Risk Management

Managing currency volatility in emerging markets

Published: Feb 2014

Portrait of Phil Weisberg

Phil Weisberg

Managing Director and Global Head of Foreign Exchange, Thomson Reuters

Portrait of Eric Burroughs

Eric Burroughs

Editor FX Buzz, Reuters News

Portrait of Damian Glendinning

Damian Glendinning

Corporate Treasurer, Lenovo

Last month Thomson Reuters, in partnership with Treasury Today, hosted a webinar ‘Managing Currency Volatility in Emerging Markets’ exploring the key factors influencing the recent volatility in emerging markets currencies.

Eric Burroughs, Editor FX Buzz, Reuters News, set the scene by discussing the emerging markets vulnerabilities as exposed by the spike in US yields. He also referred to the ‘fragile five’ (a term coined by Morgan Stanley when referring to the currencies of South Africa, Turkey, India, Indonesia and Brazil) highlighting that the currencies of Turkey and Indonesia are particularly problematic and should receive special attention from corporates in 2014. The difficulties seen in India and Indonesia during 2013 also highlighted the severe implications of FX volatility on liquidity. Regulatory pressures in emerging markets, specifically where they are proving difficult in non-deliverable forwards (NDFs) for hedges must also be closely monitored by corporates.

The challenges for corporate treasurers, according to Phil Weisberg, MD and Global Head of Foreign Exchange at Thomson Reuters, is to navigate what is less and less an homogenous asset class. The continued movement away from an environment that was essentially determined by risk appetite to one that is increasingly being driven by the fundamentals and individual stories within each country is not an easy task for corporates to manage. Weisberg suggested that corporates can make strategy decisions that are currency-specific rather than treating these markets like an asset class.

Weisberg saw three major themes for the currency markets:

  • Firstly, the emerging markets we have been talking about for years have now emerged and their currencies trade similarly to other more mature currencies. He highlighted the Mexican peso (MXN) and Chinese renminbi (CNY) as prime examples.
  • The second theme Weisberg discussed was regulation. He noted that while the driving principles of new regulations were transparency, reduced risk and increased customer protection, there have been some technical challenges to the liquidity function in adjusting to the changes. He also explained that while some market participants, particularly those in Asia, have taken a ‘wait and see’ attitude towards regulatory requirements, it is important to realise that the rules will soon start impacting everyone in the market, as in the case of reporting trades to swap data repositories.
  • The final theme Weisberg highlighted was the risk management process and practices, such as electronic trading and planning ahead, that corporate treasurers can use to mitigate such risks.

The challenge for practitioners is to learn how to navigate the regulatory changes.

For his part, Corporate Treasurer at Lenovo, Damian Glendinning, said “the challenge for practitioners is to learn how to navigate the regulatory changes – a challenge that is complicated by the fact that the changes to come have not yet been clarified”.

In hedging currencies, Glendinning recommended treating emerging markets the same as mature markets and stressed that volatility is not necessarily linked to emerging market status. He offered some sound advice to corporate treasurers in suggesting that a clear hedging policy and approach is fundamental for all currencies, not just emerging market currencies. The difference with emerging markets is that they often have exchange controls, which can have an impact on the ability to hedge and lead to increased use of NDFs. It is here that regulations come in and the importance of planning ahead is again necessary.

Exchange controls … can have an impact on the ability to hedge and lead to increased use of NDFs.

A clear policy of currency risk and hedging should be an essential component of every corporate treasury policy. Percentages of transactions to hedge must be determined, the cost of hedging versus the risk should be evaluated and management should be made aware of the trade-offs.

Some currencies are expensive to hedge or cannot be hedged such as the Venezuelan bolivar and Argentine peso. Glendinning suggested that corporate treasurers explore local borrowing or factoring as a means of expediting settlement. Local manufacturing opportunities could also be used to create offsetting exposures, reducing the need for hedging in the first place.

Glendinning stressed that corporate treasurers and management must understand their business models and evaluate the level of risk they are willing to take. It’s important to evaluate cost of hedging vs risk. In their closing remarks, the panellists agreed that corporate treasurers should not wait for the regulations to be crystallised to prepare and craft clear policies and approaches for managing currency volatility in 2014.

The webinar is available to view in full at: treasurytoday.com/webinar

What more webinars?

The Reuters webinar is one of a series of sponsored webinars that we are delighted to be hosting at Treasury Today. By working with the sponsors and encouraging corporate participation we are able to offer relevant and interesting material to our readers.

For more information please email webinars@treasurytoday.com

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