Currency volatility increases credit risk for exporters

PUBLISHED : Sunday, 07 June, 2015, 8:43pm
UPDATED : Monday, 08 June, 2015, 12:06pm

A weaker yen and euro might be good news for Hongkongers shopping in Japan and Europe but it is bad news for trading companies as volatile currency markets could see more companies failing to pay bills on time.

"Currency volatility is a key risk for the credit and payment markets this year," said Fabrice Desnos, the Asia-Pacific head of credit insurer Euler Hermes.

Desnos said many currencies that had traditionally been considered safe and stable had exhibited high degree of volatility.

The Swiss franc rose 30 per cent against the euro in January after a cap was removed, before dropping back to a gain of about 20 per cent.

The debt crisis in Greece has haunted the euro, which fell to a 12-year low against the US dollar in March before bouncing back recently. It is still down almost 20 per cent on last year's level.

The Russian rouble has slid to a five-year low, dropping more than 30 per cent against the dollar along with the rout in oil prices.

Meanwhile, the yen has dropped to a 13-year low against the dollar as the Japanese government embarked on monetary easing to boost the economy.

Jasper Lo Cho-yan, the marketing director of Tung Shing Futures, said the global currency market in the first half of the year was the most volatile he had seen in recent years, and he expected the situation would worsen.

"Usually, the currency markets in the second half of the year would become more volatile as fund managers are more active trading," Lo said. "The already volatile currency markets are set to become more volatile and investors must be cautious."

He said the key reason the US dollar was so strong compared with many other currencies was because of expectations of interest rate increases in the United States this year, and the Hong Kong dollar, pegged to the greenback, had risen with it.

On the other hand, Japan and Europe had both implemented quantitative easing policies to weaken their currencies and boost their economies, something Lo said was likely to continue.

"Only the Chinese yuan and Swiss franc will remain strong currencies along with the US dollar in the second half," he said.

Desnos said currency volatility would badly affect many trading companies if they were not well prepared for such fluctuations.

"This would affect their ability to pay their bills on time and could lead to delays or defaults," he said.

Euler Hermes, the world's largest credit insurer, provides insurance to cover companies for the risk of payment defaults or delays from buyers.

Desnos said many multinationals and medium-sized companies had increased their credit insurance cover recently, partly due to worries about the knock-on effects of currency risks.

"It is true that a weak euro or weak yen help boost European and Japanese exports but such benefits may take time to happen," he said. "The weak currencies only become positive news for the credit markets when they could create jobs and economic value.

"The negative impact of a weak currency, however, would come quicker as that would affect import material prices, while some companies which have not hedged their risks might be caught by surprise, affecting their cash flow."

China, a key exporter, would be among those affected by movements in other currencies and the internationalisation of the yuan would add to such uncertainty.

Figures from Swift, an interbank messaging network provider through which the majority of international banks and corporations settle trades and investments, showed the yuan was the fifth most active currency for global payments in March, accounting for 2.03 per cent of payments worldwide.

"The efforts to loosen the grip on the yuan have increased volatility," Desnos said, pointing out that the intraday trading band for the yuan was now up or down 2 per cent from the mid-price set by the People's Bank of China, three times the range in 2007.

"The risk-management toolbox is still limited and the effect of a change in currency is high for companies that specialise in low or middle-range products.

"It will take time before Chinese companies can become accustomed to and handle this risk but this represents an opportunity for education and development of best-in-class hedging financial products and services."

He said other exporters needed to pay attention to Russian and Chinese companies because of high risks of default or delayed payment.

"Russian companies are suffering from the low oil price and the increase in import prices due to the weak currency," he said.

Euler Hermes' baseline scenario sees claims continuing to rise, with Russian insolvencies forecast to increase by 30 per cent this year.

"[This is] a worst-case scenario, with 25 per cent probability, which could be triggered by an escalation of sanctions or full-fledged capital controls or oil prices below US$50 per barrel for a sustained period," Desnos said. "This would trigger an economic collapse, with real GDP contracting by up to 15 per cent [this year] and insolvencies rising by up to 80 per cent.

"We expect currency volatility to continue and the rouble to weaken again somewhat during the remainder of [this year]."

For China, the concern was economic growth weakening to 7 per cent this year while many companies had been hit hard by the government's anti-corruption drive.

"China is looking positive for the longer term, but for the short term the country is in the process of rebalancing, which will affect certain companies' ability to repay their bills," Desnos said.

"Asian countries, including China, face increased challenges in weaving new trade routes with the rest of the world as non-payment by companies' foreign clients continues to rise."

On top of solvency issues, Desnos said there were several other factors which made it hard for Chinese companies to get paid.

First, the financial information on clients was often limited, which increased the risks of non-payment. When Asian companies tried to chase overseas buyers to pay, the foreign languages and different legal systems involved made it difficult for them to chase their money.

"Foreign companies are often at a disadvantage against local partners within the judicial system," Desnos said. "In practice, most companies have little chance of debt recovery once liquidation procedures start."

The strengthening of the Swiss franc had hurt Switzerland's exports to the euro zone, which made up 45 per cent of the country's export market.

"Several export-focused sectors face deteriorating prospects," Desnos said. "This is notably the case for automotive suppliers, machinery and equipment manufacturers that have factories in Switzerland.

"Further, the textile industry will need to make additional efforts in terms of creativity and innovation in order to maintain market share.

"Finally, retailers located in the border regions of Switzerland are likely to be forced to cut their prices to remain competitive."