Like many emerging market economies, Brazil employs currency restrictions to manage its economy – to control inflation, avert capital flight and to deter currency speculation. While cross-border trade is encouraged (Brazil’s total exports for 2024 were a record US$337bn5 ), the fact that all cross-border payments must be made in a hard currency (as BRL cannot be held offshore) adds complexity for treasury teams worldwide.
Figure 1: Integrated liquidity and FX management solution Brazil
Source: Deutsche Bank
Allseas is managing its FX exposures at group level. “The subsidiary’s working capital is funded in EUR by an offshore group entity and fluctuates in line with project needs. At the same time, project related inflows and outflows occur in multiple currencies onshore, which creates a continuous need for FX conversions on both the on- and offshore market,” explains Treasurer Manuel Kampman. These, he adds, “need to be actively managed”.
With the BRL this can be done through non-deliverable forward (NDF) transactions, a standard and liquid hedging instrument in the offshore market. However, the simultaneous alignment of local FX conversions with offshore NDF trades remains a challenge. This is because funding the Brazilian subsidiary requires an onshore conversion from EUR into BRL, while at the same time the group executes an offshore NDF in the opposite direction — selling BRL and buying EUR — effectively creating a swap. Even if both transactions are executed on the same day and only minutes apart, any timing difference can introduce unwanted basis risk.
“The overall outcome was efficient liquidity and FX risk management in Brazil while demanding only minimal internal resources from our treasury team”
Manuel Kampman, Treasurer, Allseas
“Before, handling both the local FX trades and the corresponding offshore hedges required executing several transactions at the same moment, creating an operational workload that was difficult for a small treasury team to manage efficiently,” says Kampman.
Deviation in the timing of hedged cash flows – not least because of likely delays in completing all the regulatory requirements – means outstanding hedges may need to be rolled over to remain protected against exchange rate movements. This involves a manual tracking of onshore documentation completion.