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The Characteristics of Emerging Market Economies

Revaluations in Foreign Exchange

Different procedures are desirable in the case of revaluation. The objective is to increase working capital in local currency. Again, any action that increases a current asset, and at the same time increases a current liability, has no effect. In general, the exact reverse of the procedures for devaluation are desirable.

It is worthwhile to go over some of them to point up the differences.

To start with, everything possible should be done to turn current assets in other currencies, including cash in another currency, into local currency cash. Even when rates appear advantageous, deposits or investments in other currencies should be avoided. In the same way, obligations in foreign currencies should be incurred, if possible, since they have the effect of increasing local currency working capital.

In addition, long-term obligations could be incurred; because of the translation rules, they result in an immediate gain that is not offset until the obligations are repaid.

When a revaluation may occur, there are generally no, or few, restrictions. In fact, the central banks concerned generally try to promote outflows, and inhibit inflows, for these reasons.

Notes and accounts receivable, again, should be managed on an operational, rather than financial, basis. When some of them represent obligations by foreigners, a further credit review should be made to insure that a tile debtor would not find it difficult to pay, at a future date, higher amounts in terms of their own currency.

Furthermore, when billings are in one currency, but are paid in another, on the basis of a designated rate of exchange, consideration should be given to whether the provision is enforceable, or whether (because of the customer problem) it should be enforced for debts incurred, prior to the revaluation.

The same kind of question is equally applicable when the currency in which payment is made is devalued, since that is equivalent to a revaluation of the currency in which the debt is incurred. If this seems complicated, two examples will clarify it:

A German exporter bills customers in the United Kingdom in Deutsche marks, but regularly accepts payment in sterling, at the current market rate, to a bank account in London. The mark is revalued in September-October, 1969. Although, technically, they should pay additional pounds at the new rate for outstanding debts, the customer could feel that only pounds, at the old rate, are really due, and some adjustment might be required.

Now take the same situation back to December, 1967. The pound has been devalued, but again the customer may feel that payment should be made at the pre-devaluation rate. The reason for that point of view is that the revaluation, or devaluation, has the effect of a retroactive price rise, and has to be considered for its effect on continuing customer relationships.