WALKING THE EMERGING MARKETS TIGHTROPE

Guidance is required when walking the emerging markets tightrope, says Paolo Spada head of CEE Global Transaction Banking at Unicredit

Nothing better illustrates the fragile interplay between risk and reward than business involvement in the emerging markets. Indeed, prolific emerging market growth in recent years has been stimulated, in part, by this fragility, with profit margins widening as a corporate assumes more risk. The Central and Eastern European (CEE) region is a clear example of this, with manifold business opportunities for those who venture into this volatile market.

Yet harnessing the region’s business potential while simultaneously reigning in the risk is like walking a tightrope, and is certainly one that would prove difficult without guidance.Strong relationships between corporates and their banking partners have thus become essential in the world of business, and represent another collaborative step towards breaking down the remaining barriers to globalisation.

Challenges faced

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Paolo Spada
Paolo Spada

Bank-corporate relationships have become increasingly complex. Before globalisation took a hold of the business sector, banks played a far more static role in their clients’ affairs – supporting their needs within constituent markets while co-operating internationally through correspondent relationships with fellow banks. But with corporates now heading further afield in search of new opportunities, their banking partners have adopted ‘follow-your-client’ strategies.This acknowledges the need for a multifaceted approach in order to stay in tune with clients’ requirements when exploring new but often highly complex business environments. The CEE region is key in this respect. There is strong growth potential due to geographical positioning and infrastructural needs. Yet the knock-on-effects of the 2008 global financial crisis still linger in the region, meaning that CEE – as an emerging market region for corporates to exploit –presents a number of critical challenges.

Many corporates are now recognising that they need to position themselves strategically within CEE in order to fully enjoy the fruits of long-awaited recovery. But previous speculation – regarding the probability of convergence between the business landscapes in the eastern and western halves of Europe – has proved unfounded. Differences remain between the CEE region and Western Europe when it comes to business practices.

This, of course, throws up problems for multinational participation in the area. The Russia-Ukraine conflict is one among several recent issues that have rendered the region increasingly volatile. Such complexity demands bank involvement on an intimate basis. While IT infrastructure and logistics can be managed from afar, some form of on-the-ground presence is essential for operations, as corporates often require local knowledge in order to be assisted over the regulatory, cultural and legal hurdles.

Knowledge breeds responsibility

Corporates therefore solicit more than just payment services from their banks. Advisory services are also a crucial need.In turn, this requires a partnership approach between banks and corporates. While in the past, businesses worked with a variety of banks on a multi-contractual basis to cover separate regions (and even within separate markets), corporates now look for a single banking partner that can provide the same breadth.Thus, banks must be comprehensive in their coverage so as to remain competitive. They must hire or train individuals with expertise in both regional and global markets, in order to gain perspective at both a macro and a micro level.

The value of local insight and its impact on credit pricing cannot be underestimated, particularly in a region as systemically ambiguous as CEE. Indeed, legal requirements vary according to region and can be difficult for multinationals to manage without a knowledgeable, on-the-ground, presence to guide them.While a number of initiatives have moved the region towards standardised regulation in Europe and even globally– namely SEPA and the Basel Accords– their implementation in the CEE region continues to be heterogeneous(i.e. jurisdictional) and regionally nuanced.

In 2016, however, SEPA-compliant payments formats become mandatory for all euro-denominated payments, including those collected by non-euro counter parties. Corporates in CEE must prepare for the transition: something that, again, they will look to their banking partners to facilitate. UniCredit, for example, has already geared up to do so, and is helping clients become SEPA-compliant in advance of the 2016 deadline.

 But beyond concerns regarding regulatory differences, variances in culture and language can pose a significant challenge when it comes to doing business in the emerging markets, and is another area in which banks can help their clients. Indeed, many of our Western European clients request management advice when dealing with their business partners in the CEE region.

In Europe’s current turbulent geopolitical climate, and with further enforcement of regulation not far off on the horizon, cooperation between corporates and their banking partners is key to weathering the storm. And as businesses globalise and emerging economies deepen their participation in the wider market, corporates will increasingly look to their banks to provide them with the tools they need to thrive.

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