When exporting to emerging markets, how can companies manage payment and FX risks? | Article – HSBC VisionGo
As SMEs start trading with emerging markets, they may not be familiar with the currency trends, common payment methods and foreign exchange (FX) policies in those countries. Learning how to manage FX exposure is a pre-requisite in cross-border trade. SMEs should not underestimate the potential loss or gain from exchange rate fluctuations, which may be a small amount in the short term, but could be significant when accumulated over the long run.
This article will address areas that foreign trading SMEs should pay attention to as they export to South Africa, Russia, Saudi Arabia and Malaysia, including:
- The impact of foreign exchange policies and capital controls on foreign exporters
- How to choose the payment currency and method for each of these emerging markets appropriately
- How to manage the exchange rate risks of these emerging market currencies
Before we go into the details, you may refer to the table below for an overview of foreign exchange controls, payment methods and exchange rate risks management in relation to exporting to South Africa, Russia, Saudi Arabia and Malaysia.
Foreign exchange controls
Exchange rate risk management
South African rand (ZAR)
Relatively free in
trade-related capital flow and FX
Referring to HSBC Commercial Banking as an example, the bank supports accounts in ZAR and RUB. The local payer can make payment directly to the payee’s HSBC account in the respective currency. Companies can also request the payer to pay in the US dollar (USD).
Companies can set up “Rate Alert” and “FX Order” on their Hong Kong bank account through internet banking or mobile banking app to stay on top of the latest FX rates, and to execute an exchange once the target price is reached. They can also make use of hedging tools such as forward contracts.
Russian ruble (RUB)
Relatively free in
trade-related capital flow and FX
Saudi riyal (SAR)
Relatively free in
trade-related capital flow and FX
Banks in mainland China and Hong Kong in general do not provide account in this currency. Payers will need to first convert the funds in this currency into USD or other common currencies before making a payment.
SAR is pegged to the USD, so the exchange rate is relatively stable, and few companies would arrange hedging. Companies can consult their bank if there is such need.
Malaysian ringgit (MYR)
(Refer to Note)
In general, it is only possible to exchange the ringgit for foreign currencies within the country, and the exchange has to be done through licensed onshore banks and non-bank financial institutions.
After the exchange, the flow of foreign currencies out of and into Malaysia also requires approval.
Banks in mainland China and Hong Kong in general do not provide account in this currency. In addition, due to the strict FX control in Malaysia, the payer usually needs to exchange for foreign currencies within the country before making a payment.
With Malaysia’s strict foreign exchange control policy, export companies are advised to arrange FX hedging in Malaysia.
What are the impact of capital and foreign exchange controls in different countries on foreign trading companies exporting to these markets?
Russia, Saudi Arabia and South Africa
Newcomers to foreign trading may not be familiar with capital and foreign exchange controls in different countries, and may worry that these policies may affect their export business. In fact, a country’s capital control is managed through its current account and capital account. Capital account includes investment activities such as the trading of equities and bonds. Countries with a certain level of foreign exchange control usually allow very little freedom in its capital account.
Meanwhile, the current account covers trading activities, and Russia, Saudi Arabia and South Africa are relatively open in this respect. As long as the relevant information such as business documentation and trade contract are in place, the currencies can be freely exchanged and free-flow of capital is allowed.
Note that according to Malaysia’s foreign exchange policy, for transactions and payments in international trade, the Malaysian ringgit can only be converted into foreign currencies within Malaysia through licensed onshore banks and non-bank financial institutions. After the exchange, the flow of foreign currencies out of and into Malaysia also requires approval. (Please refer to the note.)
Exporters should pay extra attention to the requirements of approving payment in the export market. For example, banks in the export market may require certain documentation in order for a loan to be approved. The exporter should remind the payer to prepare the corresponding documentation in a timely manner. If a business exporting to these four countries does not have a bank account there, the buyer will have to prepare and supply the disbursement documents. If the exporter has a bank account in these countries, the exporter may need to provide relevant documents for the proceeds to be wired from the local account to its Hong Kong bank account.
How to choose the suitable payment currency and method?
South Africa and Russia
First, find out whether your bank account is able to receive payments made in that local currency. To facilitate the management of cross-border capital flow and to receive foreign currency remittance from overseas buyers, mainland Chinese exporters would usually set up a Hong Kong commercial banking account.
Taking HSBC Commercial Banking account as an example, the account supports payments in South African rand (ZAR) and Russian ruble (RUB). In other words, exporters can choose to receive payments in these two currencies through their Hong Kong bank account of the respective currency.
Saudi Arabia and Malaysia
For the Saudi riyal (SAR) and the Malaysian ringgit (MYR), generally speaking, banks in mainland China and Hong Kong do not provide accounts in these currencies. Therefore, when exporters sign a contract with a buyer, they may consider requesting the buyer to convert the local currency into USD within the country, before depositing the payment into the exporter’s bank account. Considering Malaysia’s foreign exchange policy mentioned above, this method involving currency conversion locally before making the payment is particularly suitable for the Malaysian market.
In addition, foreign trading companies should also take exchange rate volatility into consideration as they choose the payment currency. Emerging market currencies may not be as stable as common reserve currencies such as the USD and the British pound. Therefore, when negotiating for export orders, the exporter may price the goods in USD, and request the buyer to make payments in USD, or agree on an exchange rate for the equivalent amount to be paid in USD, in order to reduce the loss from exchange rate volatility and to manage FX exposure. Forward contracts and other financial tools can also be deployed. Let us now explore these options according to the circumstances in different markets.
How should businesses manage exchange rate volatility risks in emerging market currencies?
During the first half of last year, under the impact of the pandemic, emerging market currencies have depreciated against the USD to varying degrees. For example, the rand has shown a fluctuating downward trend against the USD since last April. Last year, the Russian ruble was also under depreciation pressure against the USD for some time. This is less favourable to exporters, especially when the buyer has strong bargaining power, and decides to pay in the local currency.
If the local currency such as the rand or the ruble depreciates, the local currency can only be exchanged for a smaller amount of the required currency, such as the USD or the RMB. To exporters, this has in effect reduced the profit and compressed the profit margin.
In order to counter the potential FX risks, when exporters sign a contract with a buyer, they should take into consideration potential FX volatility risks that may happen in the future, and take corresponding hedging measures. Exporters may also make use of relevant financial products and services provided by the bank to reduce loss from FX and manage their FX exposure.
1. South African rand (ZAR) and Russian ruble (RUB)
If the payment currency is the rand or the ruble, exporters may set up “Rate Alert” and “FX Order” on their bank account through internet banking or mobile banking app. That will help exporters stay on top of the latest FX rate and execute an exchange once the target price is reached. You may refer to this article to find out about how HSBC’s solutions can help you achieve real-time FX: A stress-free approach to FX exposure management.
Moreover, the majority of foreign trading SMEs would also make use of forward contracts to counter the potential FX risks. They can also purchase simple option products to lock in the target exchange rate in advance in order to avoid potential loss from short-term exchange rate volatility. But due to credit limits, not all companies can use forwards or options to hedge against FX risks. Please consult your Relationship Manager about how to choose among these tools.
For the South African rand and the Russian ruble, since some of the banks in Hong Kong support accounts in these two currencies, companies may make use of a wider range of financial products to hedge against FX risks. For example, as mentioned above, exporters may arrange forward settlement contracts with the bank ahead of time, and agree on transaction terms such as the currency, amount, exchange rate and settlement date. On the day of settlement, the company can arrange the settlement with the bank according to the transaction terms specified in the contract. This method can help reduce potential loss from FX. For details, please consult your Relationship Manager.
2. Saudi riyal (SAR)
Meanwhile, the Saudi riyal is pegged to the USD, so the exchange rate is more stable, and therefore fewer companies would choose to hedge. But in 2020 Q2, the exchange rate of the riyal experienced a relatively large fluctuation and was on a weakening trend. Foreign trading companies that are especially keen on FX exposure management may consult their Relationship Managers in Hong Kong banks about hedging against the FX risks of the riyal.
3. Malaysian ringgit (MYR)
When the Malaysian ringgit is involved in an exporter’s trade business, there are relatively few choices of hedging financial tools in Hong Kong. Considering the strict foreign exchange control policy in Malaysia, exporters are advised to arrange FX risks hedging locally in Malaysia. HSBC has a strong global branch network. You may consult a customer service manager in a branch in Malaysia.
With increasing tension in global trade and the impact of the pandemic, when foreign trading SMEs trade with emerging markets, it has become even more important for them to plan ahead and make good use of financial derivatives to hedge against FX risks. Each step in the cross-border payment process should be managed properly in order to avoid unnecessary loss.
Note: If you need to buy or sell the Malaysian ringgit (MYR) in the offshore market, please consult your Relationship Manager.