In 2013, many executive missed performance targets despite meeting volume and market share goals. The culprit was exchange-rate volatility, which caused many companies to miss revenue and profit targets after local currencies were translated to dollar or euros. According to FiReAPPS, US-based multinationals lost an estimated $17.8 Billion dollars in 2013 due to exchange-rate fluctuations in emerging markets. For an emerging market executive, a 10% gain in profit and sales in a given market was wiped out by a 10% decrease in the value of the local currency. The list of emerging market currencies that depreciated by more than 10% against the US dollar is extensive, including: The Russian ruble, Indonesian rupiah, Brazilian real, South African rand, and Turkish lira. Currency depreciation turned local-market success stories into earnings disappointments.
*Source: Frontier Strategy Group analysis, Bloomberg
With the risk-return payoff for shifting towards developed markets, executives should consider high levels of emerging market currency volatility to be a given in 2014. Exchange-rate volatility can wreak havoc on internal operations and business partners, but its effects can be mitigated. A cross-functional approach to contingency planning ensures that all key elements of a business including, sales, supply chain, talent and finance are ready for the next bout of turbulence. The question for emerging market leaders should be how to manage volatility, not how to avoid it. This problem should be solved at the local and regional level, no longer just at the corporate treasury. Emerging market executives have a number of operational strategies in their arsenal for minimizing the impact of FX fluctuations.
Before choosing or recommending a course of action, it is vital to determine an organization’s objective in managing currency volatility. Many companies focus simply on maintaining margin in an environment characterized by currency volatility. More opportunistic companies will use the environment to build market share. The strategies detailed in our FX Quarterly series can be implemented with little to no support from the corporate treasury.
*Source: Frontier Strategy Group analysis