Lately a subset of emerging markets are “punching above their weight” in how time‐consuming they are to manage. But these are also markets that are increasing their share of revenues and will be increasingly important markets for member companies going forward. At The NeuGroup’s recent summit for its two FX groups, members looked to sort out what is doable and not, and how much it costs to manage risk associated with troublesome currencies, including BRL, INR, RUB and CNY/CNH.
A few of the takeaways included the suggestion to start gathering data on emerging market currencies. With so many citing emerging markets as one of their top concerns, and with FX generally getting extra scrutiny, summit attendees were told to take stock of the currencies out there and break them into those that do and those that don’t matter to your company.
As for a specific country’s currency, members were told to make sure they have an updated China contingency plan (and Asia contagion plan). China may have a long‐term internationalization plan and an economic plan for growth, but what if something happens that threatens your outlook and your exposures there? Also, “when China wobbles, the rest of Asia tumbles,” so a China‐ and Asia contagion plan is imperative.
Maybe you have one, but when was it last updated? And would it still work if you needed to spring into action? Each plan is company specific, and maybe the assumptions have changed as well as conditions on the ground. Send it around to the relevant business and finance people and vet it again. What is the business continuity plan for China and other troublesome countries? Many people in the company may never have lived through a contagion event, so don’t isolate treasury from the business: talk to the line management again. It is good practice to review plans at regular intervals and also to identify a trigger for additional review.
The main reason for this is that it takes time to start hedging a new currency, so build‐in a reasonable lead time between the trigger point and the desired start of a hedge program for that currency. On group member noted at a previous meeting that just getting ISDAs in place for onshore China hedging took months.
Another takeaway: sit down with both procurement and sales to make sure contract pricing is in the appropriate currency. Whatever the pricing currency, you likely have an exposure anyway, so why not take on the direct risk and manage it internally? If not, you may end up in the situation described by Michael Armstrong in the FXMPG half‐day: indirect USD risk.
Meeting participants report that emerging market currencies are taking up more than their fair share in some instances for a variety of reasons, not only related to volatility but also market complications like FX controls. Good prep and planning of course can help cut down on the time suck.