In the Asian
currency markets, 2015 has been a year of surprising volatility.
In particular, the RMB devaluations in China and the political
scandals in Malaysia have had an impact on currency values, and an
even bigger impact on sentiment.
For many larger institutional businesses, this is no great
inconvenience. They have hedging strategies in place and may also have
a trading desk where they may be able to take advantage of the
fluctuations.
For small and medium sized businesses, however, it is often not the
case, and their day to day activities and bottom line can receive a
mauling if they are on the wrong side of the currency movements.
For most SMEs, foreign exchange means the spot market, and they are
happy to take whatever conversion rate applies at the time of the
transaction.
With the recent volatility, however, come indications that Asian SMEs
are more inclined to engage with hedging products such as FX forwards
and options.
The increased engagement signals a more sophisticated approach from
regional SMEs, and an opportunity for FX providers used to the
one-dimensional approach of this market segment.
East & Partners Asia’s Asian Foreign Exchange (ABFX) report looks at
FX engagement by SMEs across four regional markets: Hong Kong,
Singapore, the Philippines and Malaysia.
In the most recent iteration of the bi-annual report, 1861 SME
businesses with an annual turnover of between US$1-20 million were
interviewed about their FX use.
Every one of the 1861 businesses were engaging with Spot FX, which was
a pre-condition to participating in the research.
The most recent report, from August 2015, shows significantly higher
levels of engagement with Options and Forwards products.
Where 25.6 percent of SMEs were using options in May, this had grown
to 27.0 percent by August.
Engagement rates for Forwards were higher, moving from 29.5 to 31.5
percent over the same period. |
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Singapore has consistently been the most sophisticated, in addition to
the most competitive, of the markets.
In Singapore,
35.0 percent of SMEs use options, and the percentage using options
moved through the 40 percent barrier for the first time in August, and
hit 41.7 percent.
When East began the ABFX research in August 2013, only 30 percent of
Singapore SMEs were using FX Forwards, so the product penetration in
that market has effectively moved from three in ten to four in ten in
two years.
Part of this can be attributed to the increased sophistication of the
SMEs, but currency volatility must also have played a part.
In Malaysia, for example, where the ringgit has lost just over 15
percent of its value so far this year, 22.9 percent of SME businesses
currently use FX Forwards. In August 2013, this figure was 18.0
percent.
Malaysian SMEs are also turning away from using their own currency to
conduct international business.
As a percentage of FX volumes, Malaysian SMEs report that the ringgit
has fallen from comprising 13.9 percent of FX volumes in May to 13.0
percent in August, with a forecast to fall to 12.4 percent in six
months’ time.
All this is occurring in the context of a highly competitive market,
where SMEs are choosing to spread their FX wallets among multiple
providers.
FX continues to be the most consistently multi-banked financial
product, with SMEs – who are usually averse to sharing their wallets,
using up to four or five providers for Spot FX.
In Singapore, which is the most fragmented and competitive of the four
FX markets, the average wallet share for primary providers in the Spot
market has fallen to a region-wide low of 18.6 percent. In August
2013, this was at 21.9 percent.
For this reason, the increased engagement with Forwards and Options is
a welcome opportunity for providers.
While they might be facing declining wallet share, this can be
compensated in part if they can provider hedging products to their
clients.
Volatility might pose some difficulties for some, but for others it
can be an opportunity to increase the cross-sell. |
