October 2015

Asian SMEs turn to FX hedging products
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.
  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.
Singapore FX Forwards and Options Engagement
Percentage of SME Businesses Engaged

Source: East & Partners Asia's Asia BFX Markets Program
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