20-12-2022 08:40

Top 5 hidden FX risks from doing business in emerging markets

Local regulations in emerging markets can result in time-consuming administrative process and trapped cash. Don't get caught off guard. Jana Poulsenova, Managing Director in Nordea Markets, shares the top risks to be aware of when doing business in these markets.
Vung Ang in Vietnam

The slowdown in the global economy, volatile commodity prices, the strong US dollar and higher US interest rates are brewing into a perfect storm for emerging markets and their currencies.

Someone feeling the turbulence first-hand is Jana Poulsenova, Managing Director in Nordea Markets, who leads a team of designated experts that provides advice and customised solutions for companies doing business in emerging markets.

“When you do business in more regulated countries, it is important to remember that local regulation and volatility in the FX market affect your business and your counterparties, even if you have your contracts in EUR or USD,” she says.

Here are the top five hidden risks Jana Poulsenova sees when it comes to doing business and navigating cross-border payments in emerging markets:

1. Geopolitical tensions

Geopolitical risks have always been inherent in the emerging markets space, but the developments during the last year have made this risk essential to discuss with customers.

“With Russia’s invasion of Ukraine, we’ve seen a very volatile 2022 so far,” she says.

While the Russian RUB used to be a fairly liquid currency, that’s not the case anymore after sanctions against Russia. Restrictions from Russia have also had a material effect on offshore RUB financial markets.

The effects are not confined to Russia but rather have rippled out to other countries. For example, the sanctioned Russian bank Sberbank of Russia used to be the second largest bank in Kazakhstan. Removing Sberbank from KZT dealing not only removed a large KZT interbank player, it removed a bank serving as the intermediary KZT bank for many global banks.

“It’s crucial to look at the currency flow. How do the funds flow, which banks are involved and which intermediary bank does my house bank use?” says Jana Poulsenova.

2. Local regulations

Heavy local regulations in emerging markets can result in time-consuming administrative processes, not to mention trapped cash.

In Turkey, for example, where the lira has tumbled to record lows, the local regulator has introduced several new regulations, covering invoicing, company funding, repatriation and funding of vostro accounts. The regulations aim to limit TRY weakening, but so far TRY is testing historical lows. We see Turkish companies asking their foreign counterparties for TRY contracts as it is difficult for them to pay in EUR or USD.

3. Taxation

One specific area to be aware of is various types of tax regulations. Some countries impose a tax on exchanging local currency.  

“As an example, I can mention the Brazilian Financial Operation Tax IOF for BRL foreign exchange,” Jana Poulsenova says, adding, “We have good solutions to fulfil requirements from the local regulator and offer efficient BRL payments to Brazil.”

4. Economics

Another risk lurking in the background is economics. Slower global growth tends to drag on emerging market countries, which depend on global trade. Many such countries have debt denominated in US currency, and a stronger dollar makes it more expensive to service their debt, threatening their creditworthiness. As a result, so-called “de-dollarization” is a growing trend – with countries trying to limit their dependency on the US dollar.

Countries short of US dollars are putting capital controls on outflows to protect their capital account balance, while at the same time stimulating capital inflows by easing rules for incoming payments.

“We’re hearing from companies that can’t get their invoices paid,” says Jana Poulsenova.

Local authorities, for example in Egypt and Pakistan, have imposed restrictions to fight the weakening of local currency, she adds. As a result, some transactions can only be settled in local currency, and some transactions cannot be settled at all. There are hidden costs and risks when doing business in emerging markets – contracting in USD or EUR is not always the solution.

5. Pressure on local companies to use local currency

In general, local authorities want their local companies to use local currency.

In China, for example, the People’s Bank of China removed several requirements for cross-border RMB payments. At the same time, authorities advise Chinese companies to use RMB when doing business with companies overseas to avoid currency exposure and to “de-dollarise” their society. RMB is still a regulated currency but is emerging as one of the top world currencies by turnover.

In general, local authorities want their local companies to use local currency.

Jana Poulsenova and her specialist team are among the top experts in the Nordics when it comes to helping customers navigate the risks that come with doing business in emerging markets. With in-depth market knowledge of on-shore trading and hedging opportunities and experience from a broad range of emerging markets jurisdictions, they can assist you in ensuring timely and safe settlement of cross-border payments in emerging markets.

They also offer strong execution capabilities. Good relationships with settlement banks in emerging markets enable Nordea to execute and collect payments in local currencies via safe and efficient account networks.

Niklas Riesenfeld works with these correspondent bank relationships as Head of Infrastructure Banks at Nordea. He emphasises the top-notch reputation Jana Poulsenova’s team has among correspondent banks.

“I often hear from banks how impressed they are with our knowledge and competence in this area. When it comes to navigating local regulations, local documentation and structuring transactions, the team’s skills are unparalleled,” he says.

Markets and investment