09 Jun 2009
Robert Snell, head of global subsidiaries group at Citi, talks about the challenges facing multinationals' subsidiaries operating in the emerging markets, including liquidity and funding risk and local counterparty risk.
Snell, previously representative director and president of Citibank Japan and head of the corporate banking division, took up his new role as head of global subsidiaries group (GSG) in January. The function of the business unit is to serve the subsidiaries of Citi’s multinational corporate clients. With dedicated teams, the GSG covers 79 out of the 109 countries in which Citi has a presence; in the other 30 countries, Citi's GSG deals with partner organisations within the bank. Snell has spent the first few months of his new position travelling to more than 20 countries to get a sense of the issues that subsidiaries are facing in these turbulent economic times.
Q (gtnews): What are the biggest challenges facing multinationals’ subsidiaries?
A (Robert Snell, head of global subsidiaries group, Citi): Multinational companies have blossomed because of globalisation, specifically through free trade, reduced national tariffs and a general blossoming of the global middle class. For OECD [Organisation for Economic Co-operation and Development] parent companies, growth has generally come from developing markets and globalisation has been critical for their success.
With the crisis, multinational companies, and many of the world’s banks, have entered a tunnel. We were driving down a highway, in some cases very quickly, and have now entered a period of darkness. We don’t know what is going to happen to globalisation - is there a light at the end of the tunnel; is it near or far away, or is it a train coming our way?
I am convinced that the period of crisis with respect to globalisation and rhetoric around nationalisation is not going to last long. Therefore, how do companies make sure they don’t get lost, take the wrong turn or hit the brakes too hard?
There are three themes companies need to focus on:
From a financial perspective, the availability of capital and liquidity is critical.
Companies need insight and access to useful information so management in local, regional offices can effect change.
In many cases, local or regional offices need to act somewhat more independently than in the past. Head office is in crisis mode and distraction can be overwhelming. So in order to run an effective business across markets at varying stages of crisis, a willingness to act locally is critical.
Q (gtnews): What are the main risks facing subsidiaries operating in regional and local markets, and what can they do to mitigate this risk?
A (Snell): There are two risks that are paramount: the liquidity and funding risk, and the local counterparty risk. The first half of the risk equation is basic funding and there are two sources of this - either from head office or in the local market by accessing the banking market, whether through global, regional or local banks, or the capital markets in some of the developing markets.
Presently, many parent companies are far less able to move money into the subsidiaries because they need it at home. And it is also true that they have always been reluctant to do this since, in certain jurisdictions, it is hard to get the money out again.
Obviously, the global banking market is under severe pressure, particularly in markets supported by the large OECD banking groups. However, in a number of markets, the local banks - or banking groups with large local branch networks - have abundant liquidity. In some countries, such as China and India, the central bank is aggressively pumping liquidity into the system . Many local market participants can take advantage of the higher relative savings rate, and lower levels of leverage, to more efficiently sustain investment spending.
Citi tries to provide balanced guidance to its multinational clients - if we can provide liquidity then we will, or if we are unable to do so at the right price, we will intermediate. Many local banks are worried much more about credit risk and dealing with the certain local industries or SMEs. Therefore, doing business with a multinational upgrades the risk of the local bank’s portfolios. Citi can help our clients arbitrage this for maximum advantage.
The other risk issue is that our clients are now much more worried about their suppliers or distributors, which has a direct impact on their ability to sustain their local business. Believe it or not, companies are now looking at basic letters of credit (LCs). Even if previously a company had confidence in its supplier or customer, out of prudence, that dynamic has been eroded, so I am now seeing a large increase in demand for LCs in the developing markets, as well as more innovative approaches to what is called ‘channel finance’.
But because open account transactions have been popular now for many years, the treasury of multinational companies are not as knowledgeable about LCs, or about today’s channel finance innovations - so staff need to be re-educated. It is interesting to see this very old instrument become active again.
Q (gtnews): How is the liquidity crisis affecting the relationship between the multinational and its subsidiary?
A (Snell): Head office needs more liquidity and they are calling on their subsidiaries to repatriate funds aggressively. There is some tension between the drive to repatriate funds in order to help fund the mother ship and the need of local companies to hold on to their cash for local growth opportunities.
Add to the mix the volatility of currencies today, compared to the relative stability of the currency markets up until 16 months ago. This is important to consider because once a company makes the decision to repatriate money, a fluctuation in the currency markets can change the outcome quite significantly. One way to address the issue of sovereign risk is just to have less capital floating around in certain markets - but at what cost?
Whether or not to repatriate funds is a tough decision to make at this juncture because, on the one hand, head offices are very distracted by their own issues, but, on the other hand, if a corporate doesn’t continue to invest or even double up in these developing markets, someone else will. A corporate can lose the war by withdrawing too much capital from the emerging markets. Plus, the classic BRIC [Brazil, Russia, India, China] markets are much more important today because of their contribution to the overall company profitability - to withdraw from them would be quite dramatic in terms of proportion of business today versus even five years ago.
In terms of wholesale withdrawal or decision to stall in a market such as Russia, we haven’t seen companies withdraw - all the companies we have talked to say that the demographics of the Russian market, as one example, have good long-term prospects. The wealth creation is taking a step back but there is a long-term market for consumer businesses. We are seeing hardly any wholesale timeouts, particularly compared to 1998 when many companies bailed out, or sharply curtailed investment emphasis in certain markets.
The market volatility is so disturbing that unless you have the right local insight for the local and regional market, it still remains too easy for companies to make strategically bad long-term decisions and under-invest at the wrong time. For example, a company in India may say that the market is no longer growing at 12% and so it is going to scale back its operations. Yet India will probably plod along at 5-7% growth this year, which is not so bad and it’s probably only a matter of time before it rebounds robustly.
Q (gtnews): How important is payables and receivables management in this economic climate? What are the main issues for corporates?
A (Snell): Payables and receivables management has always been important but now particularly so as the credit markets continue to be difficult. The further away you get from the head office of a multinational, the more the credit market is withdrawing. Managing receivables is a complicated job because a company will be under pressure to extend terms and increase company financing because the bank in the region is not lending as much money. So receivables management is very important to make sure companies can access the money they need.
For example, a big brand company that sold consumer goods asked us if we could see a point in the immediate horizon when banks in the CEE countries were going to start lending again. Every couple of weeks they were getting one of their distributors saying that they couldn’t pay the next day but needed another few weeks. And then they would call in two weeks and say they couldn’t pay then either. So this company has seen a frightening extension of receivables and that just heaps more pressure on. This goes back to the number one issue we are dealing with - the issue of funding.
At head office, the multinational will see that the CEE financial markets are, generally, becoming more conservative. As they see this happening, they are going to have to put pressure on their global banking relationships to develop solutions.
Another thing they can do is inject capital themselves - they can raise capital efficiently in their domestic market and move it intra-company. They can also put in more equity capital but, as I said, that's tough since once you inject equity capital into your subsidiary, the tax issues make it harder to pull that money out.
Q (gtnews): Do you have specific areas that you will tackle in your new role? Have you got big plans in the pipeline?
A (Snell): Well, I will be touring Latin America over the next weeks - Buenos Aires, Bogotá, Santiago, and more. Everywhere I go, whether Istanbul, Algeria, Ireland, which are all very different places, I meet with the subsidiaries of the same company and begin to put together a picture and get a sense of how they are thinking.
My business strategy is what Citi calls the network business. We are an important part of that - the GSG defines the elements alongside our global transaction services (GTS) platform, our products, and FX capabilities. Doing basic banking is now back in vogue for our multinational clients.
We are in a good position but we have to extend and invest in the business, just like our customers. One of the things we have been doing is sponsoring thought leadership events in a number of markets to address issues around capital and funding; around counterparty risks; and around issues as complex as politics and the new role of ‘government as players’... and then try to offer solutions and insight - here is what we think we know about the industry or sector.
We also play the role of a so-called information pipe back to the multinational’s headquarters. We sometimes under-appreciate this aspect of our job. We connect everything together through the relationships that we have at headquarters, alongside the regional and local levels. This enables a treasurer in India, for example, to stand a better chance of getting the attention they need. And in dynamic markets, with high risk but high reward, this is crucial. And Citi tries in many cases to give our subsidiary clients the information they need to position themselves and their plans within their own company, thus ideally ensuring that they don’t miss critical opportunities. That is what we do: support the network for the benefit of our customers’ growth strategy.
First published on www.gtnews.com
- Joy Macknight
- I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.