00;00;01;24 - 00;00;33;10
Unknown
Is the quality and availability of data the biggest challenge for the group treasurer of a company that operates in 100 countries? And how does a large European energy group manage emerging market currencies? Welcome to CurrencyCast. My name is Agustin Mackinlay. I'm the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure to welcome Danilo Gonzalez, Treasury Manager for Europe and Africa at Siemens Energy.
00;00;33;13 - 00;00;56;15
Unknown
Danilo Gonzalez, a warm welcome to you and thank you for joining us in this episode of CurrencyCast. Thank you for having me, Agustin. I'm pleased to meet you and happy to discuss any FX topic with you. Right. That's great. Danilo, can you start by introducing yourself to our audience? Sure, of course. My name is Danilo Gonzalez.
00;00;56;15 - 00;01;24;28
Unknown
I am leading what we call The Competence Hub for Treasury for the region of Europe and Africa. We focus on three main products: cash management, trade finance and probably the most challenging, FX management as well — in different countries in the Europe/Africa region. All right, we're going to go into the details of all that. But first, a general type of question. You work for
00;01;25;00 - 00;02;05;29
Unknown
the Treasury Department of Siemens Energy, you're based in Lisbon, you have to oversee operations in Europe and in Africa, you work in a multicultural environment, and you're dealing with lots of internal and external stakeholders, right? Dealing, as you said, with, I imagine reports and controls, bank relations, risk management, maybe even M&A. So how is the typical day of the Treasury Department in these conditions?
00;02;06;02 - 00;02;32;22
Unknown
Yeah, that's correct. When you have been doing this for many years, you sometimes feel like it is business as usual, but no single day is equal to another. So, the challenges are totally different from one day to another. Let's say you expect the unexpected sometimes. Right? And so things are like this. So, basically, we focus on the three products.
00;02;32;24 - 00;03;06;20
Unknown
At the same time, it depends on your coverage. We have, for instance, people defined or, let's say, allocated to one country for the three products, or we can have just persons dedicated to one specific product, like FX managers only who cover FX management for three or four countries, or we can have only one person dealing with the country with all the treasury-related topics.
00;03;06;21 - 00;03;49;14
Unknown
So it depends on the size, it depends on the volume, it depends on the complexity and regulation of the country. So our idea is always to have, let's say, an expert of the country that understands the country. And if there is a capacity, we can grab more, more countries or more geographies. It's up to the capacity to be honest. Right, now Danilo, in a previous conversation you told us that perhaps the biggest hurdle that the Treasury Department of a large group like yours has to face when managing Europe and Africa is the quality and and the availability of good data.
00;03;49;14 - 00;04;18;23
Unknown
Right, and especially in regards to cash and liquidity management issues. So define a little bit or give us more details in that respect maybe defining what what is cash traps and how do you deal with that. Yeah sure. And its right. So when you're in a big company, of course you need to deal with so many stakeholders.
00;04;18;26 - 00;04;48;21
Unknown
And if we give an example in the FX management environment, we have what we call the commercial project managers who need to identify the risk, the currency risk, in which we can support with advisory, defining the right strategy either for the contract or if some currency cases, if that is required, try to mitigate the risk. Then once it's materialised, we need to be properly informed that there is a hedge requirement.
00;04;48;23 - 00;05;17;27
Unknown
So basically, communication is key. If nobody tell us what they need, nobody will know. So you can even go to set for yourself. But it's going to be very complex because we are talking about going into different subsystems or any other similar system where you might retrieve the information but is not it's not an easy take. So communication is key that the exposure is correctly reported at once.
00;05;17;29 - 00;05;44;09
Unknown
Then we have countries, big countries where you might have 400 commercial project managers that are dealing with currencies. And so it is massive. So you need to have coordinators, you need to have people that understand the concept and understand the risk that this implies If they don't report. And we move to the hedging, which is our task, internally or externally to hedge.
00;05;44;11 - 00;06;10;29
Unknown
And then we have the third part, which is our fellows from accounting and they need to do the booking. They need to report the P&L. They need to do the, what we call the outstanding transactions reporting, the revaluation of the deals or applying the hedge accounting principles to better deal with this principle etc. So we are like three teams collaborating with each other on a regular basis.
00;06;11;02 - 00;06;52;07
Unknown
This is why it's important that all are aligned and all speak the same language, to be honest. Right, absolutely. Look, I was talking to Francois Masquellier earlier in Brussels, the CEO of Simply Treasury, and he was helping organise the EACT Summit 2024 in Brussels recently. And he has come up with what he calls a Treasury Tech Map and half seriously half jokingly I suggested, why not having a section on the centralisation of treasury operations, because it seems to be quite a trend.
00;06;52;10 - 00;07;22;29
Unknown
You see it at the level of cash management, you see it at the level of foreign exchange risk management. You see it at the level of data governance. Do you have views on, say, the centralization and maybe specifically in what regards the availability of data or data lakes, or is a similar structure in place? Yes, we have an In-House bank solution internally.
00;07;22;29 - 00;07;55;12
Unknown
So which means that the system owner is headquarters for almost everything in the treasury. So it's a payment factory in cash management where we centralise everything internally. Because the disadvantage is that if you have many let's say solutions from banks or service providers, you might end up with ten tools. So if you have your internal tool, you have the capacity to develop it, to enhance it and adapt it to your reality and your problems.
00;07;55;12 - 00;08;23;01
Unknown
Let's put it this way, your challenges. Same applies in FX, It's well centralised, it’s a data lake basically. And one of the big advantages is that you don't need to have so many let's say external users, let's put it this way, because then you lose control. And this is very, very important for us to have to understand what is going on in every country in terms of cash management,
00;08;23;01 - 00;08;53;11
Unknown
FX, who is doing what and if they’re doing it under our guidelines. Otherwise, you lose control. And centralising this, it means that we control the users, we control who is sending deals externally or internally and of course it's a repository also of the FX confirmations, of the hedges. Right. Bookings is a different topic, but it also makes life easier, to be honest.
00;08;53;13 - 00;09;30;14
Unknown
All right. Now let's go a little bit more in detail into foreign exchange risk management, maybe you outlined some of the ideas there, but maybe we could go into a little bit more detail about, so, for example, who sets policy when it comes to foreign exchange risk management? Is it only headquarters? And another interesting question: are subsidiaries allowed to execute external trades with their own liquidity providers or just internal trades? It depends on the country.
00;09;30;18 - 00;10;04;20
Unknown
So, the rules are always set by headquarters and then the applicability is a different story. Because when you are at headquarters, you might have a mission, say like this is what I would like to implement, what makes sense. But knowing the applicability, if it’s going to be 80%, 90%, worldwide, this is the challenge because you can set 20 rules, but then maybe 15 are applicable and the other five, not for Africa or for the Americas and so on.
00;10;04;22 - 00;10;31;17
Unknown
So we have to be a little bit flexible. But there is the main, let's say, main rule of what you can do where you cannot do and then you take it from there. So if there is an exception, it needs to be approved internally, but it is rather seldom. We must try to follow the rules just because, let’s say it’s the way to go.
00;10;31;20 - 00;11;02;09
Unknown
We shall not be deviating. And also because this gives us a standardisation. So when everybody does the same thing it's easier, easier to extrapolate and it’s easier to benchmark or collaborate. We can discuss with other colleagues saying: How do you guys do this? “We do it like this”. So because we use the same system we can share knowledge and if they do it totally differently, it is not that easy to compare.
00;11;02;12 - 00;11;32;10
Unknown
And regarding whether we do it internally or externally, to the most extent, we try to do it internally. If the regulators say we cannot, then we go externally. So it's a tax issue, it's a tax concept, or a legal concept that prevents us from centralising. But really, yeah, okay, really interesting. Yeah, a tax issue or a regulation issue that is one that creates the need for some flexibility.
00;11;32;10 - 00;11;57;11
Unknown
And that's exactly, I think what we have done here within our so-called Kantox In-House FX product where clearly headquarters or head office is in charge of foreign exchange policy. But there is some real flexibility as you mentioned, right? Maybe it's a tax issue, maybe it's a knowledge issue, maybe it's a regulation issue.
00;11;57;11 - 00;12;24;21
Unknown
So, for example, if Brazilians want to have better conditions on their own, well, they could go external, perhaps on their own, but always with the policy set by headquarters. And I think that matches what you have described right? Danilo, what's the type of exposure that you face typically? Forecasted exposures,
00;12;24;26 - 00;12;53;13
Unknown
isit rolling budgets or is it just individual campaign periods or perhaps even only transactional type of FX risk? I guess it's going to depend on the situation as well, right? Yeah, but mostly, let's say we make money with a project business. Okay, so selling turbines and installation of a power plant, it's a long tenure.
00;12;53;16 - 00;13;20;17
Unknown
Okay. Or maintenance, it's also long tenures: 10 years, 50 years. And project business is probably the largest, maybe the easiest to let's say to have a strategy because we don't need to think too much about budget or forecast and so on. So you just put the deals based on the milestones and then you need to adjust.
00;13;20;20 - 00;13;44;05
Unknown
But we also have product-business for transformers, for materials and so on. So there is a forecast for these, but it has a different strategy. So we hedge, for example, product-business a little bit differently than when hedge project business. And normally product business, we do not apply hedge accounting, that’s mostly in project business.
00;13;44;07 - 00;14;15;29
Unknown
And then you have maybe sales orders or purchase orders that you individually can hedge. So it will depend also on how big the amount is; because the internal rules we say like up until a certain amount, we don't do anything or we don't do hedge accounting for little money. Let’s put it this way. Okay. All right. Really interesting. Now, let's discuss a little bit about these emerging market currencies.
00;14;16;01 - 00;14;56;06
Unknown
I was reading yesterday a new paper from the Bank for International Settlements with really interesting considerations. So, for example, emerging market currencies being traded more and more in multi dealer trading platforms. Right. So electronically and also the idea that more international players are involved in emerging market currencies. So for example, when counting at least one counterpart outside the country, where the currency is issued, it's already at 80% in terms of internationalisation.
00;14;56;06 - 00;15;31;07
Unknown
So really good progress there. What is the approach of your group, Danilo, when it comes to emerging market currencies in general and NDF, non-deliverable forwards? A good example would be Africa. Where we always try to look for FX instruments like NDFs, or similar, when the normal, let's say, FX market, forward market is not available.
00;15;31;09 - 00;16;04;15
Unknown
But we see at least in Africa for instance, that there is not much appetite for the banks because it becomes expensive to maintain forwards or even non-deliverable forwards as well. So they prefer to say let's do “spot” in some countries and then maybe one or two where they say, okay, you can hedge, but it will depend on foreign currency availability at a certain point in time.
00;16;04;17 - 00;16;40;20
Unknown
Yes, absolutely. Now, in a previous conversation also, I remember, you manage a lot of exposures in Europe and Africa. And you told us that the South African rand is a special currency. Tell us what makes the South African rand such a special currency within that universe? I mean, it is, especially in the African environment, though, because let's say, it is more liquid than any other currency, I would say, in Africa.
00;16;40;23 - 00;17;02;11
Unknown
So it is where we have like a kind of free market or when you can hedge until 14 months, according to my bank. It has to be external. There are some rules, but you can hedge, which is something that in most of the countries you cannot do. And of course you can do swedish krona, you can do euros,
—--------------------------
00;17;02;11 - 00;17;26;24
Unknown
GBP, dollars, with a lot of documentation behind. So it is similar to Brazil, I would say, is like you can hedge, but you need to have the underlying transaction in place. And if this cannot be supported by documentation, the central bank will cancel your deal. will force you to swap again to the local currency.
00;17;26;24 - 00;17;47;09
Unknown
So he's not that I am buying for buying or selling for selling its you need to have a justification and if the maturity arrives and you are not paying for instance, or you are not using the currency, the central bank will force you to convert the money back. So it's like an anti-money-laundering policy. Let's put it this way.
00;17;47;09 - 00;18;20;05
Unknown
Let’s tackle, Danilo, if you will, the issue of emerging market currencies. I read yesterday a report by the Bank for International Settlements. It has good things to say about emerging market currencies, namely that more and more they are traded electronically through multi dealer trading platforms. And in regards to non-deliverable forwards also there is progress in more internationalisation, more automated trading.
00;18;20;07 - 00;18;52;15
Unknown
What is your approach, generally speaking, to exotic currencies and non-deliverable forwards? Yeah, well, basically for those exotic currencies it’s let's say “country reality”. So as I give you an example, in Nigeria, we decided that the functional currency should be the dollar. So we can have inflows and outflows in dollars. So we are safer like this because otherwise the volatility will hit us strongly.
00;18;52;18 - 00;19;18;26
Unknown
There were elections in Nigeria recently, so it was a lot, there was a lot of volatility, same as Angola. So in some cases, we decided to pay earlier If we see that there is a devaluation in the currency and if we have liabiliities, we try to pay earlier. So those kinds of measures, we are always try to be aware of what's going on.
00;19;18;29 - 00;19;44;16
Unknown
Our banks help us a lot to keep us updated because they are very well connected to central banks. And then there is a key element here that is that your contracts need to be set very well. So you need to define, at least in Africa, define very well what is the onshore part, what is the offshore part in a contract.
00;19;44;24 - 00;20;15;01
Unknown
So because the offshore part normally the central bank will allow you to make transactions in hard currency outside the country. Then you pay taxes locally, you do your onshore part in local currency, but then the hard currency can flow outside, which is good news sometimes. It's not a guarantee that the central bank will allow you, but you will be in a good position to achieve this if you have a really, really well described contract in this regard.
00;20;15;06 - 00;20;42;10
Unknown
This applies in most of the countries in Africa. Yes, absolutely. The importance of having contracts well prepared so that you can enforce those contracts. Right? Danilo, in a previous conversation, we briefly discussed the South African rand and you said it's a bit of a special currency.
00;20;42;10 - 00;21;08;26
Unknown
Now, tell us a little bit what makes the South African rand such a special currency within this space? Yeah, I mean, South Africa is it's like a, what I call the mini-Europe in Africa. Okay, so you have everything there. And the FX market it's not an exception. So you can hedge until 14 months, as far as I know.
00;21;08;29 - 00;21;33;18
Unknown
And of course, you can hedge any hard currency that you can have without, let's say there is not a problem in hedging, but there is a lot of heavy documentation that needs to be supported and provided on a regular basis to the central bank. So there is no underlying transaction that the central bank is not going to look at, or the auditors.
00;21;33;20 - 00;21;58;02
Unknown
So you have to be very prepared in terms of documentation, justifying your transactions very carefully one by one. So this means that if I have a cash flow that I cannot justify, the central bank will force me to convert it back to rand. This is how it works and this is why there is good communication between cash management and FX in order to have this in place in a proper way.
00;21;58;05 - 00;22;54;09
Unknown
And you can imagine that we do it externally there. And the penalties could also go to the bank because the bank is my transactional company or my intermediary. So if the central bank doesn't like what I'm doing, also my bank, my partner may suffer some penalties because of the strategies that we are doing. So you need especially good traceability capabilities, right, to make sure that every single item is traceable back to its original commercial transaction and have it properly documented. Now what is the impact, Danilo of, I think it's implicit there in what you said just before, but the impact of interest rate differentials between currencies, the euro
00;22;54;09 - 00;23;24;15
Unknown
and some of those African currencies as they are riskier and they are bound to have large interest rate differentials with the euro. At Kantox what we do, for example, if Mexican companies are exporting to the US, they would do it in dollars and they’ll have favourable forward points, right? They're going to be to their advantage and here you need to anticipate as much as possible hedge execution.
00;23;24;15 - 00;23;54;11
Unknown
But what if those interest rate differentials are not going in your favour? So we favour solutions that delay the execution of hedging as much as possible. How do you approach that issue? In general, for hard currencies in the binding offer phase, we anticipate a risk buffer. We can also use options to hedge until the contract is signed.
00;23;54;14 - 00;24;15;20
Unknown
But of course you have to pay a premium, so it's not very attractive. But yes, we put our risk buffer and then we make a calculation based on the milestone of the offer. So like this, the hedge cost is kind of covered. You cannot anticipate the swaps. So the anticipation of positions of the cash flows, this is unexpected.
00;24;15;26 - 00;24;59;01
Unknown
But it is normal, it happens everywhere. But like this you mitigate your volatility. We implement hedge accounting to avoid the P&L impact especially in long term projects, more than five years. We want to avoid the P&L effects every year. And yeah, we also do intercompany financing internally. So if this is possible and allowed, any country that requires money deals with headquarters as the primary entity that finances every single entity.
00;24;59;03 - 00;25;24;17
Unknown
So there’s concern of cash concentration in cash pooling and similar applications. So then you can allocate the money where it is needed. So if I am having 100 million in the U.S., but I need it in another in other countries, in other continents, then it can be easily used, because it’s well recognized,
00;25;24;20 - 00;25;51;08
Unknown
So if you know where your money is, it's easier to say, I need this, here and there. For that we go back to the first part of the conversation, right? You are going to need to have those all the data available and readily usable. Yes. you need to know this. Well, of course, we have we have all the camt.053.
00;25;51;08 - 00;26;34;14
Unknown
We have the MT940 to report in our central payment factory system, every information that we need. And we even have the same day for cash pooling accounts, we have the same day reporting. So the camt.052 or MT942. Right! Now let's change the subject a little bit. Danilo, Siemens Energy is well known for the importance it gives to issues like corporate social responsibility, ESG. We read that the company wants to ensure our climate is protected and technology helps to protect the environment.
00;26;34;17 - 00;27;12;00
Unknown
So how do you at the Treasury Department approach these issues? Well, actually, I mean, we live this ESG topic in every single department, so Treasury is not an exception. So in the finance department, having a bigger pressure inside the finance department, there are a lot of initiatives in terms of diversity to have, let's say, equality, gender equality and so on.
00;27;12;02 - 00;27;46;29
Unknown
So as well as in terms of environment and sustainability, we have auditors or let's say rating offices that help us to, let's say, to rate our numbers in terms of sustainability internally. Right? So we get some numbers we have help from externals to have this in a proper, let's say, well-controlled. But it's not an isolated effort.
00;27;46;29 - 00;28;10;11
Unknown
So the company lives this, is part of our values; it’s part of our behaviour so we in finance, we also replicate what the other departments do. So it is transversal to all the members. So no, not a specific issue for the Treasury, but a company wide type of policy. All right, Danilo, thanks very much.
00;28;10;11 - 00;28;48;29
Unknown
Now let's get towards the end of this conversation with a broad question about Africa in general. I hear or I read rather, on Bloomberg a rather not so optimistic article about Nestlé, Unilever and Bayer, abandoning some of their manufacturing capabilities in the continent. And especially what I find striking is that they all cite the issue of currency instability.
00;28;48;29 - 00;29;17;28
Unknown
So overall and taking a long term view, what is your view of the continent, African currencies, what can be expected? I would understand that, for example, banks, taking the foot out of Africa. It depends on what you do. For us, energy needs to be implemented everywhere and Africa is the right place to be.
00;29;17;29 - 00;29;43;01
Unknown
This is our view. And just on the top of my head, I know that we are having new contracts almost every day here and there. So there is no way that we will say, let's move out of Africa when there is a really, really big market to cover and how we solve our risk when we go into those markets,
00;29;43;03 - 00;30;18;29
Unknown
It's a very good question because, I mean, Treasury is normally involved in early stages to define the risk, to define, okay, it's not only important to win the contract, but also how we are going to get the money out. And like this, you need to be really careful on the regulations and these regulations in every country change a lot, can be in one year two, three times. And this is the challenge but always when a door is closed, a window that opens.
00;30;19;01 - 00;30;42;03
Unknown
I can give you an example that, for instance, in one country, one bank A say, no, you cannot. And the bank B says, yes, you can. And so sometimes laws have a kind of different interpretation. So you need to assess. Maybe you have more than one partner, you need to go to partner one and partner B and let’s say challenge.
00;30;42;05 - 00;31;08;15
Unknown
“Are you sure? Because otherwise I will go with B” and B thinks different and I will. I mean, you need to have options and this is what we do, but you need to be updated. You need to be on top of the information. You need to know that, for instance, if in Nigeria there's a devaluation, it might not last. Maybe six months, maybe after the elections, things get better and things like that.
00;31;08;17 - 00;31;26;27
Unknown
So we also talk to the banks and say like, what's your expectation, is it going to be better? When? Because we have a lot of pipeline here. We don't get the money out, so we don't pay so what is going to happen in six months? And they give you an estimation so you're okay and then you manage your expectations as well. Also an important,
00;31;26;28 - 00;31;45;24
Unknown
Maybe you don't know this, but in several countries in Africa, if you go there, you cannot go alone. So normally you need to go with a local company and then you do a joint venture in which you might have 51 or 55% of ownership, so you are the owner or the primary owner, but you can never go alone.
00;31;45;24 - 00;32;08;14
Unknown
So in some countries you need a local presence from local people or to join another company that belongs to the corporation that you're building. So at a certain point they share your risk because if the depreciation is hitting you, it is hitting them as well. And if you want to repatriate money, they need to get it back as well.
00;32;08;17 - 00;32;29;14
Unknown
Or if you need to pay dividends, they need to get it back as well. But this is how it is. So the local markets may need to protect their own people and their own companies. So they say you are a foreign company, you want to come here as a nonresident, you need to partner with somebody locally in a minority, but still.
00;32;29;16 - 00;32;55;14
Unknown
So this is very common also in Africa. And another probably very important topic is the central bank. It behaves very similarly in different countries. So you can extrapolate what the central bank wants. That’s very useful, right? It's very useful to have knowledge in different countries so you can compare realities and then at the end you say, okay, let's have the same process or we know what to expect for the central banks. We can anticipate problems.
00;32;55;17 - 00;33;30;03
Unknown
Look, I like the sense of reasonable optimism that you are displaying here. So it goes right the way we approach emerging market currencies and the emerging market world: prudently but with reasonable optimism. Now, Danilo Gonzalez, treasury manager for Europe and Africa at Siemens Energy, thanks a lot for being here today, we've covered a lot of ground.
00;33;30;03 - 00;34;04;26
Unknown
We started out by discussing Treasury operations in a very general way. We discussed a little bit the problem of data availability. We went on then to talk about emerging market currencies and you've outlined all of those scenarios. Is there anything, Danilo, that you would like to add? No, rather thank you. Thank you for having me in the show; it was a real pleasure and hopefully talk to you soon.
00;34;04;29 - 00;34;17;28
Unknown
All right so again, Danilo Gonzalez, treasury manager for Europe and Africa at Siemens Energy. Thanks a lot for being here in CurrencyCast. See you next time.
