Three tips for Singapore businesses to manage international cash flow amidst economic uncertainty

The global economy has slowed significantly over the last 12 months. According to the International Monetary Fund, global growth likely fell from 3.6% in 2018 to an estimated 2.9% in 2019 (IMF, 20 January 2020).

This is the lowest rate of growth since the global financial crisis. This year might bring even more uncertainty. This is reflected in the Singapore Government’s latest economic forecast, with growth expectations only sitting within the range of 0.5 to 2.5% in 2020.

After a year of rising protectionism and geopolitical friction, with escalating US-China trade tensions and ongoing uncertainty around Brexit, plus slower-than-expected economic growth in China, many business leaders in Asia Pacific are contemplating tougher economic times in 2020. Here in Singapore, business confidence dropped to a near two-year low for the final quarter of 2019, with manufacturing and wholesale trade braced for a downturn.

However, recovery for the former is on track this year, with hopes that the partial US-China trade deal will help boost confidence in the sector.

The challenge for all businesses becomes how to ensure that the expense, time and resources it takes to manage international transactions and minimize foreign exchange risks do not weaken the benefits of expanding across borders. Here are three tips for businesses looking to mitigate risks and avoid hidden costs as they trade internationally.

1. Prepare for more volatility
Financial markets are driven by expectations of future earnings. As the future becomes more uncertain, financial markets become more volatile.
How can markets count on future earnings when the future is so uncertain?

We expect further volatility in markets as they adjust to uncertainty. This uncertainty and volatility can have a major impact on businesses both in the ability to get your clients to commit to decisions but also volatility in market-driven prices.

2. Don’t rely on guesswork
This might sound counter-intuitive, but more uncertainty means forecasting becomes more important.

Having a strong understanding of your historical payments and income is a good first step. If you don’t have the data yourself, speak to your payments provider. You might be surprised by the detail they have.

Now stress-test the business. How can your business cope with a 10% fall in income?

3. Consider managing risk and uncertainty with hedging solutions
FX markets are always unpredictable. If uncertainty grows, we might see greater volatility in FX markets in 2020.

Businesses can generally benefit from a combination of hedging tools. Forward Contracts lock in a given exchange rate for a set period, which helps with budgeting. There are some disadvantages associated with Forward Contracts. For example, a margin call on a Forward Contract may affect your cash flow position.

Foreign exchange options, on the other hand, provide protection against unwanted currency movements but also allow you to forego the option and buy at the spot rate on the day if the exchange rate has moved in your favour.

Options, of course, have some disadvantages. There can be an upfront cost – or an initial give-up on the protection rate – that causes the option to be less competitive when compared with a spot transaction or a Forward Contract. Also, the eventual rate achieved with an Option Contract might be worse than the rate than can be achieved trading in the spot market.

Foreign exchange options may be useful when there is some uncertainty around your foreign currency needs.

The ability of Foreign exchange options to manage uncertainty is critical in terms of the advantages they provide. This may be especially true in 2020. Uncertainty around demand might cause businesses to stay away from locking-in FX protection. However, many hedging products allow business to lock-in a protection rate whilst having no obligation if they do not require the cover.

The key for businesses is to take advantage of the latest technology and services to understand volatility, make better forecasts, stress-test these forecasts, and then manage the risk and look to benefit from the opportunities.

If our years in FX have taught us anything, it’s that it is counterproductive to spend time and energy closely monitoring fluctuations in the exchange rate. With an effective system in place, you can have more confidence in your forecasts and get on with building your business.