We live in volatile times
As we head to Singapore for SIBOS 2015, the front pages of the financial press are still dominated by China’s stock market rout and the impact of the country’s decision, on 11th August, to devalue the renminbi by 2%. The statistics paint a sorry picture: since June 2015, China’s equity markets have dropped by almost 40% and China’s foreign currency reserves shrunk by $93.9bn at the end of August – the largest monthly fall ever recorded.
Many emerging market currencies have depreciated off the back of China’s policy regime shift, with the Indian rupee weakening by more than 4.2% against the US dollar during August, the Russian rouble down by over 8.5%, and the Brazilian real weakened by 10.7%. Elsewhere, the Indonesian rupiah has lost 14% against the dollar during the course of 2015, with the Thai baht down 8% over the same period. Whilst in Malaysia, the ringgit recently hit a 17-year low.
Unsurprisingly, rumours of a ‘currency war’ are rife. Rather than this being seen as a welcome depreciation that will boost exports, analysts are now firmly viewing this as volatility that needs to be stabilised. All eyes are on the central banks in Asia as they work to defend their respective currencies, and seriously reconsider interest rate moves. The effect on these nations’ growth assumptions is obvious, and already the downwards revisions are coming in.
There are clear red flags here for corporates around revisiting business models and strategies, and for treasurers, hedging policies and practices should be scrutinised. For some companies, the impact runs much deeper. Spare a thought for ASEAN companies, for instance, who have taken on increasing amounts of foreign-currency debt in recent years.
According to Standard & Poor’s’ review of credit quality among 100 of the largest companies in the region, currency depreciation has, on aggregate, “added the equivalent of close to $30bn in the local currency debt load of the largest companies in ASEAN since 2010.” With a refinancing wall looming for many ASEAN corporates in 2017, the debt challenges only look set to get tougher.
On a more positive note, the formation of the ASEAN Economic Community (AEC) by the end of this year should act as a catalyst for growth. Nevertheless, this is very much a long-term aspiration. In the near-term, with currency market volatility continuing, treasurers would do well to engage closely with their strategic business partners, both within the organisation and externally.