impact of exchange rates on export business
TRANSCRIPT
THE IMPACT OF EXCHANGE RATES
ON EXPORT BUSINESS
FILIPE FERREIRA DA COSTA | GIL LOUREIRO | NUNO FERREIRA | PATRÍCIA BOAVIDA
Agenda
What is exchange rate
How does it impact on economy (macro level)?
How does it impact on export business (micro level)?
What exactly is exchange rate?
Is the rate at which two currencies are exchanged;
Reflects the demand and supply of one currency
relative to the demand and supply of another;
The demand and supply of currencies is fueled by
the demand and supply of goods and services
and capital.
Key factors influencing exchange rates
Inflation Countries with consistently high inflation tend to have a lower currency value as its purchasing power decreases relative to other currencies.
Interest rates Lower interest rates compared with other countries discourage investors which causes a country´s currency to depreciate.
Trade Balance Countries with a deficit in balance of trade tend to see their currencies depreciate as demand for their currency decreases.
Public Debt Countries with high level of public debt are less attractive to foreign investors, due to fears of high inflation and the chance of defaulting. This will decrease the currency´s value.
Political Stability & Performance Political or economical risk in one country might encourage investors to invest in a more stable country.
Government intervention Central banks influence exchange rates by buying or selling the domestic currency to stabilize it.
THE IMPACT OF EXCHANGE RATES
ON ECONOMY
Economic effects of currency depreciation
Devaluation of domestic currency
Effects on Imports
Imports of intermediate inputs Prices RISE
Import Prices RISE
(finished goods | services)
Production costs RISE
Effects on Exports
Export Prices FALL INCREASE in Exports
GDP
Employment
Exporting Industries Profits and Incomes
Domestic Prices (imported goods and services, consumption composition will change)
Net Exports INCREASE
Aggregate Demand
INCREASE
Y=C+I+G+(X-M)
1Assuming that the export stimulus effect and the volume effect on imports together outweigh the import-cost effect
Inflation
Impact in key economic indicators1
DECREASE in Imports
Foreign demand or domestic supply
of export goods is inelastic
Global economy in recession
Business activities located in domestic market
Higher costs passed on to customers to maintain margin
Low Effect
Foreign demand or domestic supply
of export goods is elastic
Substantial demand from overseas visitors
Business overseas operations and investment
Higher costs to be absorbed via lower margin
High Effect
The effect of a depreciation depends on:
THE IMPACT OF EXCHANGE RATES
AT COMPANY LEVEL
The Portuguese Trade Account Exports for goods and services (2015)
USA 5%
Brazil 2%
Spain 21%
France 13%
Others 26%
UK 9%
China 1%
Angola 5%
Italy 3%
Netherlands 4%
Germany 11%
+189% (1996-2015)
PT Exports vs. Exchange Rates
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
2000
4500
7000
9500
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
EXPORTS (M€) FX (€/£)
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1000
2000
3000
4000
5000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
EXPORTS (M€) FX (€/$)
0
20
40
60
80
100
120
140
160
0
1000
2000
3000
4000
5000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
EXPORTS (M€) FX (€/AOA)
€ appreciation (more € for £)
Financial crises hits
Bank of England cuts interest rates
9/11
Financial crises hits
Unemployment rate peaks
End of civil war
Oil prices fall
Reduction in oil production and Pub.+Priv. consumption
Angola economic crisis
UK US AO
Regression Model - the impact of FX in PT exports
export
s st
andard
devia
tions
FX Population Gov. Revenue Gov. Expenditure
UK US AOA
Example PT to UK: a 0,09 decrease in € (or increase in £) results in a 0,54 standard deviation increase in Exports, in value +483 € Millions (0,54x892)
Model versus Real
Exports (PT) = -11244,6 -919,8 FX (€/$) +51,05 Population +0,74 Gov. Revenue -0,72 Gov. Expenditure
Illustrative Example – The Navigator Company: Impact of €/$ in exports to the U.S.
Model
1,327
3.586,95
Exports 2014 (€ millions)
186,81
3.782,21
Exports 2015 (€ millions)
200,231
% (var.)
+5,4%
+6,7%
1,112
€/$ 2014 €/$ 2015
Impact of FX on EBITDA (sensitivity analysis)
-12% -8% -4% 0% 4% 8%
% of EBITDA
+7,1% (+6,3 M€)
-8,6% (-7,7 M€)
+9,0% (+7,4 M€)
-11,0% (-9,1 M€)
+1,8% (+7,2 M€)
-2,2% (-8,8 M€)
-2,3% (-7,5 M€)
+1,6% (+5,2 M€)
2015
2014
2015
2014
FX change
+10% -10%
Translation Exposure Changes in reported owners' equity in
consolidated financial statements caused by change in exchange rates
Operating Exposure Change in expected future cash flows arising
from an unexpected change in exchange rates
Transaction Exposure Impact of settling outstanding obligations entered into before
change in exchange rates but to be settled after change in exchange rates (impact on cash flow)
Changes in exchange rate can affect firm value through:
Types of Currency Exposure
Moment in time when exchange rate changes
Risk Mitigation
Diversify markets and/or production sites
Sourcing / Purchasing Flexibility
OPERATIONAL TOOLS
Currency risk-sharing agreements
Usage of derivatives: swaps and forwards - hedging policies
SHORT TERM TOOLS
Match cash flows: natural hedge
Intercompany back to back loans
Financing: Diversification of markets and currencies
LONG TERM TOOLS
In sum…
Several factors influence exchange rates, some related with demand and supply of goods
and services and some with capital/investment
Also, when there is a depreciation, the exports of a country will be cheaper and imports
more expensive. This may improve trade balance and therefore lead to economic growth
Evidence based on a model shows that exporting firms are vulnerable to exchange rate
movements. Nevertheless, there are other variables that impact the outcome
There are different types of currency exposure and the associated business risks are a fact
of life for multinational firms
APPENDIX
Exchange Rates and Net Exports
• If export products are predominantly priced and invoiced in domestic currency, and imports are predominantly priced and invoiced in foreign currency, a sudden devaluation of the domestic currency can possibly result – initially – in a deterioration of the balance on trade (x-y). After exchange rate changes are passed-through to product prices, and markets have time to respond to price changes by altering market demands, the trade balance will improve (y-z). The currency contract period may last from three to six months, with pass-through and quality adjustment following for an additional three to six months.
Currency impact on European Corporate Earnings
Fireapps quarterly study on how currency affects corporations. The companies included in this data set are large multinational firms with at least 15% international revenues in at least two currencies.
Goods & Services
Demand
Currencies
Gov. Expenditure
Population
Economic Growth
Gov. Revenue
Exports
FX
Variable to Explain: Exports - consolidated Goods and Services exports from Portugal to country ‘x’ in € million. Independent variables: FX – nominal exchange rate of €/x Gov. Expenditure - consists of total government expense and the net acquisition of nonfinancial assets, in Billions national currency. Population - comprise either all usual residents of the country or all persons present in the country at the time of the census, in Millions persons. Gov. Revenue - consists of taxes, social contributions, grants receivable, and other revenue, in Billions national currency
Regression model – variables that explain PT exports
Standard Deviations Standardized Coefficients
Variables UK US AO UK US AO
FX 0.09 0.17 53.80 -0.54 -0.26 -0.13
Population (Per. M) 2.25 16.15 3.36 0.75 1.39 0.26
Gov. Revenue (€B) 117.26 774.12 1,876.42 1.02 0.97 0.04
Gov. Expenditure (€B) 161.12 1,157.24 1,881.47 -0.64 -1.41 0.82
Exports from PT (€M) 892 594 1,512
Example: a 0.09 increase in FX(€/£) results in a 0.54 standard deviation decrease in Exports from PT to the UK, in value -483 € Millions (0.54x892)
0.00
0.00 Variable with more than 90% of probability of being correct that it have some effect;
Variable with less than 90% of probability of being correct that it have some effect;
Regression model – standardized coefficients
Regression model – outputs for US
SUMMARY RESULTS
Regression statistics
R multiple 0.99
R square 0.97
Adjusted R square 0.96
Standard error 113.24
n 20.00
Exports Standar Deviation 594.21
ANOVA
GL SQ MQ (F) F of
significance
Regression 4.00 6,516,390.46 1,629,097.61 127.05 0.00
Residual 15.00 192,339.68 12,822.65
Total 19.00 6,708,730.13
Coefficients Standard error Stat t P value 95% lower
than 95% higher
than Less than
95.0% More than
95.0% Standard Deviation Standardized Coefs
Intercept -11,244.60 1,701.82 -6.61 0.000 -14,871.95 -7,617.25 -14,871.95 -7,617.25
FX (€/$) -919.84 249.30 -3.69 0.002 -1,451.22 -388.46 -1,451.22 -388.46 0.17 -0.26
Population (Millions Per.) 51.06 6.94 7.36 0.000 36.27 65.84 36.27 65.84 16.15 1.39
General government revenue (Billions) 0.74 0.08 9.02 0.000 0.57 0.92 0.57 0.92 774.12 0.97
General Government Expenditure (Billions) -0.72 0.11 -6.62 0.000 -0.96 -0.49 -0.96 -0.49 1,157.24 -1.41
• Very high value of R Square • All independent variables are significant with a confidence
interval of 95%
Regression model – outputs for UK
• Very high value of R Square • Independent variable “Gov. Expenditure” not significant
with a confidence interval of 95%
SUMMARY RESULTS
Regression statistics
R multiple 0.98
R square 0.95
Adjusted R square 0.94
Standard error 217.55
n 20.00
Exports Standar Deviation 892.17
ANOVA
GL SQ MQ (F) F of
significance
Regression 4.00 14,413,337.55 3,603,334.39 76.14 0.00
Residual 15.00 709,918.79 47,327.92
Total 19.00 15,123,256.34
Coefficients Standard error Stat t P value 95% lower
than 95% higher
than Less than
95.0% More than
95.0% Standard Deviation Standardized Coefs
Intercept -11,049.90 4,742.37 -2.33 0.034 -21,158.03 -941.78 -21,158.03 -941.78
FX (€/£) -5,284.60 1,326.69 -3.98 0.001 -8,112.37 -2,456.82 -8,112.37 -2,456.82 0.09 -0.54
Population (Millions Per.) 295.90 94.67 3.13 0.007 94.11 497.68 94.11 497.68 2.25 0.75
General government revenue (Billions) 7.76 3.91 1.99 0.066 -0.56 16.09 -0.56 16.09 117.26 1.02
General Government Expenditure (Billions) -3.57 2.82 -1.26 0.225 -9.58 2.44 -9.58 2.44 161.12 -0.64
Regression model – outputs for AO
• Very high value of R Square • Independent variable “Gov. Revenue” and “FX” not
significant with a confidence interval of 95%
SUMMARY RESULTS
Regression statistics
R multiple 0.99538792
R square 0.990797111
Adjusted R square 0.988343008
Standard error 163.2353932
n 20
Exports Standar Deviation 1511.893068
ANOVA
GL SQ MQ (F) F of significance
Regression 4 43030905.4 10757726.35 403.7308 4.52178E-15
Residual 15 399686.9037 26645.79358
Total 19 43430592.31
Coefficients Standard
error Stat t P value 95% lower than 95% higher
than Less than
95.0%
More than
95.0% Standard Deviation Standardized Coefs
Intercept -1,245.93 831.81 -1.50 0.155 -3,018.90 527.04 -3,018.90 527.04
FX (€/AOA) -3.52 2.03 -1.73 0.103 -7.85 0.81 -7.85 0.81 53.80 -0.13
Population (Millions Per.) 116.24 54.73 2.12 0.051 -0.41 232.89 -0.41 232.89 3.36 0.26
General government revenue (Billions) 0.03 0.11 0.26 0.795 -0.21 0.27 -0.21 0.27 1,876.42 0.04
General Government Expenditure (Billions) 0.66 0.14 4.72 0.000 0.36 0.95 0.36 0.95 1,881.47 0.82
Sources:
• www.pordata.pt • stats.oecd.org/ • www.ine.pt • www.economicshelp.org/macroeconomics/exchangerate/effects-devaluation/ • www.economicshelp.org/macroeconomics/exchangerate/factors-influencing/ • www.pestana.com • www.thenavigatorcompany.com/ • www.xe.com/pt/currencycharts/?from=EUR&to=AOA&view=2Y • www.igcp.pt/fotos/editor2/2015/Taxa_de_Cambio/2015_10_30fim_de_mes_.pdf • www.bportugal.pt • www.portugalglobal.pt/pt/biblioteca/livrariadigital/portugalfichapais.pdf • How do large depreciation affect firm performance? – Forbes, Kristin J. IMF Staff Papers, 2002 • Análise das empresas do setor exportador em Portugal, Estudos da Central de Balanços, Banco de Portugal, Junho 2015 • Firm Performance in a Global Market, De Loecker, Jan et al., Princeton University, 2014 • The Impact of Financial Risks on the Firms’ Performance , Noor, Jamal A. Mohamed and Abdalla, Ali I., European Journal
of Business and Management, Vol. 6, No5., 2004 • Internacionalização – Países Lusófonos, Survey, AIP, Janeiro 2015 • International Monetary Fund, World Economic Outlook Database, April 2016
(https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx ) • Penn World Table, version 9.0 (www.ggdc.net/pwt)