Foreign Currency Trade Loan – Hedging Foreign Exchange Risks

Foreign Currency Trade Loan

The exchange rate of the Macedonian Denar against the major hard currencies of the world has remained stable in the last few years. Because of the IMF restrictions, the local Narodna (Central) Bank does not print money and there are no physical Denars in the economy and in the local banks.

Thus, even if people want to buy Foreign Exchange in the black market, or directly from the banks – they do not have the Denars to do it with.

The total amount of Denars (M1, in professional financing lingo) in the economy is around 200,000,000 USD, according to official figures. This translates into 100 USD per capita. Thus, even if each and every citizen of Macedonia were to decide to convert ALL their Denars to Deutsch Marks – they would still be able to buy only 150 DM each, on average. These tiny amounts are not sufficient to raise the rate at which DMs are exchanged for Denars (=the price of DMs in Denars). Foreign Currency Trade Loan

But will this situation last forever?

According to economic theory scarcity raises the price of the scarce commodity. If Denars are rare – their price will remain high in DM terms, i.e. they will not be devalued against the stronger currency. The longer the Central Bank does not print Denars – the longer the exchange rate will be preserved.

But a strong currency (the Denar, in this case) is not always a positive thing.

The Denar is not strong because Macedonia is rich. The country is in a problematic economic situation. The banking system is perilous and unstable. The reserves of foreign exchange are minimal – less than 30 million USD. Foreign Currency Trade Loan

The currency is stable because of externally imposed constraints and an artificial manipulation of the money supply.

Moreover, a strong currency makes goods produced in Macedonia relatively expensive in outside, export markets. Thus, it is difficult for Macedonian growers and manufacturers to export. When they sell their goods in Germany, they get DM for them and when they convert these receipts into Denars – they get less then they should have if the Denar reflected the true relative strengths of the two economies: the German one and the Macedonian one.

They pay expenses (e.g.: salaries to their workers, rent, utilities) in Denars. These expenses grow all the time as true inflation grows (as opposed to the official rate of inflation which is suspiciously low) – but they keep getting the same amount of Denars for their produce and products when they convert the DMs which they got for them. Foreign Currency Trade Loan