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September currency review

As regular readers of this blog will know, the two factors used to calculate cost of living (CoL) indices for international assignees usually off-set each other to a significant degree. This is because the factors, inflation and exchange rate movements, are inextricably linked and influence each other.

So, when a sharp rise in inflation occurs in a country, more often than not it is due to a recent substantial fall in the local currency value. The higher inflation comes because of the increase in import costs (an important factor for expatriate staff, who tend to buy a lot of imported goods) and that obviously pushes the CoL index up. However, as international assignees often have their salaries based on hypothetical home salaries and/or are paid at least some of their pay in home (or another foreign) currency, they will be able to convert this into more of the recently devalued local currency, and that pushes the index down.

The off-setting nature of the two CoL factors is useful, because it minimises index changes, making it easier to manage and review international remuneration packages. Problems arise, however, when inflation and exchange rate movements do not off-set each other but instead work together to push the index in the same direction.

Difficulties occasionally come because of a combination of low inflation and a falling currency in a location, but this is rarely too troubling for the simple reason that inflation can only go so low. Its upper bound, however, is unlimited, as Zimbabwe proved in 2008 when its annual inflation reached 89.7 sextillion percent, according to one estimate. While this world record is an outlier, there are nearly always several countries at any one time experiencing inflation in at least double figures. Furthermore, our regular inflation round-up on this blog shows that some continue to have high inflation for many months and even years, during which time their currencies can sometimes undergo a period of appreciation.

So it is far more common for a combination of high inflation and a rising currency to cause trouble for global mobility teams as they try to protect the buying power of their international charges, and that situation is developing in Turkey currently.

Turkey has struggled to contain inflation for years, but between March and September last year, the annual rate leapt from 10% to 25%. Because the jump followed a spectacular currency collapse, though, the CoL factors off-set each other to a sizeable degree and indices were not too volatile. In the last 12 months, however, the Turkish lira has bounced back, gaining 11% against the euro (see final table below), at the same time as inflation has remained elevated (latest 15%).

ECA International publishes its main CoL indices twice a year and the September 2019 survey is due for publication in November. We use our own inflation data, which reflects spending and lifestyle patterns of international assignees, rather than official national statistics, but the trends at least are always similar. Due to the combination of CoL factors highlighted above, expatriates in Turkey could see substantial rises in their CoL indices this time, and global mobility teams need to be aware of this possibility to ensure that staff are not losing out.

Furthermore, two other countries, Egypt and Ukraine, have the same combination of high inflation and a rising currency value over the last 12 months and may also see significant increases in CoL indices.

Countries experiencing largest currency gains in September
Currency code Movement v EUR
2 - 30 Sep 2019 (%)
Argentina ARS +3 54.5
Mexico MXN +3 3.2
Russia RUB +4 4.3
Turkey TRY +4 15.0
Ukraine UAH +5 8.8

With the European Central Bank loosening monetary policy in a bid to stimulate economic growth, only two countries saw their currencies decline by more than 2% against the euro during September. They are our old friends Venezuela and Zimbabwe, whose economic crises continue.

Countries experiencing largest currency losses in September
Currency code Movement v EUR
2 - 30 Sep 2019 (%)
Venezuela VES -12 282972.8
Zimbabwe ZWL -37 288.6

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

Selected currency movements (v EUR)
Country Currency code % movement to 30 September 2019 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS +3 -24 -23 -25 54.5
Australia AUD +1 0 -2 -1 1.6
Brazil BRL +1 -5 -4 +3 3.4
Canada CAD +1 +3 +4 +4 1.9
Chile CLP 0 -3 -4 -4 2.3
China CNY +1 0 -3 +2 2.8
Egypt EGP +2 +6 +8 +14 7.5
India INR +2 +2 +1 +8 3.2
Indonesia IDR +1 +4 +3 +10 3.5
Japan JPY -1 +4 +5 +11 0.2
Kenya KES +1 +2 0 +3 5
Korea Republic KRW +2 0 -3 -2 0
Mexico MXN +3 +2 +1 +1 3.2
Nigeria NGN +1 +3 +2 +6 11.5
Norway NOK +1 -2 -3 -5 1.6
Philippines PHP +1 +3 +4 +10 1.7
Poland PLN 0 -3 -2 -3 2.9
Russia RUB +4 +2 +4 +8 4.3
Singapore SGD +1 +2 +1 +5 0.4
South Africa ZAR +2 -3 -1 0 4.3
Sweden SEK +1 -1 -3 -4 1.4
Switzerland CHF 0 +2 +3 +4 0.3
Turkey TRY +4 +6 +2 +11 15
United Kingdom GBP +2 +1 -3 0 1.7
United States of America USD +1 +4 +3 +6 1.8
Venezuela VES -12 -67 -84 -99 282972.8
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