Lack of currency stability is weighing on governments and expats

With the Coronavirus’ spread on a global scale, in the rapid fashion it did, the timeframe and speed made it easier for us to assess the impact that it has had. All other factors seem to fall secondary to the drastic changes the virus had.

Of course, the literal infection, symptoms and treatment of the virus was only secondary too. The primary factor in 2020, the headline if ever there needed to be one, was the endless months of lockdown across the entire world. Very few countries escaped the contracting economy of standing still, at home, not being allowed to spend their money – and that’s if they had money, because employment too fell off a cliff edge. To make matters worse, some governments, like South Africa’s, used this as an opportunity to regain control over their population and ban substances like tobacco and alcohol. Of course, the economy shifted to an unbalanced state and created a growing black market.

The Dow Crash

From January to the end of February, we saw the Coronavirus’ rapid increase in numbers. Eventually, on the 28th February, stock markets reported their largest single-week decline since the 2008 crisis. A few more dips over the next few days, and we were heading straight into Black Monday I on the 9th of March, a -2,013.76 change (-7.79%). Black Thursday II, a few days later, saw a -9.99% change, and the 16th March saw a -12.93% change.

These were the largest day point drops in history. They sparked a rise in the USD, though, which was when the Dollar rose from 0.88 against the Euro on the 8th March to 0.94 on the 19th. This inverse relationship has been even more clear, as we have seen the stock market climb to incredible heights over the past few months, yet the Dollar is the weakest it has been in years. The Yuan on the other hand is strengthening.

Since the March crash, the Dow Jones has seen relentless growth. It took roughly half a year to get back to over 29,000, which is an incredibly short amount of time given that most major public companies will have been struggling due to lockdown restrictions, rising unemployment and a caution over leisure spending. This V-shaped recovery is certainly a controversial one, with many economists claiming they do really not exist.

Recessions in 2020

It’s clear that larger companies fared a lot better than SMEs, who were more likely to face closures and have less capital to adapt to current strategic demand. This is reflected in the stock market growth of course, where public companies have been rising in value. Still, even then, it’s unlikely that the Starbucks and McDonald’s of this world actually saw a rise in real value.

Instead, they will have faced worldwide temporary closures, supply issues, and so on. Yet, McDonald’s were priced higher in October 2020 than in January 2020. This is a very benign example of the irrationality of the stock market growth this year, though there are plenty more extreme examples like Tesla, and any popular stock on the retail investing app Robinhood.

The following countries are currently in a recession:

  • Austria
  • Belgium
  • Canada
  • Denmark
  • Estonia
  • Finland
  • Hungary
  • Ireland
  • Italy
  • Latvia
  • Lithuania
  • Mexico
  • Netherlands
  • Norway
  • Romania
  • Russia
  • Spain
  • UK
  • USA

This is clearly much of the western economy, yet as we have noted earlier, the western stock markets are doing very well. Something is afoot, and the threat of a speculative bubble is on many investors, businesses and politicians’ radar.

The positive to take away from this is that the recessions are generally forecasted to be short lived for most. For example, India has faced economic troubles this year, but are forecasted by the RBI to have 7.5% growth in 2021.

The reason that recession is likely to be short lived is because our circumstances are almost artificially temporary. Shops closing temporarily, for example, is somewhat more manageable than say, a 2008 debt crisis where everyone is defaulting and your receivables aren’t coming in. Not only can governments and alternative lending companies fill in the gaps, but spending should resume back to fairly normal levels in a post-Coronavirus world.

There is another argument, however, that claims things are going to get much worse. The World Bank posted about how Covid-19 will plunge the global economy into its worst recession since WW2. Whilst this was back in June, the forecasts are still held by many experts.

The reason for this is in part due to the debt taken out this year. In order to pay furlough and give small business grants, governments had to pay for them through debt. Of course, they aren’t getting repaid for these, and so it’s been a costly year. At the end of it, businesses are still struggling and shutting down, and the government hasn’t (arguably) got much more money to give. This was papering over the cracks, and shone a bright light on the potential need for Universal Basic Income, something that is stipulated as being the ultimate safety net for future catastrophes.

Brexit going into 2021

On Christmas Eve, a Brexit deal was announced. Britain announced free trade, control over immigration, and a win on fishing rights. Europe announced no free trade, immigration is still in contention, and fishing rights were split. In short, this was a war of propaganda, where Boris was trying to claim Brexit as a miracle success where they have their cake and eat it, whilst the EU were trying very hard to deter other countries from following suit. The real winner? Neither of them (or, possibly China).

One thing is for sure: a no deal was avoided, and many transition periods were imposed regarding things like fishing rights. This should certainly help any abrupt breakdowns in trade or customs, though the UK do have to have custom checks unlike EU members.

For now, the Pound should be fairly stable against the Euro, considering this is the most certain we have been over the UK-EU future in four years since the referendum. Whilst the UK economy is predicted to shrink somewhat as a result of Brexit, there will be few other surprises chucked their way, meaning that the Pound can factor in its own future into the price.

2020’s Impact on Foreign Trade

The huge swings in prices led to a difficulty in foreign trade, though it has been far from persuaded against it. Foreign trade has been rife, in part because consumers are forced off the high street and onto their laptops when buying Christmas presents.

As we can see from the PS5 stock scandal, there are clearly issues affecting major companies. Whilst scalpers have contributed to hundreds of thousands of stocks being hoarded and priced up to ridiculous amounts, they only account for roughly 3% of total stock. This means that Sony is clearly struggling with either distribution, or having all of the components in stock.

One example of a customs issue that was born out of the virus came recently, where the UK’s Royal Mail had to suspend deliveries to Europe, Canada, and Turkey due to a significant disruption. Transportation issues have been rife, and courier demand has gone through the roof, as we can see with the rise in valuation of FedEx and other distribution companies.

The fact that consumers are only buying online right now means that SMEs have to adapt and capture this online demand. Not only this, but their highstreet sales are out the window. Weirdly, despite the logistical issues of the pandemic, and the shrinking in the economy itself, SMEs are actually presented with an opportunity.

The issue is, many are not experienced with currency, and the foreign currency market is extremely difficult right now. From the rise in retail investors, strange stock market behaviour, and tanking economy, currency volatility has been all over the place.

Add on top of this a reliance on banks, who take extremely high margins when it comes to currency exchange along with international transfer fees, and you have a significant obstacle in the way.

Multi-currency accounts

One of the best ways for small businesses to overcome this currency hurdle is via multi-currency accounts usage. As is explained by its own name, these are accounts where you can have several virtual bank accounts all in one place, and all in different currencies.

The places you can find servicing these are money transfer companies. These are fintechs, some of which are startups and some of which are FX veterans, that have access to the interbank rate along with the latest infrastructure. Using incredibly easy-to-use apps, they can facilitate currency transactions at the click of a button.

Of course, multi-currency accounts are not only useful for transferring money at very low costs (i.e. sub-1% margins instead of 4% bank spreads), but they are also useful for managing money altogether – a bit like a corporate current account. Some may be verified banks, whilst most are not. They are safe to use, but it’s best not to keep huge sums of money in there as they aren’t a total replacement for a bank account.

Instead, these accounts can be used for paying supplies and overseas staff. Frequent transfers can be made at the click of a button, and at competitive rates. Best of all, when selling overseas (i.e. Amazon), you can receive the money into an account that matches the payer’s domestic currency. This saves them money, in some cases, and it means the small business escapes using in-house currency exchanges like Amazons, which takes 3%+.

Finally, such companies aren’t like PayPal, many actually have businesses services that can offer personalized support. For example, picking a money transfer company with a dedicated account manager can mean speaking to a professional that can offer guidance over the best way to exchange a large sum of money.

This can lead to other products such as hedging. Money transfer companies commonly offer Forward contracts and Options, so small businesses can guarantee a pre-agreed exchange price ahead of time. This can profoundly help a business with its cash flow forecasts, and is perhaps the best way for small businesses to gain more certainty over their currency rates.

With so little certainty in the world, SMEs have to improve the things that are within our control. Currency is an area which can be controlled, or at least, more so than letting the market volatility run riot.

A unified currency

One argument in favour of cryptocurrency is that it could potentially solve many of the issues talked about in this article. There would be almost no friction in buying and selling goods, because you would simply be dealing with money that the world economy accepts.

A unified, global currency doesn’t mean that every country only uses this, and has no currency of its own. If this was the case, then their struggling economies wouldn’t be able to gain a competitive advantage through their devalued, cheaper currency, and thus exports would be limited.

Instead, if say, Bitcoin was so dominant that most companies used it, then we could buy and sell using this currency. Even if we have to transfer back to our own domestic currency at the end of the “day”, it would be cheap transfer margins because of how commonly it’s bought and sold. On top of this, we could finally use a multi-currency account that has only two currencies, instead of 10+.

The selling point of this is that countries keep their sovereignty and domestic currency, and can still somewhat control monetary policy. It’s just that free trade can prosper with less friction with a unified cryptocurrency. Unless crypto was banned outright by law, this could be a trend we see in the coming decade.

Heading into 2021 as a small business

Besides taking control over currency and capturing a more global, online market, it’s important to adapt in other ways too. The pandemic has caused many shifts, many of which will be fairly permanent. SaaS companies are doing well due to WFH, just as online/home entertainment companies are.

On the other hand, there will be a flood of demand back for things the public has missed out on, such as going to bars, restaurants and cinema. It’s possible we could see a huge rush back towards travel too, though this may depend on how abruptly Covid-19 is defeated, if at all. The point is, there may be some power vacuums around certain industries waiting to get filled as the demand surges back – not least from an investors point of view, too.

Finally, heading into 2021, SMEs will have learnt the importance of diversifying revenue streams. Relying on highstreet sales alone has cost many companies who hadn’t already set up on an online marketplace, whilst restaurants felt the brunt of not having takeaway services already up and running.

As for the economy, SMEs should prepare for the worst. We are likely to see most major economies climb out of recession, but the economy will nevertheless take some time to fully recover. Debt will be an issue and credit will be short, so low-cost expansions will be necessary.

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Foreign Policy News

Foreign Policy News is a self-financed initiative providing a venue and forum for political analysts and experts to disseminate analysis of major political and business-related events in the world, shed light on particulars of U.S. foreign policy from the perspective of foreign media and present alternative overview on current events affecting the international relations.

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