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March currency review: managing COLA in a crisis

In recent blog posts we looked at the effects the coronavirus pandemic was having on exchange rates and inflation, the two main factors influencing expatriate cost of living. Our tables below show starkly how the currency carnage has continued, and there will be much more volatility to come before the crisis is over. But how can you, as global mobility professionals, make sure cost of living adjustments (COLAs) continue to protect your international staff's standards of living while on assignment?

As always, the first bit of advice is not to panic. Don't make too hasty decisions that you could live to regret, but do keep up to date with what's going on in the countries where you have operations and be prepared to act swiftly if need be. When a crisis hits, exchange rates can become very volatile, but the volatility itself dictates that a wait-and-see approach might be wise, particularly as sharp swings in currency values can just as suddenly reverse. Regarding the current crisis, it should also be remembered that significant portions of recent currency declines (see first table below) are due to collapsing oil prices and not necessarily coronavirus. A sudden rebound in oil would likely spark swift currency recoveries too.

It is useful to remind yourself what COLAs are there to protect, which is the expatriate worker’s standard of living over time. The objective is to iron out any temporary losses or gains to purchasing power caused by the two cost of living factors.

Big exchange rate movements and alarming headlines about currencies crashing or soaring inflation don't necessarily mean staff are badly out of pocket. In fact the two COL factors can often cancel each other out; an assignee might be facing rising prices due to a weak host currency but also gaining from the same depreciation if they are paid in a stronger currency. It is important to look in detail at how your assignees are impacted and not rush to judgment based on partial information.

Furthermore, with Covid-19 being a pandemic (i.e. global), all countries are affected, many in similar ways and to similar extents, at least as far as cost of living is concerned. Remember that with international staff it is not just conditions in the host location that need to be considered, but also those back home. The relevant comparison may ease concerns. For instance, even though the Brazilian real has fallen 13% against the euro in March, if your expatriate is on assignment in Rio from Norway (or another country from the first table below), their cost of living may be little affected, because the applicable exchange rate, in this case BRL/NOK, has only fallen 1%.

As this blog post from 2018 explains, there are numerous reasons why you shouldn't precipitously adjust pay for local nationals when currencies slump, and most of them apply equally for expatriates. Nevertheless, companies can be tempted during troubled times to shift pay delivery entirely into hard currencies, but this can be a substantial administrative task and cause problems later - when the crisis ends, exchange rates can reverse sharply; will you then change back to your old system? If so, will expatriates be content with that? You would still need to ensure that they weren't out of pocket or receiving an unexpected windfall during the interim period, requiring ongoing monitoring.

Some clients have asked us whether they should freeze COLAs until things have settled down. This can soon bring problems, however, because whatever level you freeze the allowance at will rapidly become inappropriate, making the readjustment when things recover potentially all the more painful depending on how long the freeze has been maintained. The nature of the pandemic means it is very uncertain how long that might need to be.

ECA’s recommendation to wait-and-see doesn't mean you should do nothing. Quick, decisive action will be essential to protect the buying power of assignees around the world that are affected by currency fluctuations. You'll find practical advice on a variety of different approaches in an ECA webinar here (‘Managing and preparing for currency volatility’) and a blog post on the topic here. However, the best course of action may well be to continue with your current policies relating to pay reviews, COLAs and management of exchange rate fluctuations as if the coronavirus crisis didn't exist. A robust policy, which ECA's Consultancy team can always help you create or review, will ensure necessary protections are in place.

So, take a deep breath, stick to your remuneration policies (or quickly put logical and defensible ones in place), and watch carefully how things settle down. Hopefully, you'll find that the tools you already have are sufficient to address even such a deep crisis as the current pandemic. However, as always, if you are experiencing difficulties with any aspect of your international workforce management, please don't hesitate to get in touch.

Countries experiencing largest currency losses in March
Currency code Movement v EUR
2 - 30 Mar 2020 (%)
Belarus BYN -16 4.3
Brazil BRL -13 4.0
Colombia COP -15 3.7
Georgia GEL -22 6.4
Iceland ISK -11 2.4
Indonesia IDR -13 3.1
Kazakhstan KZT -18 6.0
Kyrgyzstan KGS -14 4.1
Mexico MXN -19 3.7
Nigeria NGN -18 12.8
Norway NOK -12 0.9
Russia RUB -17 2.3
South Africa (Lesotho, Namibia, Swaziland) ZAR -13 4.5 (4.1, 2.5, 2.8)
Ukraine UAH -15 2.4
Uruguay UYU -14 8.3
Zambia ZMW -16 13.9
Zimbabwe ZWL -24 540.2

The table above shows only those countries whose currencies have fallen by 10% or more against the euro in March. Many other countries saw high single-digit depreciation. All bar two in the table are emerging markets, and nearly all are exporters of natural commodities whose prices have slumped of late.

Developing economies might have to introduce capital and currency controls to defend exchange rate values through the crisis. Potential measures expatriates might need to be aware of could include restricting movement of money out of countries and reducing access to hard currencies within them. Indeed, Egypt has already acted, by limiting bank withdrawals.

Only three currencies gained anything against the euro in March, as per our next table:

Countries experiencing largest currency gains in March
Currency code Movement v EUR
2 - 30 Mar 2020 (%)
Haiti HTG +1 19.5
Jamaica JMD +1 5.2
Myanmar MMK +2 9.1

In other currency news, as we reported earlier in March, Nigeria has already been forced by the oil-price crash to stop pegging one of its official exchange rates to the US dollar. Now there is growing speculation that Oman (and perhaps others) might have to do the same. Gulf economies have been particularly hard hit by the coronavirus/oil-price crash combination.

Zimbabwe has decided to go the other way. Not for the first time recently, the Zimbabwe dollar was the world's weakest currency in March, prompting the central bank to give up its experiment with (semi-)floating exchange rates and fix the currency to the US dollar once again (@ USD 1 / ZWL 25). It is fair to say, this has been tried before. There is no reason to suspect that reintroducing a fixed exchange rate will be any more successful at solving the country's economic crisis than last time... or the time before...or the time before that...

Finally, here is this month's selected currency movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 30 March 2020 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS -4 -7 -14 -29 50.3
Australia AUD -7 -13 -12 -14 1.8
Brazil BRL -13 -24 -23 -23 4
Canada CAD -5 -6 -7 -3 2.2
Chile CLP -3 -11 -16 -21 3.9
China CNY -2 0 -1 -4 5.2
Egypt EGP -1 +3 +2 +10 5.3
India INR -5 -5 -8 -7 6.6
Indonesia IDR -13 -15 -15 -12 3.1
Japan JPY 0 +2 -2 +4 0.5
Kenya KES -4 -3 -2 -2 6.4
Korea Republic KRW -1 -4 -3 -5 1.1
Mexico MXN -19 -22 -20 -19 3.7
Nigeria NGN -2 -2 -4 -2 12.8
Norway NOK -12 -18 -17 -20 0.9
Philippines PHP 0 0 +1 +5 2.6
Poland PLN -5 -6 -3 -5 4.7
Russia RUB -17 -25 -23 -18 2.3
Singapore SGD -3 -5 -5 -4 0.8
South Africa ZAR -13 -23 -17 -19 4.5
Sweden SEK -3 -5 -3 -5 1
Switzerland CHF 0 +3 +2 +5 -0.1
Turkey TRY -4 -7 -15 -13 12.4
United Kingdom GBP -5 -5 -1 -4 1.7
United States of America USD 0 +1 -1 +1 2.3
Venezuela VES 0 -40 -73 -96 9585.5
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