Market uncertainty prompts corporates to invoice in local currencies

Rising market volatility stemming from the western world has led to the increase use of local currency invoicing by multinational corporations, believes Standard Chartered.

  • 27 Jul 2012
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Foreign companies with a large presence in emerging markets have moved towards invoicing in a country’s respective local currency in order to minimise foreign exchange (FX) exposure arising from increasing market volatility.

While there are ongoing concerns with counterparty, liquidity and funding risks, multinational corporates (MNCs) are also concerned with mounting FX risks. This has resulted in a shift from primarily invoicing in G10 currencies to now, G20 or even G30 currencies, says Standard Chartered (StanChart).

“We are seeing a growing number of requests for local currency invoicing; although not a large volume yet but it is still an interesting trend,” declared Michael Aragona, head of Hong Kong, Taiwan and Japan strategic client coverage group at StanChart at a conference held by Reval, the treasury software provider, on July 25. “People who normally invoice in US dollars are starting to see the growth of renminbi or people coming and saying that they would like to receive and issue invoices in Malaysian ringgit, for example.”

Aragona, who spoke at Reval’s “The Changing Landscape of Treasury Risk Management” in Hong Kong, believes that corporates are embracing new tactics as answers to today’s treasury challenges. In the past companies have been trying to reduce the number of currencies managed, but now these entities are more open to holding a portfolio of non-operating currencies.

“Local currencies seem to be under scrutiny, but not necessarily in a bad way. In the past we have seen clients wanting to move towards operating currencies. Today clients are thinking that maintaining local currency for certain types of transactions is efficient as long as one understands the risks,” said Aragona.

In addition to managing FX exposures by invoicing in local currencies, MNCs have also reverted to more prudent alternatives to managing their liquidity.

“Some European corporates seem to be repatriating their profits back to Europe as directed by their headquarters, whereas some seem to be holding their liquidity outside of Europe or sometimes [subsidiaries] are asked to hold this much cash in a much more stable market,” noted Aragona.

“We also see clients approaching local regulators to better understand local regulations and ‘one off approvals’ to remove trapped cash,” he added.

As a result, corporates that will be able to weather any storm created by the euro crisis are those with the “right focus, right systems, right people and right partners,” declared Aragona. These are MNCSs that are nimble and adaptable to ongoing market changes.

The reliance on rating agencies has also dwindled as corporates themselves seek to analyse counterparty risk. One of the methods to minimise counterparty risk is to diversify the exposures from one service provider to several.

“With the added credit risk in the market these days, it also seems that Asian treasury centres are spending more resources and time on analysis particularly in-house,” said Aragona. “They are complaining that they need to spend so much time and money again managing the risk themselves.”

  • 27 Jul 2012

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1 Citi 7,375.29 34 9.61%
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1 Citi 3,884.96 9 15.58%
2 JPMorgan 3,300.70 8 13.24%
3 BNP Paribas 3,182.92 4 12.76%
4 HSBC 2,054.96 8 8.24%
5 Saudi National Commercial Bank 1,604.15 2 6.43%

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Rank Lead Manager Amount $m No of issues Share %
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1 AXIS Bank 85.65 1 100.00%
Subtotal 85.65 1 100.00%
Total 85.65 1 100.00%

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1 Standard Chartered Bank 510.75 4 16.00%
2 State Bank of India 401.68 3 12.59%
2 Citi 401.68 3 12.59%
4 MUFG 330.94 3 10.37%
4 Barclays 330.94 3 10.37%