Protecting and Unlocking Your Cash

Protecting and Unlocking Your Cash

CURRENCY REPATRIATION BLOCKED FUNDS Arnaud Francq Director Financial Settlement Systems IATA

CURRENCY REPATRIATION Currency Repatriation - Blocked Funds Status Collection of Information Communication Actions

BLOCKED FUNDS The issue of blocked funds is growing and a source of increasing concern for airlines Airlines reported blocked amount has reached (at historical rates) USD 4.885B Recent devaluations impact on value of funds Country Pre-Devaluation Amount (USD) New amount value (USD) Impact Venezuela 3,780 M 172 M 100 M Angola 152 M 129 M -15% 299 M Egypt 137 M 121 M -12% 341 M Nigeria 591 M 410 M -30% 451 M USD 1.7B

CURRENCY REPATRIATION The strategy is based on 3 main pillars Collection of Information Communication Actions

IATA HEAT-MAP FOR WATCH LIST COUNTRIES PEG COUNTRY Spot 1m ch Spot 12m ch Fwd/ NDF Credit Spread Credit Rating MF India BBB- Indonesia BB+ Jamaica B BB- Kazakhstan BBB- Kenya South Korea AA AA MF CBM+/-0.8% Malawi MF BASKET Malaysia A- MF Mauritius Baa1 Mexico BBB+ MF Mongolia B- Nigeria USD 0,3850 Oman BBB- MF Pakistan BBB USD 0.71 +/-0.3% Jordan USD 0,2894 +/-3% Kuwait GDP CPI CA NPL FX Res FX Res (%)

IATA CURRENCY CENTER EXCHANGE RATES DIRECTORY View exchange rates used in the industry by the airlines for different activities click to see details COUNTRIES PROFILE Blocked Funds Countries where airlines View more Watch List This watch list considers View more All Others IATA Country Profile View more UPDATE FEEDS REGIONAL OUTLOOK & NEWS TOP COUNTRIES UPDATE - Nigeria: Nigeria FX market is still not functioning properly click to see details - Egypt the CBE Releases funds to airlines in August click to see details - Trinidad and Tobago has important lack of hard currency, current delays of ICCS is 65 days

SUMMARY Strong coordination across IATA and with Airlines to Identify blocked funds (blocked funds countries) Monitor early indicators (watch list countries) Drive lobby activities and action plan Deliver updated reporting and communication internally and externally Currency Centre will be a single information exchange point Sep-16

Trapped Cash & FX Risk Stephen Leach Managing Director, Foreign Exchange Citigroup

Trapped Cash & FX Risk Trapped cash or blocked funds? Source of the problem? Who s the problem? Practical points Alternative sources of foreign exchange? Response by airlines? Warning signals

Trapped cash or blocked funds? The inability to convert local currency balances into hard currency (U.S. dollars etc.) at the prevailing exchange rate A growing problem for every multinational company doing business in emerging markets Inextricably linked to exchange rate risk

Source of the problem? Monetary authorities unwilling or unable to allow the exchange rate to adjust to a shock e.g. due to a sharp decline in oil export revenues An unrealistic hope that the situation is temporary The absence of an exchange rate within a reasonable range at which supply & demand are balanced A distrust of market mechanisms

Source of the problem? Ill-designed economic policies combined with fixed (or tightly managed) exchange rate regime Delaying everything makes the problem worse due to the accumulation of arrears

Which countries tend to be the problem? Countries with an excessive dependence on oil exports or a similar commodity Less developed, undiversified economies, with weak foreign exchange reserve positions

Which countries are not the problem? Russia Argentina Saudi Arabia FX controls None Eliminated Fixed rate Exchange controls None Eliminated None Monetary policy response to FX Sharp tightening, then ease Sharp tightening, then ease None FX shortages No No Delays? Black market No reason to develop No controls = no reason for black market FX outlook Appreciation due to firmer commodity prices? Real appreciation, nominal depreciation (due to inflation) None Stable

RUSSIAN ROUBLE: 2015-2016 Roubles per U.S. dollar 90 85 80 75 70 65 60 No sense of crisis No demand for controls No black market 55 50 45 Fitted Rouble/USD Source: Bloomberg, Thomson Reuters, Citi

Billions of U.S. dollars RUSSIA: Foreign Exchange Reserves 560 520 480 Willingness to spend reserves eliminated risk of controls 440 400 360 320 Source: Bloomberg, Citi

Pesos per U.S. dollar ARGENTINE PESO: 2015-2016 17 16 15 14 13 12 11 FX rate controls & exchange controls all lifted 10 9 8 Interbank Blue rate Blue chip swap Source: Bloomberg, Thomson Reuters, Citi

Billions of U.S. dollars 50 45 40 35 ARGENTINA: Foreign Exchange Reserves Not the reserve cushion of Russia No choice but to accept market-determined FX rate 30 25 20 Source: Bloomberg, Citi

Billions of U.S. dollars 780 740 700 660 SAUDI ARABIA: Foreign Exchange Reserves How much is Saudi Arabia willing to spend to defend a fixed exchange rate? 620 580 540 500 Source: Bloomberg, Citi

Which countries have a problem? Egypt Nigeria Venezuela FX controls Pegged rate Through intervention Two-tier market Exchange controls Tight Restrictive Tight Monetary policy response to FX Limited tightening Inadequate tightening None FX shortages Yes Significant Severe Black market Yes Growing black market Yes FX outlook Devaluation and/or large depreciation in response to IMF program Periodic, erratic devaluation???

Naira per U.S. dollar NIGERIAN NAIRA: 2016 450 400 350 FX rate determined largely by intervention 300 250 200 Interbank Black market 150 Source: Bloomberg, Thomson Reuters, Citi

Billions of U.S. dollars 50 45 NIGERIA: Foreign Exchange Reserves Above the minimum, but poor trend 40 35 30 25 20 Source: Bloomberg, Citi

EGYPTIAN POUND: Actual vs. PPP Pounds per U.S. dollar 13 12 11 PPP Dec '07 as base EGP Black market around 12.50-12.70 10 9 8 7 6 5 4 Source: Bloomberg, Thomson Reuters, Citi

Practical points? Payment problems tend not to be temporary If -- or when -- they are resolved, the solution tends to involve a sharp depreciation or devaluation of the currency

Alternative sources of FX? Legal parallel markets Blue chip swaps Counter-trade But how applicable to airlines?

Response by airlines? Adjust capacity quickly don t assume the situation will improve soon Insist on payments in hard currency from the outset but don t restrict oneself to U.S. dollars Insist on pricing flexibility from the outset

Warning signals? Fixed exchange rate regimes or Exchange rate regimes not allowed to respond to market signals Multi-tier exchange rate regimes The existence of black markets in foreign exchange Tighter exchange controls An FX crisis without FX adjustment sharply higher interest rates?

Concluding thoughts This is not a problem that is going away The outlook for the global economy & commodity prices is simply insufficiently strong FX adjustment alone is insufficient other policy measures are required It will take some countries ten years or more to recover from the policy upheaval of recent years

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Heat Map for your funds: A framework for identifying currencies at risk Andrew Matters Head of Industry Analysis, IATA Economics

The project brief: To develop a tool which helps to warn of possible currency events Why does it matter? Blocked funds are a $-billion issue an important and growing problem for airlines Model with monthly updates is part of IATA s broader Currency Centre project The framework employed is based on sound theoretical underpinnings but is designed to be accessible to a broad industry audience The tool provides a systematic Warning Signal for further analysis & action It is not (& cannot be) a silver bullet to solve the problem of blocked funds Data coverage & quality challenges for some countries

Chosen indicator variables: Economic activity (GDP) Inflation (CPI) Current account balance Non-performing loans (% of total) FX reserves vs imports (level) FX reserves (% change) FX spot rates (% change) FX forward (NDF) rates Sovereign credit spread/ Rating Solvency indicators Liquidity indicators Momentum indicators

A teaser: Currency regime Country Spot 1m ch Spot 12m ch Fwd/ NDF Credit Spread Credit Rating MF A BBB- B BB+ C B USD 0.71 +/-0.3% D BB- E BBB- F G AA USD 0,2894 +/-3% H AA MF CBM+/-0.8% I MF BASKET J A- MF K Baa1 L BBB+ MF M B- N O BBB- MF P BB GDP CPI CA NPL FX Res FX Res (%)

So how does it help? The model is: A forward-looking tool an Early Warning Indicator which helps to identify countries where there is the potential for a currency event and which may, ultimately, lead to difficulties for an airline in repatriating sales proceeds One input into IATA s monthly currency watchlist & related briefing Relevant for internal (IATA) and external (member) use in devising strategies to help manage the risks associated with such an event

www.iata.org/economics

One size does not fit all: The Multiple Dimensions of Blocked Funds: Panelists: Zaïna AKBIL, Finance & Treasury, Royal Air Maroc Suhail Ahmad Osman, VP Treasury, Emirates Manfred Dinter, Cash Management, Lufthansa Stephen Leach, Emerging Markets FX Specialist, Citibank

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