What does currency swing mean for Singapore businesses?

The growing volatility in currency is probably one of the top concerns for Singapore businesses with overseas operation. The sudden decision by the Swiss National Bank (SNB) to remove Swiss franc fixed exchange with the Euro refreshed our memory of the vulnerability of profit exposure to external economic factors.

For Singapore business, the effects come when a Singapore firm repatriates its overseas profit denoted in local currency back into Singapore dollars. This currency effect on the profit may increase or decrease the net profit of the company.

Is Currency Hedging for every business?

A natural solution is to do currency hedging. However, doing so might be costly for small and medium businesses.

The measure requires local companies to probably set aside some working capital to do the desired hedging against currency that is most vulnerable to its business. This working capital is in itself an opportunity that could have devoted into productive capital use.

Moreover, the growing listing of Singapore established firms in the stock exchanges would be pressured to put their working capital into areas of potential growth to maximise investment returns for their shareholders. This dual mandate to mitigating currency effect while maximising returns to shareholders seems to be an uphill task.

For most emerging enterprises, the pragmatic approach is to denote their export products in local currency, Singapore dollars. This may remove the uncertainty of profit due to exchange rate movement.

However, not every business is able to operate in such fashion, especially those with physical presences or local e-commerce presence. Imagine operating an e-commerce site in Malaysia yet the payment currency is in Singapore dollar, it doesn't seem logical.

Franchise and Overseas Offices

Given a small domestic economy, most established well-loved Singapore brands such as Breadtalk , Sheng Shiong, and Sakae have established their bases in regional and international markets. The form of partnership can either be in terms of joint venture or franchise collaboration.

Depending on the share of overseas turnover, the currency effect to net profit denoted in Singapore dollar tends to vary. Hence, while local SMEs are thinking of expanding overseas, it is timely to consider the currency effect on your gross margin.

For businesses with a thin margin of profit, rapid changes in exchange rate can dilute existing profit and in worst scenario cause a net loss.

Business contracts and lag-time effect

The export-oriented economy of Singapore means that most Singapore businesses engage in export contracts that are likely to be made with a lock-in price for products over a period of time.

This restricts the nature of firms to increase price of products when the currency swing moves against them. The impact to Singapore firms is likely to be very asymmetric depending on the degree of intermediately components that are imported to overseas factories for manufacturing locally or in overseas factory.

The complex manufacturing chain process makes many layers of currency changes a tough nut to crack for Singapore businesses. Nonetheless, for most established firms, tapping on banks' expertise provides an alternative solution to mitigate large currency fluctuation and ameliorate any negative impacts if any.

Of course, given the presence of business contracts, the real effects of currency swing tend to have lag-time. This often provides breathing period for the company to re-strategise their business expansion taking into account currency volatility.

If you are looking into expanding overseas, it is perhaps equivalently important to consider currency as a factor of business consideration as much as a business plan.