Companies must consider FX exposure risks when tapping South-east Asia’s rapid growth

FOR any company, the Asean economic bloc represents a business opportunity that cannot be ignored.

The 10 countries that make up the Association of Southeast Asian Nations have a combined population of 684 million people and a gross domestic product of US$3.8 trillion, making it the world’s fifth-largest economy.

These countries are also growing rapidly: Asean’s collective GDP has chalked up a compounded annual growth rate of 4 per cent over the last decade. In contrast, the world economy grew at a rate of 3 per cent over the same period.

As companies expand beyond their domestic markets to take advantage of this Asean growth opportunity, they frequently encounter challenges and are faced with various risks.

“One of the biggest challenges for companies is FX (foreign exchange) volatility,” says Ravi Murthy, Head of corporate sales, Asia-Pacific (ex-Gr China), Markets and Securities Services at HSBC.

Murthy notes, for instance, that while the Indonesian rupiah and Philippine peso have depreciated this year, the Malaysian ringgit has appreciated substantially. Such currency movements are difficult to predict.

The trajectory of Asean’s currencies has been affected significantly over the last couple of months by expectations that the US Federal Reserve is moving into a phase of monetary policy easing.

In theory, this easing should coincide with a weakening of the US dollar against Asean currencies. Yet, currency movements are never influenced by just one factor.

In Malaysia, for instance, the ringgit has been supported by a surprisingly strong recovery in foreign direct investments. In Indonesia, meanwhile, elections have had a meaningful impact on currency movements.

A second challenge, Murthy says, is the lack of FX liquidity for some currencies. “It is difficult to generalise within Asean,” he adds, as the region’s currency markets are at varied stages of development, but companies may find FX hedging challenging when liquidity is limited.

Besides currency liquidity, there may also be a lack of products. For instance, in Singapore, companies may have access to a range of hedging products: from basic spot and forward contracts, to more complex swaps and options. These may not always be available elsewhere, though.

Finally, effective FX hedging may require the understanding of certain technicalities and regulatory requirements.

“Companies might have to decide whether to hedge onshore or offshore, for instance,” says Murthy. The decision might depend on what is allowed by regulations, where companies can get better prices, or even the tenors that might be available.

Effective FX hedging

Chief financial officers and corporate Treasurers face greater complexity today thanks to macroeconomic headwinds and geopolitical risks.

Among the 300 CFOs and more than 500 senior treasury professionals surveyed for HSBC’s Corporate Risk Management Survey 2024, 68 per cent said treasury plays a key role in strategy decisions.

In 2021, when HSBC last conducted this same survey, just 41 per cent of those polled said the same.

Also, 47 per cent of respondents in the 2024 survey said managing currency risk is an area in which they feel their businesses are least equipped.

Rahul Badhwar, HSBC’s global head of corporates sales for markets and securities services, noted that FX markets this year have had to deal with a record number of nations going to the polls.

“Unlike economic variables, geopolitical outcomes can be even more difficult to predict – making it harder for corporate treasurers to hedge FX risk and make long-term decisions,” Badhwar said.

Undoubtedly, managing FX risk requires companies to monitor macroeconomic and political developments within the region – and even globally.

Rather than dictate hedging strategies based primarily on FX predictions, however, Murthy suggests companies should instead focus their FX risk management activities on meeting specific financial and business objectives.

“Some customers may want to take zero FX risk, and will want to hedge their exposure immediately,” he says. “Others may decide on a maximum amount of risk they can tolerate.”

Another consideration might be where companies want to consolidate their risks – whether at the individual country level or in one central location.

Once the financial objectives or key performance indicators have been set, companies can decide what products they want to use to achieve those objectives.

“You need to ask yourself what it is you are achieving with your FX strategy,” says Murthy. “Are you trying to protect or maximise your revenues? Protect or reduce your cost base? Protect or maximise your cash flows?”

Best-in-class solutions

Companies should choose the right combination of hedging strategies that work for them. This means utilising a wide range of hedging instruments to achieve the outcome that best meets the objectives set.

Best-in-class practices for FX risk management include diversifying currency exposures, as well as optimising the timing of FX transactions.

Companies should also consider leveraging technology for efficient FX operations, Murthy says.

This means adopting digital tools and platforms that enable real-time FX monitoring and hedging, and that can seamlessly integrate with internal treasury management systems.

To take advantage of these tools, companies need to seek out and establish strong partnerships with counterparties that can provide tailored FX solutions, market intelligence, and operational support to navigate the complexities of the Asean FX landscape.

They will also need to consider whether their chosen partners have the necessary presence in the various markets where they operate or intend to expand into, as well as the necessary expertise.

FX management is integrated with the core business operations of a company, such as exports or imports of goods and services, as well as payments.

Forex needs also extend to the hedging of balance sheets, paying dividends to shareholders and inter-company transfers.

“A company might be acquiring another company within the region, and the size of FX exposure with such an acquisition might be relatively large,” he says. “Recently, we assisted a client with the FX risk management for such a transaction.”

As a universal bank with a global presence, HSBC has long acted as a partner to its customers with international ambitions.

In September, HSBC was named the world’s best FX bank for corporates at the Euromoney FX Awards for its innovative FX solutions.

These include a new pricing and risk management solution, which helps clients achieve better prices and better manage liquidity, and a platform called HSBC Evolve offering corporate clients access to over 1,500 currency pairs.

“Given that we are present in six Asean markets, with brick-and-mortar operations, we can holistically offer solutions to our client,” Murthy adds. “Thanks to our Asean network, and onward international connectivity, it is easy for us to do that.”