The recent financial rout in the commodity and currency market has resulted in volatility in the financial market. No longer are businesses whether large or small immune to the spillover effects of external influences on domestic businesses operation.
Positive Currency fluctuation effects on businesses
Based on the latest The World Bank data on countries' export of goods and services as a percentage of GDP, Singapore's percentage in 2014 was at 187.6%1. As a small city-state economy, we have to think of the world as our "oasis".
With a lack of natural resources, it would also mean that we are inclined to import goods and services from the international market to strengthen our global competitiveness. This can be reflected by our import of goods and services as a percentage of GDP, which stood at 163.2% in 20142, according to The World Bank data. Having said the above, there is profound impact of currency changes on Singapore businesses.
For example, between the periods of April to mid-June 2015, we have seen an appreciation of the Singapore dollars against the Japanese Yen. Given such scenario, business owners who regularly import products from Japan would be able to translate into cost saving in terms of cost of goods.
As we have seen in Singapore, there has been growing interest of businesses that target consumers with fixed pricing for goods produced in Japan. The similar trend follows for Korean products making their wave in Singapore. Business of such nature would be affected by swings in the foreign exchange markets.
Looking into recent rapid depreciation of the Malaysian Ringgit, business owners who have operations in Malaysia tend to benefit from such trend. This means that a lower amount of Singapore dollars can help finance the payroll of their employees in Malaysia.
For example, if we look at Venture Corporation, a global provider of technology products and services, the depreciation of Ringgits has positive impact on their finances. According to a report, the company has a substantial share of staff cost denominated in Ringgits3. This would translate into cost saving in operation activities.
Negative Currency fluctuation effects on businesses
The reverse holds for business owners who have recurring businesses in the overseas market. A natural business destination for many local corporations will be Malaysia, partly assisted by the close geographical proximity.
When overseas revenues are denominated in Ringgits, the repatriate profit to Singapore may result in a lower profit figure given the depreciation of Ringgits. Therefore, there can be asymmetric effects of currency fluctuation depending on the nature of their business operation.
Limiting downside risk to global currency rout
While advance financial services are a luxury for large firms, there has been expanding of financial services for small and medium enterprises (SMEs). This can be in a simple forward contract. Such financial contract allows a firm to buy or sell a currency at a fixed rate in the future.
Consider a business owner who is selling a container of electronic products to an overseas buyer. The payment receivable by the seller is perhaps in two months' time. Given this period, the seller can tap onto forward contract to fix the exchange rate for the transaction to take place in two months' time.
This brings a greater certainty to SMEs who are expanding abroad or have considerable foreign currency exposure in their daily business operation and secure a degree of profit margin.
While the external economy remains challenging these days, taking effort to mitigate currency risk is probably one of the best measures SMEs can start to explore in the current dynamic business environment. It's never too late to lay a solid foundation in your overseas venture.
1The World Bank, Exports of goods and services (% of GDP). Retrieved December 12, 2015, from http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS
2The World Bank. Imports of goods and services (% of GDP). Retrieved December 12, 2015, from http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS
3Development Bank of Singapore (DBS). (n.d.). Equity. Retrieved December 12, 2015, from https://www.dbs.com.sg/treasures/aics/EquityArticle.page?dcrPath=templatedata/article/equity/data/en/DBSV/012014/VMS_SP.xml
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Raymond Foo is currently holding the position of Franchise Manager and Learning & Development at Evorich Holdings, assisting the organisation to develop new business model and overseas venture program. With a passion for business, he started his first education business at the age of 21. During the course of entrepreneurship, he has developed deep interest in writing. The topics of interest are economics, finance, business development, and education.