of every treasurer's list in our region is information,” said Makhlouf. “The most important thing is that you get the information at the right time and in the right way and that you share it with the rest of the organization so that they can begin the type of analysis that Hisham mentioned. The initial information will come from the treasury team, which is always in direct contact with the market and up to date on what's going on.”

“During times of crisis, it is the treasurer's role to guide the entire company toward a safe landing because it is a matter of cash flow,” said Rania Afifi, Associate Director of Treasury, Misr Italia Properties. “Yes, profitability is great, and we will work toward the goal of profitability; however, I believe that in such a turbulent time, profitability does not take precedence. The priority is to maintain continuity, consistency, market share and good working capital management to avoid a future crisis.”

Looking for more? Find resources for treasury professionals in the Middle East and Africa.

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