- Asian markets, and Singapore’s in particular, are poised to enjoy strong growth in the coming months
- Decline in SGD and JPY offer SMEs opportunities to buy in, Euro outlook looks optimistic despite weak start to the year
- Adopting new solutions and strategies, and exploring foreign-exchange policies and derivatives, can help you cope with financial uncertainty
8 mins read
As 2021 looks set to deliver strong growth globally, with Asia and Singapore in particular being bright spots, SMEs looking to trade in the region stand to benefit from the continued strength and stability in the Singapore dollar (SGD). Peter Chia, Senior FX Strategist of Global Markets and Economic Research at United Overseas Bank (UOB) shares his insights and thoughts on global growth’s impact on major currencies and how it affects SMEs that engage in cross-border, cross currency transactions.
Read on below for more in-depth SME insights.
An overwhelming majority of CEOs expect worldwide economic growth to improve in 2021, according to recent surveys by auditing giant PwC.
Global business recovery is also expected to continue making headway thanks to the growing roll-out of COVID-19 vaccines and huge monetary and fiscal stimulus globally, according to Peter Chia, Senior FX Strategist of Global Markets and Economic Research at United Overseas Bank (UOB).
Similarly, the outlook for the foreign-exchange (FX) market is buoyant, and this will continue to have a significant impact on small to medium-sized enterprises (SMEs) engaged in cross-border and cross-currency commerce. While FX markets will continue to experience volatility for the foreseeable future, taking a systematic and strategic approach to managing risks will help you navigate your way.
Asian markets remain strong
After an unprecedented slowdown last year, the global economy is on track to enjoy a strong rebound this year, notes Chia.
Boosted by a rapid vaccine rollout and huge monetary and fiscal stimulus globally. Risks have now shifted to the upside and we can expect more growth upgrades across the year.
It’s anticipated that the region will benefit from an expected growth of 8.5% in the Chinese economy this year.
Singapore, for its part, is expected to be a standout performer in the region as it is expected to achieve herd immunity and consequently a faster return to normal. According to Chia, the city-state’s economy will grow by 5.5% this year, leading to continued strength and stability in the Singapore dollar (SGD). As a result, local SMEs, or overseas SMEs looking to trade in the region, should adopt FX strategies with this in mind. In fact, says Chia, Singapore’s V-shaped recovery – which saw the country rebound from an economic contraction of 5.4% last year – only offers more reasons to maintain a positive outlook on its currency in the second half of 2021.
International currencies remain volatile
Companies that engage in cross-border and cross-currency transactions should also be aware of fluctuating forecasts regarding the US dollar (USD), Euro and Japanese Yen (JPY). These shifts are anticipated to have a pronounced impact on business in the near future, says Mervyn Koh, UOB’s Country Head of Business Banking for Singapore.
As Chia notes, while the Singapore dollar weakened from S$1.32 per US dollar to S$1.34 during March/April, the SGD has actually held up well in the face of the USD’s recent strength. To put things in perspective, he points out that the decline in value that the SGD experienced is relatively slight, given that the SGD experienced an almost straight-line appreciation from $1.46 since last March. UOB advises SMEs to take advantage of this temporary dip in value as an opportunity to buy into current market weakness in the SGD. This is because the SGD is expected to appreciate and rebound later at a value approaching S$1.32 per USD by the end of 2021.
At the other end of the spectrum, the Japanese Yen appears to be oversold, and has also weakened in value at the sharpest pace seen in five years. Companies wishing to trade in the currency should look for a JPY to SGD conversion of around S$1.20 before buying in, Chia says.
Conversely, although it experienced a weak start in the first quarter of 2021, the Euro is expected to recover within the second half of the year. If you are looking to acquire or trade in this currency, expect it to find strong support around the S$1.58 level, at which point SMEs may wish to consider buying in.
Planning around market disruption
The biggest question for SMEs whose base trading currency is the Singapore dollar is how they can manage the volatility in international markets. To steer through shifts in the foreign-exchange market successfully, Chia advises, adopting a longer-term focus that is less reactive to day-to-day movements in the FX space. SMEs are advised to purse a foreign exchange strategy that helps them sidestep risks in a systematic and strategic way – a task UOB’s FX specialists can assist with – by using a simple, three-step process.
Step 1: Identify FX exposure
To determine the possible impact to the bottom line, SMEs must identify and quantify their net FX exposure. They can do this by multiplying their company’s overall exposure by the average volatility of the currency exchange that they are looking to make – for example, SGD to USD.
Step 2: Select a hedging strategy
If you find that issues related to conversion rates may impact your business profits significantly, create a back-up plan to offset them before disruption hits. UOB’s FX specialists can help you put such a plan in place. For example, many of the bank’s clients use FX forwards – contractual agreements with the bank to exchange a pair of currencies at a predetermined rate on a future date – to reduce their FX exposure.
Step 3: Put formal policies in place
The final step is to communicate your new policies for dealing with shifts in the FX space to your finance or sales team. Using this information, they can make smarter decisions that reduce your business’s financial risk exposure to currency movements.
Many SMEs are sensitive to changes in costs that may arise from FX fluctuations, which can lead to lower profits. As SMEs become increasingly active internationally, their currency exposure will also increase, even as there is overall currency volatility in the marketplace on the back of global economic uncertainty.
However, as Chia emphasises, SMEs can reduce FX risks by taking a more structured approach to anticipating these changes and planning around them in advance. Likewise, organisations can also minimise the impact of FX-related volatility to their operations by making strategic moves that help them plan for tomorrow today, and put them in a position to succeed regardless of fluctuations in the market.
Finding ways to adapt to volatile conditions in the international market will continue to remain a topic that’s top of mind for businesses and business leaders over the coming year. But with a little foresight and planning, SMEs can implement forward-thinking strategies that can help them navigate and grow along with the global economy throughout 2021.
Contact us today for a consultation with our dedicated FX specialist.