When it comes to currency and global trade, “stability” seems like a quaint concept these days, an increasingly distant memory that takes on the trappings of nostalgia. One currency goes into crisis, and then another. The stolid figures of finance issue warnings that seem crafted not only for contemporary audiences, but also for future historians who will judge the wisdom of all those forecasts.
The latest news comes from Turkey.
The country’s central bank has raised its benchmark lending rate to 24 percent from 17.75 percent — higher than analyst expectations of 22 percent — a move meant to counter the lira’s decline and investor flight. The rate hike led to gains for the lira and the local stock market, though some analysts said the bank needs to set its interest rate even higher in response to inflation.
Argentina, too, has its own currency problems, with the peso’s value on a decline and interest rates recently increased to 40 percent from 33.225 percent. The country reportedly wants a $300 billion bailout from the International Monetary Fund (IMF). According to one analysis, such countries as Sri Lanka, South Africa, Pakistan, Egypt, Ukraine and Malaysia also are at relatively high risk of currency crises.
Currency fluctuations can hurt payments and commerce operators that are not prepared to manage that risk. In Turkey, for instance, a weak lira relative to the U.S. dollar makes loans more expensive, given how much lending is denominated in dollars.
“If the lender banks don’t get their money, the banks’ balance sheets become stressed, they stop lending and the guy on the street can’t borrow,” Jared Bernstein, who served as the economic adviser to Vice President Joe Biden, told The Washington Post. “That dampens economic activity, the cost of credit goes up and that affects interest rates in countries beyond Turkey.”
And the currency troubles can, of course, impact more than loan payments.
“The Turkish economic crisis and slumping lira will impact on bilateral trade, as the cost of imported goods will rise significantly in Turkish lira terms due to the sharp currency depreciation this year,” said IHS Markit Asia Pacific Chief Economist Rajiv Biswas, according to CNBC, which went on to say that “the steep depreciation of the lira will likely hurt Turkish orders for Malaysian products this year and in 2019.”
Even beyond the specifics of Turkey, the recent global economic volatility is starting to bring significant impacts to payments and commerce.
Perhaps the most significant example came from Netflix.
When the media company reported its Q2 financials, its failure to “hedge its revenue with derivatives” led Netflix to lower its 2018 operating margin expectations to the lower end of its 10 to 11 percent projection. “We’ve got some adjustments to make because of foreign exchange rates, and we know we’ll make those adjustments and we’ll grow into that,” said Netflix’s Chief Content Officer Ted Sarandos during the company’s post-earnings conference call.
More uncertainty and fluctuations are increasingly likely.
Christine Lagarde, managing director of the IMF, has in recent days warned “about how the escalating U.S.-China trade war could deliver a shock to poorer economies. Trump is set to whack China with another $200 billion in tariffs,” according to Forbes.
And that’s not the only looming problem.
“The growth risk is a more protracted trade war involving the EU and Japan,” Neil MacKinnon, an economist for VTB Capital in London, told the publication. “That would derail the global economy and puncture the performance of U.S. equities, already historically overvalued.”
A decade ago, the collapse of Lehman Brothers triggered the last major financial crisis and the Great Recession. “All told, 24 countries fell victim to banking crises, and economic activity has still not returned to trend in most of them,” Lagarde recently wrote. “One study suggests that the average American will lose $70,000 in lifetime income because of the crisis.”
Now, mindful of all those losses, payments and commerce experts are stepping up their focus on risk management and currency hedging. In a recent PYMNTS interview with Karen Webster, COO Mark Frey of Cambridge Global Payments talked about the current state of risk management among businesses that operate in the commerce and payments world, and what’s coming next.
To be fair, Frey’s tone did not indicate that the sky is falling, but his point was serious: Prepare well for this new world of volatility, where politics, tariffs, trade wars, rising interest rates and other factors are creating constant chaos, and where the relative stability of yesterday already seems like a distant memory.
The general remedy?
A long-term and proactive look from the point of view of the financial hedging and risk management opportunities. “Having a policy in place, and identifying risk that is material to the firm, takes some of that guesswork out of the equations,” said Frey. “It gives you insulation from exposure.”
Exposure is certain to increase in the coming months and years for payments and commerce operators — it seems likely that Netflix Q2 earnings served the canary-in-a-coal-mine role. Will the sky all but fall as it did a decade ago? That’s harder to predict but, even so, does not negate the need for better risk management.