How Small Business Owners Can Cope with currency deflation and a possible recession

On 20th June 2022, the Indian rupee closed at a fresh lifetime low of 78.04 against the USD.

On the same day, the Sri Lankan rupee is at 358.753 against the USD, which is 45% lower compared to a year ago.

The same day saw the Yen closed at 135.1 to the dollar, down 19% a year ago.

Currency devaluation can present significant drawbacks, ranging from more expensive imports to higher inflation, as well as a decline in local consumer purchasing power. It can also result in less efficient and less competitive domestic industries in the medium term.

With the world just recovering from the pandemic-induced downturn, nobody expected to hear the "R" word again so soon. Yet here it is.

So far, the risks were largely seen to be concentrated in the West. The significantly hawkish turn by the U.S. Federal Reserve cast a pall on America's economic outlook.

Recession or recession-like conditions in the world's major economies will obviously have knock-on effects on Asia. But as in the past, the region could still ride the tail winds of resilient Chinese growth.

This time there is also the additional buffer of strong domestic demand due to reopenings and rebounding tourism, as evidenced by the region's growth outperformance in the first quarter of 2022.

However, with China maintaining lockdowns to contain COVID, the risks do not seem so remote anymore. 

So we collected some survival tips and talked to a range of South Asian small business owners to get a better sense of what they are seeing as currencies deflates and inflation rises.

Currency-related tips for small businesses

Here are some ways small businesses can prepare to ensure they are well-positioned to ride out the coming storm.

Diversify to other currencies

The internationalisation of products and services have driven increasing focus on the extent of which currency risk influences returns. This issue has been of particular concern for currencies from developing currencies when they bill out in foreign currencies like USD but cannot receive USD due to central bank restrictions.

These business owners are now looking to shift their headquarters and perform contract-signing and invoice and billing from these headquarters offshore. For many business owners, there is no option but to do this as their businesses rely on customers outside of their home base and the benefits from currency diversification outweigh the currency deflation risk associated with their products and services.

Improve your niche

When you’re too general and you haven’t chosen a niche, your message is going to be too vague. Too broad. It doesn’t get to the heart of any one specific problem which is why it’s so hard to gain traction.

Having a well-defined niche means your potential audience is smaller, but because your ability to reach them is stronger, you’ll actually be likely to reach more people. You can build a bigger community around your brand and gain more clients who feel they absolutely need what you offer.

Appoint a strong board

Your company already has at least one director – you. As your business grows, you may notice the increasing tension between working “in the business” – your day-to-day operations – and working “on the business” – developing future strategy, creating policies to support business performance and dealing with compliance issues.

Eventually, your company will get to a point where it will benefit from ‘outside’ or ‘independent’ directors whose experience will help you work “on the business”. These external directors bring valuable experience to guide your company through different lifecycle stages.

How small buinesses are affected by the currency situation

Sanjiva Bajiji, founder and chief executive of a a Sri Lankan software company, told us that his company has had to look for creative ways to hedge the country’s risk to appease investors. While his company has offices in several countries, including the United States, the United Kingdom, Dubai and India, the company will “likely expand” its presence outside Sri Lanka to boost investor confidence and ensure business continuity.

“We are not going to relocate the company, but we will temporarily relocate a few staff members to a Singapore and Dubai just to ensure business runs smoothly,” said Bajiji.

Time to take action

Small businesses have had a rough ride in the last few years as the pandemic threw a wrench in "business as usual". Unfortunately, the roller coaster looks set to continue as our local economies suffer whiplashes from crises around the world.

"Sri Lanka’s currency plunges to world’s worst-performing in economic meltdown. Rupee sheds a third of its value against the dollar as deepening crisis raises threat of default," said Hudson Lockett of the Financial times