FingerTec Newsletter

Exchange Rates Volatility and Recent Financial Crisis:
A Challenge for Companies Operating Internationally

by Batyr Komurzoev, Sales Manager (CIS Countries)

(An avid economist who is pursuing his PhD in Monetary Economics)

With a global brand and products sold in more than 100 countries around the world, FingerTec takes a careful approach in planning its operations well in order to avoid the possible negative effects and minimize losses due to exchange rate fluctuations.

The current financial system, referred to as Fiat Monetary System and adopted by world’s economies since the fall of the Breton Woods System, has shown higher volatility in the currency exchange rates between countries. With currencies not backed by any physical assets, Governments and Central Banks of each country are free to determine the level of money supply they want to have in their countries. In fact, it is seen as an advantage to have a more flexible monetary system that gives a wider range of monetary instruments for Governments to be used in their fiscal and monetary policies. One example would be an expansionary monetary policy in the form of increased base money supply, reduced interest rates and reserve requirements that would encourage private banks to give out more credit and thus induce economic production and growth. Alternatively, if the situation requires, Governments may implement contractionary monetary policy using the same instruments.

In reality, however, there are many factors to be considered before implementing such monetary policy. One factor is the possibility of higher inflation as a result expansionary monetary policy. Inflation is a general and consistent increase in the price level of goods and services in a given economy and expansionary monetary policy is one of the common causes of inflation. Higher money supply and easier credit allows companies to borrow and invest more and, thus, produce more goods and services. At the same time, easier credit allows individuals and companies to borrow for consumption as well which translates into higher demand for the goods and services. As the demand grows, produces and suppliers tend to increase prices of goods and services which lead to an increase in general price levels, i.e. inflation. Higher money supply can also affect the value of the currency in terms of currencies of other countries. Too much increase in money supply might give international investors a signal that the currency might depreciate. This will lead to outflow of funds from the country, the immediate effect of which would be a downward pressure on the exchange rate of that currency since investors will sell the currency of that particular country and buy foreign currencies. The challenge of the Government before implementing the expansionary policy is to identify the possible effects and choose the right time for implementing the monetary policies.

Given the flexible money supply and Governments implementing different monetary policies depending on the situation and objectives of each country, it is no wonder why we face volatile and difficult to predict exchange rates. Meanwhile, to minimize losses due to changes in the exchange rates is a continuous challenge for companies that are carrying out business internationally.

Flexible money supply and credit expansion and tightening by the banking institutions is commonly sighted as a reason for business cycles. Initially, an expansionary monetary policy might induce economic production and lead to higher growth, a period of expansion in the business cycle. However, injecting more money in the economy and encouraging banks to lend more creates a situation of easy credit and loose lending standards which is usually accompanied with inflation and increased number of bad debts. Bad debts, in turn, weakens capital structure of banks forcing them to tighten credit. Less credit reduces production, since businesses are unable to borrow to finance their activities, and lessens consumption, since buyers are unable buy on credit. Thus production and consumption falls and unemployment rises, a period of recession in the business cycle.

The recent financial crisis which originated from mortgage crisis in US and spread all over the world is an example of downturn business cycle. Since the early 2008, there have been signs of an economic recession suggested by a global inflation. In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations. Excess money supply around the world and easy monetary policy by most of the Governments of the world economies is the main reason of increased levels of inflation. High inflation and the recent burst of the so called subprime crises in US lead to a substantial credit crisis around the globe that made many large and well established investment banks as well as commercial banks announce insolvency some of which even faced bancrupcies. In addition, there is an increased unemployment in most of the countries and signs of economic downturns in major economies of the world, i.e., global recession. Output is shrinking in Japan, Germany, Spain and Britain and many other countries. In Russia, the fiancial crisis and recession was trigered by the fall of oil prices, although the end result is similar to other countries in the sence of bank failures, lost confidence of investors, slowed production and increased unemployment. The price of oil, like the price of all other commodities, is closely tied to the overall business cycle. As the recession was hit in major countries, consumption and demand for oil fell leading to lower prices. With fall in the oil prices, Russia, being a second largest oil exporting country, faced lower revenues from oil, capital flight due to depreciating currency and downward preassure on stocks and other real and financial assets, including propertes.

At FingerTec, we are closely monitoring the global as well as regional economic situation of the countries we are present in and continuously adjust our plans and strategies according to the situation. Our latest initiative is to introduce FingerTec products to the markets of Russia and other CIS countries. Although these coutries are currently under recession, with special approach and strategies, we remain optimistic about our product’s expansion in these markets.