Managing multi-currency budgeting with rising inflation in Singapore

Wed, 2nd Nov 2022

FYI, this story is more than a year old

By David Britten, APAC Managing Director, Corpay

Managing a cross-border business presents unique opportunities that comes with expanding brand awareness internationally, such as managing changes currency exchange rates. According to the Monetary Authority of Singapore (MAS), rising inflation in Singapore has significantly impacted cross-border trade commodities, leading to increased freight costs, partial port closures, and supply chain disruptions.

Singapore's core inflation rate rose to 4.8% in July 2022, surpassing the forecasted 4.7% increase according to a Reuters report. Meanwhile, this same report highlights Singapore's annual inflation rate rose to 7%, up from 0.3% in June. The pairing of inflation and disruption can drive significant supply chain challenges and creates uncertainty about margins and demand and supply volume.

Corpay is of the opinion that the reason for Singapore's high inflation is due to a combination of external and domestic factors, including:

the current Russia-Ukraine war
supply chain bottlenecks caused by COVID-19
extreme weather events
higher energy prices
global raw material shortages
rising labour costs
robust domestic demand.

Major events fuelling inflation are also likely having a major impact on the value of Singapore's currency and the rates of the foreign exchange it has with the currencies of other nations. In contrast to most other nations, Singapore has chosen to adopt an exchange-rate-centred monetary policy system rather than manage its policy through interest rates.

In an effort to slow inflation, Singapore's central bank tightened its monetary policy in April 2022, with economists expecting further tightening in October. Soon after the announcement was made, the Singapore dollar jumped in value against the major currencies, including the US dollar, and was up almost 0.7% to SGD $1.356 per dollar, as shown through live currency exchange website exchangerates.org. Moving forward, Trading Economics highlights economic forecasters expect the exchange rate to trade at 1.40 by the end of the quarter and at 1.43 towards the end of 2022.

Because core inflation is at a 10-year high, many cross-border businesses are struggling to weather the storm. We believe the cost-push inflation has contributed to push the overall price of products up due to increased production costs from inputs like raw materials, wages, and labour shortages. As companies adjust to the surge of inflation, they're passing on rising costs to consumers, reducing profit margins, substituting or eliminating products, and/or delaying production while trying to remain competitive on a global scale.

Meanwhile, supply chain chaos threatens to spur inflation higher and can affect corporate revenues and margins. This highlights the importance of budgeting for supply chain management to ensure the smooth flow of trade across international borders. Cross-border businesses should implement appropriate risk management strategies to help lessen the impact of inflation and the challenges it creates. It also means businesses should have a clear understanding of some of the risks that they may face when trading in international markets.

In our experience, the three common risks that cross-border businesses face when dealing in multiple currencies are:

1. Economic risk

Inflation, foreign currency exchange rates, and interest rates are three major external factors that can affect multi-currency budgets. The COVID-19 pandemic is an example of a global risk with significant economic implications, as is the Russia-Ukraine war. To manage economic risk, cross-border businesses should always be aware of changes influencing exchange rates, such as economic performance, inflation, interest rates, and political stability. This means replacing a rigid and static operational model with a flexible approach that may accommodate changes in market conditions and help navigate uncertainty.

2. Transactional risk

Transactional risk refers to the adverse effect that foreign exchange rate fluctuations have on the expected return from a deal or transaction. This is a common kind of risk which can negatively impact cost and revenue. For example, when a local business orders a product from an international manufacturer, by the time the order arrives and the payment is due, the dollar value has changed, and the local business will need to pay more to adjust to the new exchange rate. To help mitigate this type of risk, businesses could avoid predicting foreign exchange rates and instead have a buffer in their budgets to deal with unexpected fluctuations.

3. Translational risk

Translational risk is the risk of change in a cross-border business's foreign-dominated assets due in part to exchange rate changes. Businesses can help mitigate the risk of incurring losses by currency hedging. This means planning and implementing hedging policies that can reduce risk, increase certainty, and may temper the effect of market volatility in cross-border transactions.

With core inflation in Singapore expected to hit 5% according to a recent MAS Survey, combined with ongoing market volatility and world events, including the Russia-Ukraine war, businesses can look for ways to try to mitigate currency risk and minimise the chance of losing out to exchange rate fluctuations. Multi-currency budgeting in a global business environment calls for a robust and strategic plan that reflects the external and domestic forces that influence changing industry conditions. Using currency risk mitigation solutions can not only help businesses minimise exchange rate risk but can also help to anticipate and respond to dynamic market conditions.

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