Treasury Priorities for Multinational Corporations - Middle East and Africa

Treasury Priorities for Multinational Corporations | 29 Managing FX Risks Related to Business Operations Beyond specific instruments, the survey explored the broader strategies organizations employ to manage FX risks arising from their day-to-day business operations. These approaches reveal the underlying philosophy towards risk and the extent of proactive management. Additionally, a segment of the market employs an opportunistic approach, timing their hedging decisions based on perceived favourable market conditions, which requires a higher risk appetite and market sophistication. The coexistence of non-proactive management and such varied strategies, including opportunistic hedging, reveals a landscape where reactive practices and an acceptance of currency risk are still prevalent. This creates both inherent vulnerabilities for some and significant opportunities for organizations with more robust and adaptive risk management frameworks. Key Drivers for Capital Structure Determination The determination of an appropriate capital structure at the subsidiary level is a critical financial decision, influencing funding costs, financial flexibility, and risk profile. In the MEA region, local market conditions, regulatory environments, and specific risks can heavily sway these decisions. The survey asked respondents to rank key drivers, and the results clearly underscore the preeminence of FX risks. FX risks emerge as the overwhelming primary driver for determining subsidiary capital structure in MEA with 47% of organizations selecting it as the #1 driver, profoundly influencing decisions due to concerns about currency devaluation, convertibility, and volatility, which directly impact profitability and the ability to repatriate earnings. This dominant focus reflects the tangible financial implications of FX fluctuations. However, alongside this paramount concern, factors such as liquidity risks, counterparty risk, and political/country risk also significantly shape these capital structure choices, collectively guiding companies to mitigate the inherent financial and operational complexities of the MEA market and ensure stability and resilience. A significant 30% of organizations do not proactively manage their FX exposure at all. How does your organization manage FX risks related to the business operation within your selected geographical scope? Do not proactively manage FX exposure Consistently hedge a certain % of the exposure Hedge 100%of exposurewhere possible Reduce FX by netting our pricing strategy Opportunistically hedge when market conditions are considered favourable Other 30% 13% 10% 15% 15% 17% A significant portion of organizations in the MEA region currently do not proactively manage their FX exposure, suggesting either a high tolerance for currency risk or a reactive stance. Among those that do engage in FX risk management , there is no single dominant strategy; rather, approaches are highly diverse. This spectrum ranges from systematic and rules-based hedging, where a consistent percentage or even 100% of exposure is covered, reflecting varying degrees of risk aversion, to more operational strategies like adjusting pricing to achieve natural hedges.