Firm-level Exposure Greater Than Western Economies; Companies Could Face Consequences From Exchange Rate Fluctuations NASHVILLE, November 17 – New research from the Vanderbilt Owen Graduate School of Management has identified significantly greater exposure to fluctuations in exchange rates for firms throughout the Asia-Pacific region when compared to firms in large, Western industrialized economies. Given the potentially devastating impact of such exposure on a company’s assets or debt, the findings indicate a need for increased company hedging and greater government awareness of foreign currency risk in these emerging markets.
In a study appearing in the November edition of the Journal of International Money and Finance, Vanderbilt Owen Professor David Parsley and Helen A. Popper of Santa Clara University analyzed the firm-level exchange rate exposure in nine Asia-Pacific countries from 1990 through 2002, including Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand, as well as benchmark countries Australia and New Zealand. Comparing the market value of an average of 80 of the largest publicly traded firms per country and movements in exchange rates, they found significant exposure to fluctuations in one or more of the four major world currencies (the U.S. dollar, euro, yen and pound) for firms throughout the region.
“Large exposures are potentially devastating to firms as they continue to expand their investments in and utilization of foreign currencies,” said Parsley, lead author of the study. “As exchange rates fluctuate, companies that haven’t hedged against their exposure face significant risk of depreciation of their assets or severe increases of their debt obligations held in foreign currencies.”
Most of the firms analyzed were vulnerable against fluctuations in the U.S. dollar, including significant percentages of firms in Korea (76 percent), Malaysia (61 percent), the Philippines (58 percent), Indonesia (54 percent) and Singapore (47 percent). Against the Euro, Taiwan had the most exposed firms (27 percent), and a significant number of companies in Hong Kong (30 percent) and Singapore (31 percent) were exposed against the yen. Relatively few firms in any country were exposed against the British pound. These levels of exposure are in stark contrast to those in most Western economies, where individual companies are adept at hedging their exposures against individual currencies or more able to shift operations in response to major changes in exchange rates.
The study also found that pegs – when a country fixes the exchange rate of its currency against another country’s currency, such as the U.S. dollar – are ineffective in mitigating the firm-level risk against fluctuations. “Countries with exchange rates that are fixed against a single currency exhibit no less exposure at the firm level,” said Parsley. “The use of a peg, while usually an attempt to signal monetary stability, can lull firms into the belief that hedging against fluctuations isn’t necessary.”
More effective monitoring and reporting of foreign currency exposure needed
Parsley believes that the extent of exposure identified in the study almost certainly continues today, since few countries in the region have maintained tight control of firm-level access to foreign currency markets. The study’s findings, according to Parsley, make a strong case for a more gradual approach – including closer government oversight – to how individual firms are given access to foreign currencies for those countries choosing to maintain pegged exchange rates.
“Abandonment of capital controls is not the way to go for these emerging economies,” said Parsley. “Despite a Western push for market liberalization, economies throughout the region would be well advised to maintain a slow-and-steady approach to introducing firm-level access to these currencies, as long as pegged exchange rates remain in place.”
Parsley notes that other ways countries can help control the risk include encouraging more firm-level hedging, moving away from single currency pegs and further development of currently scarce bond markets in the region.
