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BRIC Banking? Do Your Due Diligence

Victor Hinojosa

s developed nations emerge from the economic downturn, it is evident that the old world economic order is undergoing a major shift. Brazil, Russia, India and China currently hold more than 40 percent of the worlds foreign exchange reserves and 15 percent ($15.4 trillion) of the total global gross domestic product. Reports from The Goldman Sachs Group and others make it clear the socalled BRIC nations will be dominant economic leaders by 2050. What investment and expansion opportunities does this expectation present for North American companies? If business plans for 2011 include establishing operations in India, building a partnership in Brazil, buying from Russia or exploring investment opportunities in China, here are three points to consider: 1. Learn the BRIC banking systems. Moving funds internationally is very different than domestic transfers. Dealing with BRIC countries can be far more complicated than dealing with more developed countries, such as Germany or Canada. The reason is that BRIC banking is typically highly regulated and generally slow to pay. Before transferring funds to a BRIC country, take the time to learn its banking system. This may require researching banking regulations or talking to a foreign exchange (FX) or financial professional who's dealt extensively with the country. This research will provide important insights into the costs of transferring money, how long payments will take to arrive, the kind of information required and the best currency to send. Consider sending a small test transaction to a foreign location to address any potential problems. This can prevent any larger issues that may impact client

relationships. For certified treasury professionals, this type of transaction is similar to a pre-notification through the automated clearing house (ACH) system. 2. Understand local currency payment options. Paying in the foreign suppliers local currency rather than U.S. dollars can be cheaper and faster for all parties. Dont assume that, because the dollar is accepted overseas, its the most costeffective or convenient payment option. Once dollars arrive in any BRIC country, the supplier or partner has to convert them into local currency. In doing so, their bank will charge the supplier or partner a fee and that cost will most likely be passed on in the form of higher prices. Additionally, with currency volatility levels still at all-time highs, theres a possibility their currency will appreciate against the dollar in the short term. This can result in less money for them after the conversion. As a result, they will likely add this price when they invoice you. This is one way that foreign suppliers hedge their receivables. Consider working with a financial institution thats sophisticated enough to send Brazilian real, Indian rupees or other local currencies to your partners and have them invoice you both in USD and in the currency in question. Most of the time, the latter price will be significantly cheaper (expect discounts up to 10 percent). Larger foreign exchange and payments providers can send wires in more than 100 currencies, so sending BRIC currencies is unlikely to pose much of a challenge. That said, its not always the case that local currency is best. Many Chinese industries, for example, receive tax breaks for bringing in USD (China being the worlds largest holder of USD

reserves). In these cases, some savings may be passed on to you if you pay in dollars instead. Take the time to determine whats most cost-effective for your supplier, and take action to arrange a payments program accordingly. This will often also be the cheapest. 3. Recognize risk and hedge appropriately. Even pegged currencies can expose executives to market fluctuations. Once it's determined what currency to send, develop a hedging strategy. This may simply involve assessing risks or formulating a forward structure with the help of a foreign exchange consultant at the bank or payments provider. Either way, hedging will ensure that no matter where the market moves, your bottom line is protected. The sheer number of American businesses that transact overseas without taking the time to hedge their exposure gives a company with an FX strategy a key competitive advantage. Non-deliverable forwards (NDFs) are an effective method to hedge against fluctuations in pegged currencies like the Chinese yuan. NDFs function similarly to regular forwards except that, when the contract is closed out, the currency in question is not received; rather the holder simply realizes whatever marked-to-market gain or loss occurred over the course of the contract. BRIC nations present great investment opportunities, but great opportunities often come with great risk. Knowledge and a solid strategy can provide a strong competitive advantage. Victor Hinojosa is director of Strategic Corporate Solutions for Western Union Business Solutions, which provides international payment and FX services to business clients around the world.
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financial executive | january/february 2011

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