This is part of the comprehensive analysis on the impact of Turkish currency crisis on cross border investment. The original article was published (on Aug 12) in Chinese on Momentum Work’s Wechat Official Account, which more than ten thousand investment decision makers in China have subscribed to.

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Turkish lira is already among the worst performing emerging market currencies. The recent drop is comparable to the 2014-2015 currency crisis of Brazil in terms of magnitude, though in terms of speed lira has fallen much, much faster.

Brazil: 2009-2013

We do not know yet how this crisis will evolve, but other major emerging market currencies have already been impacted, while investors sought safety in USD.

For investors and entrepreneurs who operate cross border into emerging markets. The uncertainty certainly has increased – quite a few prominent investors from China have asked Momentum Works what is our perspective on the increased risks.

While we had predicted Southeast Asia’s 2018 tech trends pretty well – we do not have crystal balls, as there are a few factors (read: Trump) which are simply unpredictable.

Not good!

One thing that is likely to happen, though, is that managers of US dollar assets will become more cautious in emerging markets in current circumstances.

We think cross border ecommerce and fintech players are likely to see the impact. Interestingly, these are probably the two most profitable tech industries operating in the emerging world.

Cross border ecommerce

Cross border ecommerce players need to pay particular attention to fluctuations of exchange rates, as they receive a different currency than the one they pay their suppliers.

“Every player who has extensive exposure to non-US markets will need to be agile in this,” Momentum Works’s friend, iPaylinks founder Zhen Guogang told us.

The tools cross border ecommerce players can use including shortened settlement cycle, and currency swaps. Those who have local operations in the destination markets can consider reinvesting their revenue in expanding local businesses, reducing the loss of repeated currency transactions.

Fintech companies

Fintech companies involved in lending cross border will be impacted as well. For example, many P2P companies operating in Indonesia match borrowers in Indonesian rupiah but lenders from foreign countries operating in US dollars. Indonesian rupiah has dropped more than 7% in value compared to US dollars since the beginning of the year.

IDR vs USD

Here, swaps and others tools should be used to hedge the impact of adverse currency movements. The good thing is that the costs of such tools can be easily factored into the business model.

As long as there is no capital control imposed in respective markets.

Other tech sectors which require significant medium to long term investments would probably see little effect of current movements, as long as they do not impact the fundamentals of the economy.

Maybe not so bad?

Of course, we also need to be prepared that the situation might not as bad as media headlines suggest. It is always hard to make predictions, even for the most seasoned analysts:

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.

 

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