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Non-Convertable Currencies

Many of the world's currencies are non-convertible. This is of concern to the exporter that finds a demand for his products in emerging markets with significant growth potential. Winning orders is probably easier than being paid in a convertible currency.

 
If it was possible to trade in local currency and somehow convert payment into a hard currency, then these markets would become extremely valuable. 
 

Currency Regimes

There are three forms of currency regime:
 

  • Floating - FX rates are driven by supply and demand
     
  • Fixed peg or band - FX rate is fixed to a single currency or basket of major currencies
  • Currency Board - local financial authority fixes FX rate. Currency is backed by hard currency reserves

 

There is greater complexity in trading with emerging markets. The risks involved in cash and currency management include:
 

  •     Currency
  •     Interest Rate
  •     Liquidity
  •     Tax
  •     Credit
  •     Convertibility
  •     Regulatory

 
Some of these, of course, apply to developed markets as well, but in most cases to a lesser extent.
 

Regulations in emerging markets

Typically an exporter could be faced with the following regulatory constraints:
 

    Non-residents unable to open local currency accounts
 

  • UK Banks unable to offer a full FX service off-shore
  • Inability as a non-resident to transact in the on-shore FX markets
  • FX trades or settlement only possible after submission of underlying documentation
  • Existence of parallel markets (different currency or interest rates in the on-shore compared to the off-shore markets)
  • Registration requirements for investments/inter-company loans to ensure repatriation rights

Taking all these problems on board, is there any point in even considering trading in the currencies of emerging markets, even if it would improve competitiveness? There is no point in winning orders for payment in a currency you cannot spend or invest.