Exchange rate movements - big movements up and down
The strengthening of the Japanese yen due largely to the unravelling of the carry trade means Tokyo has reclaimed its position as Asia's most expensive city for visitors. Goods and services there were 43% more expensive than in Singapore in September 2007, and this gap has since widened to 68%. While inflation has tripled since last year, increases in cost of living over the last two months for foreigners coming to Japan have been primarily a result of exchange rate movements.
The recent rebound of the US dollar against other major currencies has seen locations in the US, and in countries, such as Hong Kong, where currencies are tied to the greenback, all become more expensive for visitors.
“Earlier this year we reported falling cost of living in Hong Kong as the currency depreciated. Now we see this trend is reversed. In the last two months, goods and services in Hong Kong have swung from being 10% cheaper than in London, to being almost 10% more expensive,” explains Lee Quane, general manager - Asia, at ECA International.
“Global economic events mean that throughout the world exchange rates are fluctuating and, in many cases, dramatically,” Quane continues. “Depending on their salary calculation methodology, many companies will have to pay particularly close attention to these movements in order to apply appropriate cost of living indices to the remuneration packages of their international assignees.”
Living costs for expatriates are affected by inflation, availability of goods and exchange rates, all of which can have a significant impact on expatriate remuneration packages. To help multinational companies calculate assignment salaries, ECA carries out a Cost of Living Survey twice a year comparing a basket of 125 consumer goods and services commonly purchased by expatriates in over 370 locations worldwide.
Locations in China have also become more expensive. Beijing, the most expensive Chinese city for expatriates, is now more costly than Hong Kong for the first time ever. Cost of living in Hong Kong, Singapore and Taipei has also increased for visitors over the course of the past year due to a combination of inflation and currency movements.
“Beijing's movement has been driven by both the strength of the Renminbi and persistent inflation, which we have also seen in other Chinese locations,” adds Quane. “While the largest cause of changes in cost of living worldwide in recent months has been exchange rates, inflationary pressures have continued to contribute to the cost of living rises we have witnessed in many locations.”
Korean locations have seen the largest relative decrease in cost of living for visitors and this is due to the depreciation of the Korean won, which has fallen by more than 48% between September 2007 and November 2008 against the US dollar. Goods and services in Seoul were 5% more expensive than Tokyo in September 2007, whereas they are now 40% cheaper.
“This example of currency fluctuation underlines the importance for multinational organisations of managing the salaries of their international assignees very carefully,” adds Quane. “Our research shows that the majority of companies pay their expatriate staff in their home currency whilst on assignment. This means that the staff of a Korean company posted to Japan will have seen their purchasing power reduce drastically over the past two months. Companies which split pay between the employee's home and host countries will be much better equipped to ride out the current currency volatility.”
A weakened rupee has also meant that cost of living for expatriates in Indian locations has fallen to below what it was a year ago. Despite higher inflation, cost of living in Jakarta and Bangkok has also fallen below last year's levels, particularly over the last two months as their currencies weakened sharply against the dollar.
Islamabad is the cheapest location in Asia, with goods and services costing approximately 70% less there than in Japan.
The weakening of sterling as the UK economy has declined means that Central London, like Seoul, is now conspicuously absent from the top ten most expensive cities. Paris, Munich, Amsterdam and Brussels are currently more expensive than the British capital. Equally, locations in the US, including New York and Washington, are more costly than a trip to UK locations.
Moscow is the most expensive European location, replacing Oslo where current international economic conditions, and particularly the fall in oil prices, have resulted in a weakened Norwegian Krone.
The biggest rise in cost of living since September 2007 has been for people heading to Caracas where inflation of over 40% coupled with a redenominated and stronger currency, have made goods and services 28% more expensive there now for expatriates and visitors than in September 2007.
Despite the Australian and New Zealand currencies rallying earlier in the year, falls in commodity prices and the unwinding of the carry trade have contributed to the depreciation of their currencies in recent months. This has made their relative cost of living decline in comparison with last year.
Other movements of particular note have been seen in Brazil, Hungary, Poland and Turkey where currencies have swung from strong to weak in just a few months. A drop in demand for commodities has contributed to the Brazilian real weakening by around 37% since September while huge government debt in Hungary has undermined the previously overpriced florint. Investors pulling out of the more risky emerging markets have been a factor in the recent weakening of the Polish zloty and the Turkish lira.
Africa remains home to the survey's most and least expensive locations. The Angolan capital, Luanda, holds its position as the most expensive location in the world for foreigners. Certain items and brands typically purchased by expatriates can be very expensive in a location such as this where they are not readily available locally. Maseru in Lesotho is the cheapest location in the world for visitors.
ECA's cost of living data compares a basket of 125 consumer goods and services commonly purchased by expatriates in over 370 locations worldwide. The data is used by ECA Member companies to calculate cost of living allowances for expatriates. The survey covers:
