• Rami Chedid, Commercial Director at Multipass


• 31.01.2024 02:30 pm
#bank #payment #elections

2024 is the year of elections. Not only do dozens of countries across the world conduct national elections, representing a big part of the global population, but some of them will happen in high-profile countries. The United States, Asian elections with India at the forefront, the UK, and of course, we cannot exclude Russia's presidential election. These elections will have a domestic impact and a geopolitical influence – given the close relationship between politics and financial markets, specifically in the payments sector, the outcome of elections will dictate the movements in the currency markets. 

Historically it is proven that currencies fluctuate during and right after the elections, causing disruption for traders. Therefore, markets have already turned their focus to pre-elections and elections. Potential changes in policy and its frontrunners bring uncertainty, as candidates tend to manipulate existing monetary policy and vow to change the current approach. Unfortunately, most of the time results in an exchange rate decline in value after elections have concluded. Not only can it impact the national currency, but the power change can drastically influence other currencies. An example, not too long ago, involves the depreciation of the yen, which has declined by 40% since the current United States president was elected.  

Why does this matter to companies doing business globally?  

It can be viewed from two perspectives: first, in a more global perspective, foreign investors might keep a reserved attitude and set barriers for new investment flows as the elections give a cloud of uncertainty and potential risks resulting in greater depreciation of a country's currency. A prime example of this was Taiwan, which held its elections earlier this month and experienced a divestment of Taiwanese stocks ahead of the elections.  

Secondly, companies that conduct international trade, hire employees, and purchase raw materials and goods, are under a major effect. When foreign currencies undergo changes in value and some currency becomes the dominant one at that time, it affects how they pay their suppliers, their margins, and costs. According to SWIFT data, the topmost used currencies with the largest share of global payments currently are – the US dollar, Euro, Great British Pound (GBP), and currently – Chinese yuan.  

So, currency rate fluctuations can directly affect business performance. For instance, a Republican victory in the US might likely result in further strengthening of the dollar. This is due to the Republicans being more open-minded towards pro-business policies and are committed to promoting economic growth compared to the Democrats. The outcome of the US presidential election will also have a geopolitical impact, influencing the United States' relationship with China. The UK serves as a good example as well of the impact on currency – if we are looking at a Conservative win, we might see strength in the pound, as the Labour Party already have said they're going to borrow money for investments, which would potentially weaken the pound. 

Besides elections, of course, there can be other risks that affect currency volatility. To name a few – there is uncertainty around the Middle East, and further diplomatic issues in Asia as well as between China and Taiwan. Still, unfortunately, the uncertainty with Russia's invasion of Ukraine. If the market perceives that these geopolitical tensions are creating risk, what we'll see is safe haven flows. We'll see a lot of funds flowing into the US dollar, the Swiss franc, and the Japanese yen. So, if you're paying your suppliers in any of those currencies, it's going to get more expensive for businesses to buy goods. If you are going to be receiving any of those currencies, the good news is that you're going to be getting more of your native currency.  

So, how can SMEs (Small and Medium-sized Enterprises) effectively address these fluctuations?  

The task is to manage the market volatility for the benefit of one's business and set an effective FX strategy to limit the risks associated with currency fluctuations while reducing foreign exchange fees. Strategically, in some situations, it may be more beneficial to pay the supplier in their local currency rather than dollars or your native currency. Sometimes, quite the contrary – it may be more advantageous to make payments in a hard currency like the dollar or pound than their local currency, again if the market has moved it that way. It is necessary to follow the dynamics and keep track of when it is more profitable to pay in local currency, and when the opposite, depending on the nature of international payment requirements. From a business standpoint, it is beneficial to make payments in a currency that is weaker at the time. The bottom line is to avoid potential losses in international payments due to currency exchange rate movements, stay alert on the “grand” elections outcome, and use it for smart decisions that could benefit their business operations.