Friday, November 25, 2016

Business Planning with a Black Swan Event: Currency Policy Event and Macroeconomic Impact

Executive Summary: How does a global business make country specific plans in the face of black swan currency events? How do you cut through the noise and focus on the macroeconomic impact of a dramatic currency policy move in a BRIC country? Ask fundamental questions after thinking through the factors at play. Some quick Thanksgiving holiday thoughts. For quicker reading, skip the Background section and jump to Factors for key points. 

US economic trends and recent events have captured our attention. In these interesting times, we consider a currency policy black swan event and leverage that for some thoughts that may help you with business planning in these volatile times.

What makes a black swan event? How about making specific currency notes- that make up a significant portion of notes in circulation- legal tender no more, at short notice? India took the dramatic step to 'demonetize' the existing 500 and 1000 rupee notes.

As additional information, a blog post, by Larry Summers and Natasha Sarin, is here:

Now, the impact of this move needs to be assessed in terms of several factors:
- Existing currency policy and economic context,
- Consumer behavior and impact on share of wallet of goods and services for the near and long term,
- Different strata of economic activity that make up the complex country, starting with digital economy versus lightly banked economy versus the cash economy versus the barter economy and their economic interactions, not just the taxed versus the un-taxed parallel economy,
- Industry sectors, ranked by their dependence on the cash economy (do consumer discretionaries, cellphone and construction industries take a hit? For how long?),
- Cash management approaches across industries,
- Legal framework to deal with defaults, bankruptcies and working capital challenges,
- Asset classes and impact to specific stores of value like the dollar and gold and potential 'microbubbles',
- Banking and financials sector structure and fractional reserve systems trends,
- Trade,
- Global interconnections with other economies not explicitly identified from sectoral trade,
- Currency exchange rates and the assets and factors backing and propping up a currency,
- Monetary policy and implications of currency that ceases to exist and is no longer
- Central banking tools and accounting for currency events,
- Communication and planning for the event, including managing business and citizen concerns,
- Social change implications of the event and associated hand holding of citizens,
- Central bank, government, large banking and financial institution and industry co-ordination over operational aspects, processes and execution.

Key Questions
There are a wide variety of views on this complex topic that may or may not cover all the factors outlined above. Regardless of the diversity of thought and ideas, here are three questions that may help start the conversation on potential outcomes:
1. What is the risk, in %age terms, of the Indian economy (or large parts of the economy) going into deflation after the 'demonetization' move?
2. What is the risk, in %age terms, of the Indian economy going into stagflation?
3. What is the risk, in %age terms, of the Indian economy suffering some sort of a Japanese Lost Decade?

These questions are a starter list to help us cut through the noise and identify potential, pragmatic outcomes of the dramatic currency policy decision. This may also form your framework for tweaking your business planning for 2017 for a BRIC economy.

What do you think?

Note: This post can also be found on Medium, here: