GENERAL BUSINESS ENVIRONMENT

MONETARY AND FISCAL POLICIES

THE IMPACT OF INDUSTRY AND SECTORAL POLICIES
ON AGRICULTURE INDUSTRY IN INDONESIA

Lecturer:
Prof. Mudrajad Kuncoro, M.Soc.Sc., Ph.D.

By Group International Class Batch 64 B :

Dian Pertiwi Sulistianingtyas
14/373180/PEK/19590
Maulida Kusumaningsari
14/372740/PEK/19521
Mohamad Hafiz Arsan Haq
14/373014/PEK/19558
Putri Amandhari
14/372725/PEK/19520
Ummi Aliyah
14/372644/PEK/19510

MAGISTER MANAGEMENT
UNIVERSITAS GADJAH MADA
2015

TABLE OF CONTENT
TABLE OF CONTENT

1. INTRODUCTION

2. ISSUE

a) Indonesia Economic Condition

b) Exchange Rate

c) Export and Import

d) Exchange Rate and Export-import

11

3. THREATS

14

4. OPPORTUNITIES

15

5. BUSINESS IMPLICATION

17

REFERENCES

19

1. INTRODUCTION
One of the external factors that influence the business entities is monetary and
fiscal policy. In Indonesia, economic authorities divided into two boards and they are
trying to manage the economy to stabilize the economic development or even better
increases. Those two boards are central bank, which is Bank Indonesia that manages
policies related to the monetary system, such as interest rate, money supply, inflation
targeting, exchange rate, and minimum reserved. On the other hand, fiscal policies, such
as tax rate, subsidy, and government spending were managed by the Ministry of Finance.
Empirical study suggests that monetary and fiscal action have greater impact on
economic activities in development countries and varies on each different industry.
According to United Kingdom Foreign and Commonwealth Office (2011), Indonesia is
the biggest economy in Southeast Asia and predicted to be the seventh largest in the
world by 2050 with the confident increase of affluent middle class numbers by 45 million
and growing that makes Indonesia become the worlds third most populous democracy
and remarkable development in the economy.
Monetary policy and fiscal policy is closely related to macro economic
developments and are regulated by the government in order to manage the economic
condition in Indonesia. Monetary policy is the process by which the monetary authority of
a country controls the supply of money, often targeting a rate of interest for the purpose
of promoting economic growth and stability (Yeyati & Sturzenegger, 2010). On the other
hand, definition of fiscal policy is the action taken by the government in the state budget
with the intent to influence the course of the national economy. State budget here consists
of revenues for the taxes, government spending (government expenditure) and
government transfers (transfer government). Both of monetary and fiscal policies aim to
achieve the welfare of the community.
At the operational level, the monetary policy stance is reflected in the setting of
the policy rate (BI Rate) with the expectation of influencing money market rates. The
purpose monetary policy is to formulate and implement monetary policy and to organize
and maintain balance of payment in order to achieve stability in the rupiah in accordance
with Article 7 of Law No. 3 of 2004 on Bank Indonesia.According to Adiningsih (2013),
monetary policy consists of two acts: (1) demand management and (2) monetary
targetery. Demand management is done through managing the demand of goods and
services such that at non-inflationary level, while monetary targetery is managing the
3

value of money supply or interest rates. On the other hand, she also mentioned the goals
of fiscal policy are (1) to ensure macroeconomic stability, (2) to allocate government
fund, and (3) to improve income distribution.
These policies protect and give impact several industries in Indonesia especially
for agriculture industry that has a multinational corporation in this world. In this paper,
we will elaborate the influence of several monetary and fiscal policies as one of the
general business environment factor. Specifically, this will merely focus on one of
industry in Indonesia that is agriculture industry.

2. ISSUES
a) Indonesia Economic Condition
As one of developing country, Indonesia offers many potential resources and
unlimited advantages for foreign companies who are interested on establishing a business
within the country. According to Trading Economics website, in 2014 Indonesia
generated the lowest GDP rate, with 4.92 per cent, since 2009. Previously in the end of
2013, the GDPs rate is 5.72 per cent higher than in 2014. Many arguments emerged and
argued that the trend of transactional product has switched into non-tradable product. In
first quarter of 2014, GDP shared of tradable sector is 44.7 per cent, while, the nontradable sector is 55.3 per cent. However, reduction of GDP level can be indicated how
vulnerable the stability of Indonesia economic is and also may interpret into higher
domestic interest rate. Tradable sectors are consist of several industry areas, which are
plantation, mining, and manufacturing; whereas, non-tradable sectors are grouped as hotel
and restaurant. Moreover, the largest contribution derived from industrial sector (45 per
cent of the total GDP) where manufacturing industry is the most productive area. Services
follows behind manufacturing, while agricultural accounts held third position with 38 per
cent and 15 per cent of total GDP.
From time to time, Indonesia inflation rate is relatively fluctuated due to political
instability which is able to reduce social welfare. At the end of 2014, the inflation rate
was significantly increased up to 8.36 per cent in the fourth quarter of the year higher
than 6.23 per cent, the result from previous year. The disparity between rich and poor
people, up until now, is still high implied that subsidy or price adjustment on energy
prices, such as fuel and electricity, will reduce the poverty line. However, in reality, they
cannot modify the prices depend on societies demand. They have to consider and set the
prices based on its social and condition that do not float according to market situations.
4

Generally, GINI index is a tool or an instrument that able to measure an inequality

in a country. The result can be used to analyse the income distribution associated with
social welfare (Bellu, et all, 2006) . In 2011, Indonesia has the higher GINI Index, which
is 38.14 per cent, compared to the previous year in 2010 generating only 29.74 per cent. It
means the disparity on income distribution among societys members getting bigger and
bigger because of the decentralization system which is implemented by Indonesias
government. Papua Barat held the highest proportion in 2013, around 0.442, while the
lowest position is possessed by Maluku Utara. Overall, the average of Indonesias GINI
Index is 0.413 which indicated an income inequality is quite high

b) Exchange Rate
Exchange Rate is the price of a nations currency in terms of another currency. An
exchange rate thus has two components, the domestic currency and a foreign currency,
and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of
foreign currency is expressed in terms of the domestic currency. In an indirect quotation,
the price of a unit of domestic currency is expressed in terms of the foreign currency. An
exchange rate that does not have the domestic currency as one of the two currency
components is known as a cross currency, or cross rate. 1
Exchange Rate includes taxes on imports and exports and controls on trade. Such
policies tend to reduce the domestic producer prices for export products and to push up
the domestic prices on imported items. These impacts will affect commodities and sectors
differentially. However, in so far as export taxes are imposed on agricultural products,
rural incomes will suffer. The damage may happen directly and also through the effects
on prices of domestically produced food as producers switch away from production for
export. Because is partly about sustainable rural livelihoods, interventions that reduce
rural incomes also damage sustainability. Import duties on agricultural inputs, or
restrictions on their importation, are likely to have a similar effect, except in the case of
inputs such as agricultural chemicals that cause serious environmental and human health
risks.
In a global setting, a more open foreign trade framework, with fewer taxes and
restrictions on imports and exports, is usually held to be good for sustainable
1

http://www.investopedia.com/terms/e/exchangerate.asp#ixzz3XGM1damX

development. The case for free trade is that it will allow production to take place in
accord with the economic principle of comparative advantage. That in turn would mean
that less resources and other inputs would be needed in aggregate to attain a given level of
production, which should be good for everyone and for the environment. Free trade, while
generally having the expected benefits on economic growth and efficiency, may have
negative effects on equity, at least at first. The environment too may suffer if, for
example, free trade makes it possible for rich countries to export some of their pollution
problems to poor countries.
Figure 2.1 Potential Foreign Exchange Rate Determination

Source: http://www.emu.edu.tr/salihk/courses/fina411/chp2418.pdf

As exchange rate policy is concerned, some countries, concerned about the impact
of negative external balances on their international purchasing power, have sought to
maintain a high official exchange rate by limiting imports. Experience and economic
logic both suggest that such policies are likely to be unsuccessful in the longer run.
However, while they are in place, they turn the domestic terms of trade against those
sectors of the economy that produce trade-able goods, including agriculture. And the
distortions induced can be massive, far outweighing any subsidies that may be offered to
farmers such as bounties on fertilizers. Clearly, such distortions can be devastating.
Type of Exchange Rate
It is customary to distinguish nominal exchange rates from real exchange rates.
Nominal exchange rates are established on currency financial markets called "forex

markets", which are similar to stock exchange markets. 2 Rates are usually established in
continuous quotation, with newspaper reporting daily quotation (as average or finishing
quotation in the trade day on a specific market). Central bank may also fix the nominal
exchange rate.Real exchange rates are nominal rate corrected somehow by inflation
measures. For instance, if a country A has an inflation rate of 10%, country B an inflation
of 5%, and no changes in the nominal exchange rate took place, then country A has now a
currency whose real value is 10%-5%=5% higher than before. In fact, higher prices mean
an appreciation of the real exchange rate, other things equal.
Another classification of exchange rates is based on the number of currencies
taken into account. Bilateral exchange rates clearly relate to two countries' currencies.
They are usually the results of matching of demand and supply on financial markets or in
banking transaction. In this latter case, the central bank acts usually as one of the sides of
the relationship.
Other bilateral exchange rates may be simply computed from triangular
relationships: if the exchange rate dollar/yen is 10 000 and the dollar/Angolan kwanza is
100 000 then, as a matter of computation, one yen is worth 10 kwanza. No direct
yen/kwanza transaction needs to take place. If, instead, a financial market exists for yen
to be exchanged with kwanza, the expectation is that actions by speculators (arbitrage
among markets) will bring the parity of 10 kwanza per yen as an effect.
Multilateral exchange rates are computed in order to judge the general dynamics
of a country's currency toward the rest of the world. One takes a basket of different
currencies, select a (more or less) meaningful set of relative weights, then computes the
"effective" exchange rate of that country's currency. For instance, having a basket made
up of 40% US dollars and 60% German marks, a currency that suffered from a value loss
of 10% in respect to dollar and 40% to mark will be said having faced an "effective" loss
of 10%x0.6 + 40%x0.4 = 22%. 3Some countries impose the existence of more than one
exchange rate, depending on the type and the subjects of the transaction. Multiple
exchange rates then exist, usually referring to commercial vs. public transactions or
consumption and investment imports. This situation requires always some degree of
capital controls. In many countries, beside the official exchange rate, the black market
offers foreign currency at another, usually much higher rate.

2
3

http://www.economicswebinstitute.org/glossary/exchrate.htm
http://www.economicswebinstitute.org/glossary/exchrate.htm
7

BI Rate4
The BI Rate is the policy rate reflecting the monetary policy stance adopted by
Bank Indonesia and announced to the public. The BI Rate is announced by the Board of
Governors of Bank Indonesia in each monthly Board of Governors Meeting. It is
implemented in the Bank Indonesia monetary operations conducted by means of liquidity
management on the money market to achieve the monetary policy operational target. The
monetary policy operational target is reflected in movement in the Interbank Overnight
(O/N) Rate. It is then expected that bank deposit rates will track the movement in
interbank rates, with bank lending rates following suit.
While other factors in the economy are also taken into account, Bank Indonesia
will normally raise the BI Rate if future inflation is forecasted ahead of the established
inflation target. Conversely, Bank Indonesia will lower the BI Rate if future inflation is
predicted below the inflation target.The interbank money market is the activity of lending
and borrowing money between one bank and another bank. An interbank rate represents
the price formed in a deal between parties lending and borrowing funds. Activity on the
interbank is conducted over the counter (OTC) through deals between borrowers and
holders of funds arranged without passing through an exchange floor. Interbank tenors
range from one working day (overnight) to one year.
If movement in the overnight interbank rate does not vary far from the anchor (the
BI Rate), Bank Indonesia will work consistently to safeguard and fulfil the liquidity needs
of the banking system while maintaining the equilibrium for formation of fair, stable
interest rates. The liquidity needs of the banking system are estimated by taking into
account autonomous factors such as government operations, maturity of OMO
instruments and standing facilities and changes in currency outside banks. These factors
can have an expansionary or contractionary impact on money market liquidity.

c) Export and Import

Based on international trade study that has been conducted by ING, a global
financial institution of Dutch, in 2012; Indonesia approximately has an equal world
ranking on International Trade Transaction in 2011, positioned at number 26th for export
and at 28th for import. Moreover, it is predicted that the demand of those transaction
continuously will increase over the next few years in the future. Indonesia is still
4

http://www.bi.go.id/en/moneter/bi-rate/penjelasan/Contents/Default.aspx
8

considered as an attractive investment destination for foreign country with abundant of

financial benefit, such as low-labor cost and it marine strategic position. Below the
authors provide a figure to enhance our comprehension towards the issue (Figure 2.2).
Figure 2. 2 Indonesia International Trade Progress and its Ranking Position

Source: ING study

From Figure 2.2 we can analyze that the trade rate was drop significantly almost
20 ranks from 1995 until 2011. However, the export performances showed the position
remain stagnant for the last 20 years. It gives us evidence that the government could
reduce the import frequencies because the availability of local products is sufficiently
supplied national market demand. Moreover, technology advancement helps small
business owners and executives who desires on going global. Competent and professional
societies also determine regarding how well the government could establish and maintain
its quality of life preparing the readiness before international expansion start entering the
country.
According to World Bank data from 2000 until 2013, Indonesia has been
experienced a significant reduced on agricultural procurement whereas the exchange rate
of export activities are fluctuated. Moreover, Table 2.1 Export-Import rate in Agricultural
Sector (2000 - 2013) shows a comparison between two international transactions from
agricultural sub-sector industry in Indonesia.

Table 2.1Export-Import rate in Agricultural Sector (2000 - 2013).

YEAR
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

IMPORT
% OF MERCHANDISE IMPORT
7.18
7.47
5.80
5.31
4.55
3.45
3.41
3.51
3.04
2.80
3.06
3.19
2.62
2.72

YEAR
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

EXPORT
% OF MERCHANDISE EXPORT
3.61
3.60
4.33
4.96
4.98
5.05
6.41
6.25
6.43
4.53
6.54
7.52
5.94
5.80

Source: World Bank

Indonesia export actions are divided into two sectors, non-oil and oil. There are 10
industry categories with the biggest export value in 2011 that will be presented on Figure
2.3. Moreover, two agricultural sectors, which are rubber and palm oil, play an important
role in the economic development of any region within the state. It proves that plantation
or agricultural industry has many potential opportunities to grow with promising profit
offered in the future as a sustainable business sector.
Figure 2.3. Indonesia Top Ten Exporting Industries in 2011

Source: kemenperin.go.id

10

d) Exchange Rate and Export-import

Since 1970s, G.Edward Schuh had been initiated on analyzing the impact of
exchange rate on agricultural trade in United States. Kemal and Kadir (2005) stated that
one of macroeconomics sector, exchange rate policy, continuously developing due to the
government support for local companies to enlarge its market scope by penetrating
international market which possesses unlimited accesses. Moreover, three researchers
(Montiel 1997, Benaroya and Didier Jancy 1999) previously have been argued that
exchange rate of Asian economies deliberately underrated with the intention on reducing
export competition among business people. Depreciation incident generates two benefits
which are lowered the currency price of exports and permitted the companies to increase
its product quantities to attain more profit (Fang, 2007).
Several researchers have been discussed how exchange rate instability could
induced global transaction because of numerous economic factors. The result differently
dispersed depends on the subject of the research studies. Ramli and Podivinsky (2011)
examined the impact of exchange rate volatility on export transaction among ASEAN
countries (Malaysia, Singapore, Philippines, Indonesia, and Thailand). They utilized two
analysis models, co-integration analysis and error correction model, to attain an accurate
both long-run and short-run results between the variables. Moreover, they were also
applied no-variation unit root test that was suggested by Dickey and Fuller. The range of
data gave a measure of the spread of data from 1990 to 2010. Generally, the result
showed that at least almost all of the selected sample countries generated a substantial
impact on exports, while, Indonesia created a different result which was a negative
impact. Moreover, the other researcher analysis related to the issue will be provided on
Table 2.2 Empirical Studies about the Exchange Rate Impacts on Exports Transaction.

11

Table 2.2. Empirical Studies about the Exchange Rate Impacts on Exports Transaction.
Researcher
Doglanlar

Years
2002

Rahmatszar

2002

Countries Subject
Turkey, Korea, Malaysia,
Indonesia, Pakistan
Thailand

BahmaniOskooe
Poon

2002

Iran

2005

Tenreyro

2007

Indonesia, Japan, South

Korea, Singapore,
Thailand
87 countries
Source: Hall, et al (2010)

Result
Generates a significant
negative impact
Generates a significant
negative impact
Generates a significant
negative impact
Generates a significant
negative impact, except
Thailand
Exchange rate volatility
doesnt have a significant
impact on exports

Therefore, the authors strive to analyze the influence of exchange rate on the
quantities of export product specifically agricultural commodities. The chosen data are
derived from the Indonesia Central Statistical Bureau calculated monthly using 5 years
period from 2010 to 2014. Simple linear regression method is utilized to examine the
relationship between independent variable and dependent variable. The independent data
that we are chase is the total export from agricultural industry, whilst, the independent
variable is the exchange rate. The linear regression equation is written as:
Y =

b. X

Explanation:

= Total Export (US$ billion)

= Constanta

= Exchange Rate (IDR)

Furthermore, writers utilize statistical computer software program, SPSS, to

examine the equation and the hypothesis analysis is presented in Table 2.4. The Result of
Coefficient Correlation. To attain a precise and an accurate data, we determine that the
confident level is at 95 per cent. From the table we conclude that exchange rate has
positive impact to export trade transaction.

12

Table 2.4. The Result of Coefficient Correlation

Source: Primary data, processed 2015

The R-Square describe that variables that involved in the equation are able to
explain the influence of exchange rate on the total of exports transaction by 14.2 per cent.
The other variables outside the model could affect exports by 85.8 per cent. Moreover on
Table 2.5, we provide the result of regression analysis and its significance level.
Table 2.5. Regression Analysis

Source: Primary data, processed 2015

The result shows that the equation can be formulated as:

Y =

242.852

0.21 X

Next, 4 step test procedures are conducted to ensure the validity of the equation
from table 4 by using t test analysis.
1) Hypothesis
a. H0:1 = 0 there is no significant impact of exchange rate on exports
b. H0:1 0 there is a significant impact of exchange rate on exports
2) Formulate Analysis Plan
a. Confidence level = 95 %, = 5%,
b. The degree of freedom (k) = n- k- 1 k = 60 1- 1 = 58; where n is total
variables and k is total of total independent variable in the equation.
c. Find the t table using Microsoft Excel for t (0.05, 58) = 2.002
13

3) Analyze Sample Data

a. t analysis > t table 3.076 > 2.002 H0 rejected and Ha approved
4) Interpret results
Because H0 is rejected thus, there is a significant impact of exchange rate on
export.
The finding shows that the exchange rate positively affects to the export activities
of agricultural products. It is supported by evidence that the intensity of shipping products
out of the country continuously increased because of its outstanding market demands.

3. THREATS
General economic and social policies intended to influence overall economic
growth, trade, price levels, employment, investment and population, attained chiefly by
utilizing monetary and fiscal instruments. Deliberately altering exchange rates to
influence the macro-economic environment may be regarded as a type of monetary
policy. Changes in exchanges rates initially work there way into an economy via their
effect on prices.
Higher Price
Exchange rate is the percentage of goods that are priced in a foreign currency
compared with the percentage priced in U.S. dollars. For goods priced in a foreign
currency, the price has to be converted into U.S. dollar terms before the good is used in
the calculation of indexes. Because of this process, there is an immediate effect when
there is a currency movement.. As the value of the IDR falls, the amount Indonesian
companies that price their exports in U.S. dollars receive for their items increases in IDR
terms; thus firms may lower the price of their exports to the United States in order to
capture more market share.
High Unemployment Rate
Employment levels have an immediate impact on economic growth. As
unemployment increases, consumer spending falls because jobless workers have less
money to spend on non-essentials. Those still employed worry for the future and also tend
to reduce spending and save more of their income. An increase in unemployment signals
a slowdown in the economy and possible devaluation of a country's currency because of
declining confidence and lower demand. If demand continues to decline, the currency
supply builds and further exchange rate depreciation is likely.
14

Decreasing Gross Domestic Product

When the exchange rate are fluctuate, it might leads into external and domestic
risks along with consistency of strengtening the mixed monetery policies and
macroprudential. It could affected the number of aggregate demand that might decreased
during the decreasing number of exchange rates. While the inflation influenced from the
exchange rate it comes out on the high-prices that might occured in the market. When the
price is high and the demand will be slow down, means it will also impacted to the
national economic performance that reflected into the Gross Domestic Product slow
growth.
Inflation Rate
To stimulate exports, rates would be held down, and to reduce inflationary
pressure rates would be kept up. Most countries target economic growth at a rate of about
2% per year. With higher growth comes higher inflation, and in this situation central
banks typically raise interest rates to increase the cost of borrowing in an attempt to slow
spending within the economy.A fall in the exchange rate is inflationary for a second
reason - the cost of imported raw materials adds to production costs and creates cost-push
inflation. Changes in exchange rates will have a powerful effect on AD. For example,
lowering exchange rates, called devaluation.

4. OPPORTUNITIES
To meet the needs of a growing and emerging market nation, an economy must
expand. The rapid growth of the national overall performance could also considered
indicated of growing situated that leads into a sustain positive growth and could leads into
favorable investment center. From thus, the opportunities from the exchange rate and the
export and import volume could leads into:
Structural Reformation
High concerned from government maintaining the exchange rate and inflation rate
could stimulate the structural reformation. Stability on macroeconomic enhancement
becomes one of entrance gate to continue the structural reformation that including fixing
the transaction balance and accelerating through any infrastructure protect that needed in.
Government Intervene
Government could play a role that can affect the balance of the exchange rate in
various ways, including (a) Attempt to avoid obstacles to foreign exchange (b) Attempt to
15

avoid international trade barriers (c) Intervened in the currency market is by selling and
buying currencies. The reason of government to intervene in the currency market to
facilitate the change of the exchange rate of the domestic currency in question and to
create the conditions in the domestic exchange rate within the limits specified. The way
that can be taken by government in order to control the exchange rate, one of them is by
strengthening the regional cooperation, such Asean Community. Indonesia has a big
advantages, icluding:
Number of population around 600 million
The ninth-largest economy after the US, China, Japan, Germany, France, Brazil,
England, Italy
Single market and production base Asean
Free movement of goods, services, investment.
Trough regional cooperation, it will enable the Government to control the
exchange rate due to the government could intervene to keep the value of the currency
does not change too much and remain in a particular direction. The government can
control the exchange rate fluctuations, exchange rate system is gradually being held by
the government or fluctuate in a very narrow range. If the exchange rate change is too
large, then the government will intervene to maintain it within the desired limits.
Balanced Payments
In addition, assuming the demand for imports and exports are price sensitive
(price elastic), devaluation will lead to an improvement in the balance of payments although this can also lead to inflation and also the fact that exchange rates can be
manipulated so that they deviate from their natural equilibrium rate and stabilize the
condition.
Stenghtened IDR
Short-term fluctuations of the exchange rate occur, companies are more likely to
pass through only a small percentage of the currency change into the prices of their goods
in order to preserve market share. However, if the shift in the exchange rate is thought to
be of a more permanent duration, a higher pass-through rate is likely. Thus it is possible
that as the IDR is very weak it is caused by the combination of Indonesias currentaccount deficit, negative sentiment regarding the possible tapering of US quantitative
easing, speculative attacks and expected depreciation.

16

5. BUSINESS IMPLICATION
Any kind of business especially business in agricultural sector and doing the
business globally (do export and import) will significantly affected by the fluctuation of
exchange rate. Indonesia is a country with high GDP percentage comes from agricultural
sector, thus industry in upstream and downstream of agricultural sector as well as industry
to create value added for agricultural commodities will be a good opportunity for a
businessmen to have a global business in this sector. But, there are some
recommendations for businessmen to deal with the exchange rate fluctuation and to
survive from it.
1) A business in agricultural sector which do the business globally can protect their
business from the risks of the fluctuation of exchange rate using the currency
management service offered by high-street bank.
2) Businessmen can do hedging to anticipate lower future market price of their products.
This strategy also largely done by commercial market to secure their commodities
price. For example, a commercial farmer predicted that the yield of corn he planted
next season would be in a satisfying quality and quantity. But, the farmer worries
about the price of the commodity in the harvest period. So he decided to use hedging
technique to secure the price. He makes a contract with the importing country for
future transaction, using the price of todays market price. Thus, he would not
experience loss of the price in harvest period is lower than the price he expected. But
he also has to let go the opportunities of the higher price that could also happen in the
future.
3) There are also several ways that can be done by a company internally that trade
internationally to lower the risks caused by fluctuating exchange rate. According to
Dean (2013) some ways to protect the business that can be done bu companies are:
a. Setting plan ahead: companies can manage your foreign exchange risk by setting a
budget for the year which factors in the number and likely timing of transactions
along with a realistic assumption of current and future rates. Foreign exchange
specialists analyze past trends and can provide advice on this.
b. Assessing companys risk appetite: How much risk companies prepared to take is
likely to depend on the companys objectives as foreign exchange exposure has an
impact on its bottom line and the higher the volume and value of transactions, the
higher the associated risk.
17

c. Reviewing companys foreign exchange policy: The company needs to be flexible

enough to adapt your policy in line with the changing nature of the markets, so
review on a regular basis.
d. Carry out a research: Its worth utilizing the expertise of experienced market
traders for guidance.
e. Building a clear strategy.
f. Get the timing right: Being well informed enables a company to take advantage of
the positive movements and to guard against the negative shifts.
g. Considering online payments: Managing international invoices and processing
payments can be a time drain; online systems can automatically check bank details
and store for future use.
h. Managing the business relationships: Suppliers appreciate being informed when
payments are authorized. Company can use payment tracking services that
automatically email when a payment has been sent.
i.

Communication and monitoring: Some reporting tools enable a company to track

deals, payments and the progress against the strategy.

18

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