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Foreign Currency: 2013 in Review

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In industries as international in scope as apparel and textile manufacturing, business at every link of the supply chain can be significantly affected by currency fluctuations. Unless the bitcoin becomes the reserve currency of choice for global trade, there’s no adequate replacement for analytically assessing each relevant national currency, and charting its trajectory for the purpose of making sound predictions about what the future foreign market will bring. Below is a round-up of the foreign currency activity experienced in 2013 by those currencies of principal importance to sourcing executives. The Indian rupee was the currency to watch last year, but others exerted considerable influence on global business as well.

Indian Rupee

The biggest currency story of 2013 was the Indian rupee, partly because it suffered such wild vacillations and partly because of the impact those pendulum swings had on the price of cotton.

India’s rupee experienced a tumultuous year, slumping to an all-time low last August at 68.85. And it continued to decline thereafter, stung by a strengthening demand for the U.S. dollar.

Overall, the rupee was down 11.2% in 2013, making it among the most underperforming currencies in Asia, lagging behind only the Indonesian rupiah and Japanese yen.

The Indian government has tried several strategies to buoy its sinking currency, including pushing up market rates, restricting the importation of gold and luxury goods, and making it easier to borrow abroad.

Economists seem conflicted over the impact the sharp fall the rupee is going to have on the future prospects of India’s textile companies. Most textile outfits have reported a marked increase in exports, celebrating the extra value they gain for dollar-denominated sales. Ready-made garment exporters also have cause for satisfaction since, after two years of stalled growth, they are finally seeing their exports in the ascendent.

And most of the reports regarding the ramifications of the rupee’s depreciation have been positive. According to a study issued by Crisil Research, India’s exports have made substantial gains compared with a limp 2012, in which exports to the U.S. and E.U. dipped by 7 percent and 15 percent respectively.

India has also benefitted from significantly improved stability with regard to output and factory compliance, particularly when compared to fierce, low-cost competitors like Bangladesh. According to the Apparel Export Promotion Council (AEPC), major American and European brands have been gradually shifting more and more of their sourcing to India.

However, not all exporters in India have been able to enjoy the monetary boon, especially given the rapidly rising costs of cotton, which dealt a major blow to the profitability of small and medium-sized cotton exporters. Saddled with cumbersome input costs, and unable to hedge against price volatility with futures and options contracts, home-based exporters in places like Panipat, India are struggling to survive.

Most major exporters have managed to benefit from the weakening of the rupee against the dollar. Smaller exporters, though, have been crushed by the 15 to 20 percent spike in prices over the last few months. And whatever gains have been won by the strength of the U.S. dollar against the rupee have been eroded by cotton’s increasing cost.

Larger exporters protect themselves against the short and medium-term price volatility of cotton through hedging mechanisms. By purchasing cotton futures and options, they can make export revenues more predictable. Another added benefit of hedging is increased flexibility for cotton-related transactions since futures can be sold even when there are no buyers in the physical market. Smaller exporters, however, rarely have access to these financial instruments.

Some experts remain unfazed by the currency’s depreciation, theorizing that the culprit is a global slowdown, particularly impacting emerging markets, rather than a rejection of India by global investors. While India has certainly had its share of financial troubles, they haven’t been much more embattled than other developing economies from the perspective of currency strength, short-term interest rates or sovereign risk.

In fact, Param Sarma, chief executive at NSP Forex, expressed a qualified optimism: “The rupee’s outlook looks bright in 2014. Indian markets have withstood the tapering by the Federal Reserve. However, some risks remain on account of more aggressive tapering in the next year and the outcome of the general elections.”

India is more vulnerable than most nations to an investors’ strike if the markets freeze since its financing requirements amount to nearly $250 billion. Its current reserves of foreign currency covers this, but barely. For the sake of comparison, consider that Brazil maintains a total reserve more than double its gross financing needs.

The other problem confronting India is a sudden pessimism regarding its longterm economic outlook. Since equity investors are largely betting on India maturing in the next decade or so, and their investment capital accounts for more than 25 percent of India’s GDP, it is of paramount importance that they don’t head for the exits. Last August, even India’s President, Pranab Mukherjee, noted the “widespread cynicism and disillusionment” that has gripped forecasters of India’s fortunes.

Pakistani Rupee

According to the Pakistan Bureau of Statistics, its inflation for 2013 hovered around 9.2%. While this is high in comparison to more economically developed nations, India has averaged 8.03% since 1957, with an all-time high of 37.81% in December of 1973. Pakistan experienced deflation that amounted to -10.32% in 1959. The most important categories in Pakistan’s consumer price index are food and non-alcoholic beverages, housing, water, electricity, gas and clothing. Given Pakistan’s new GSP Plus status with the E.U., many expect that the central bank will attempt to stabilize the currency, increasing its competitiveness even more as an exporter.

Bangladeshi Taka

The creeping inflation of the taka has added to new costs pressures in politically tumultuous Bangladesh. After months of contentious wrangling between factory owners and workers, Bangladesh’s government finally agreed upon a new salary structure, effective December 1. Labor Minister Rajiuddin Ahmed Raju announced that the new minimum wage will be set at 5,300 taka ($68), a massive 77 percent increase.

And still, the factory owners only capitulated begrudgingly. Speaking to the AFP, Reaz-Bin Mahmood, the vice president of the BGMEA, said, “We have accepted the wage board decision following the Prime Minister’s request. But it’ll be difficult for many of us to raise the wages, if the Western retailers don’t hike order prices by 10% to 15%.”

In December 2013, the inflation of the taka reached 7.35%. Of course, inflation is a not a recent phenomenon in Bangladesh, a country which has averaged 6.62% since 1994, hitting a historic high of 12.71% in 1998. It briefly registered deflation in 1996. Given new cost pressures in Bangladesh, including ballooning wages and the still amorphous costs of compliance, inflation has become a serious concern.

Chinese Yuan

Most of the attention devoted to the Chinese yuan has focused on its incremental appreciation, stoking fears that already rising costs would only become even more prohibitively high. Among significant Asian currencies, only the yuan and the Korean won strengthened during 2013. The “redback” rose 2.8% against the U.S. dollar for the year, hitting record highs. Traders expect the yuan will appreciate by around 3 percent again in 2014, though China’s central bank has kept it on a tight leash so far this year.

However, not as widely noticed has been the breakneck progress of the yuan becoming one of the world’s most used currencies, surpassing the Singapore dollar and Hong Kong dollar this year to become the eighth most used currency for transactions. In the past three years, the yuan has overtaken twenty-two currencies to grab a global market share of 1.29%. The yuan also overtook the euro to become the second most used currency in trade finance.

Traders generally expect the yuan to continue its appreciation another 3 percent in 2014.

Cambodian Riel

Inflation in 2013 for the Cambodian riel was modest, documented at 1.2% at the end of December. Transportation prices rose at the rate of 2.1%, shelter 1.9%, and food prices 1 percent. The biggest inflationary advancement was seen in gasoline prices, which rose 4.7% for the year.

Still, there are price fears in Cambodia’s future, especially given massive wage increases. Initially, the Labour Advisory Committee reported a $15 increase in monthly wages, effective April 1, 2014. Under the newly accepted plan, the minimum wage will rise incrementally over the next five years, lifting it from its current $80 per month to more than $160 per month. In 2015, the monthly minimum wage is set to increase again by $15, then by $16 in 2016, $17 in 2017 and, finally, $17 in 2018.

However, the streets were overrun by a deluge of frustrated factory workers, furious over what they considered to be a stingy increase. Tens of thousands of workers launched an organized march on December 24, shutting down factory production and halting transportation. In an attempt to placate the demonstrators, the Cambodian government offered to raise the wages by an additional 25 percent to $100 per month, effective sometime in February, instead of the original proposal of $95 per month. The damage done to the industry by the protests is estimated at about $270 million. Still, Cambodia’s low inflation will potentially give it an advantage over regional competitors like Bangladesh.

Vietnamese Dong

Many trade experts anticipate that Vietnam, especially following a favorable conclusion to the Trans-Pacific Partnership negotiations, is soon to emerge as a new economic power. However, the country is still wrestling with the lowest economic growth since 1999 and the highest level of bad debt in Southeast Asia. Vietnam’s central bank cut policy rates in July in order to bolster growth and devalued its currency, the dong, to improve the balance of its payments.

The dong was devalued by 1 percent, with plans to weaken it by as much as 3 percent more this year. Inflation will likely be maintained at approximately 7 percent. Further devaluation will help Vietnam dispense with its debt, but will also provide a competitive edge against rivals in the region, also largely exporting nations, with much stronger currencies.

Euro Zone

The big currency concern in the E.U. in 2013 was the gathering threat of deflation. Consumer price inflation in the seventeen countries that use the euro held at 0.8% in the last month of 2013, well below the E.U.’s target rate of approximately 2 percent. The fear is that wages and savings will simultaneously suffer from devaluation, ultimately strangling demand.

Still, few believe the E.U. is threatened by the kind of inflation that tortured Japan in the 1990s. There is, however, likely to be some future action, likely modest, from the European Central Bank (ECB). ECB Governing Council members have signaled that the bank will provide more money to banks before the cheap long-term loans it already made expire. The ECB injected 1 trillion euros into the banking system in three different payments beginning in December 2011.

U.S. Dollar

The big question regarding U.S. fiscal policy has been: is the U.S. dollar in decline? By most measures, it should be: it faces high and quickly accumulating public debt, additional risks created by the Federal Reserve’s aggressive and atypical devaluation of the dollar, and grinding political dysfunction. Many experts openly hypothesize that the replacement of the U.S. dollar as the global reserve currency is inevitable.

Nevertheless, inflation in the U.S. has remained low, largely in step with the target rate of approximately 2 percent. And the dollar remains the trade currency of choice for most of the globe. Paradoxically, the financial crisis that distempered U.S. markets so much also ensured that its currency would remain strong, since there are few safe alternatives in a volatile economic environment. And emerging economies, in particular, have a stronger incentive than ever to accumulate safe currency assets as a hedge against their own unstable capital flows. Further, new financial regulatory strategies, sweeping the world, have contributed to this demand since banks need a larger supply of liquid assets to meet its swelling cash flow needs.

Of course, the dollar’s historical role as the global medium of exchange is likely to diminish somewhat. New developments in financial market technology are making it easier all the time to conduct cross-border transactions in other currencies. But in a macroeconomic market roiled by volatility, there is always a place for safe havens. For the foreseeable future, the dollar will continue to be this sanctuary.

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