Expatriates are at risk when their host country's economy turns volatile. But they don’t have to suffer huge financial losses if HR takes a pro-active approach, as Christine Scholtes reports.

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It can be risky to send expatriates to economically unstable countries. The local currency's value could plunge due to devaluation or rampant inflation. In some extreme cases, the local banks could close. How should you pay expats in such locations and how often should you review their salaries?

The first thing to consider is how you pay your expatriates: in local currency, the home currency or a third, hard currency?

Expatriates living in a country with a turbulent economy who are paid in dollars or euros, for example, will suddenly become better off since their money buys them more local currency. That is because the devaluation of the local currency is usually much greater than inflation.

“It is not so hard for expatriates as they are usually paid in hard currency. The hardship comes when they are delivered with local currency,” explains Tom Brazier, managing director-Europe for US-based Air-Inc, which specialises in expatriate compensation systems.

Another question to consider: Do these expatriates get a salary split between home and the host country?

In the case of a salary that is not split — the expatriate receives his money either entirely in the local currency or entirely in home currency — the effects of devaluation and the crisis in general will be harder.

According to Scott Cullen, a consultant with ECA International, "It is important to consider their salary in terms of home and host elements," with the host element being the part that is used to actually live in the host country.

Taking the example of Argentina, Cullen explains.

“If paid entirely in pesos, the immediate effect will be that they [the expatriates] no longer have enough to convert to home currency to cover their home commitments. This can be remedied by adjusting salary to take account of the new exchange rate.

"However, if pesos continue to be paid, any further depreciation will mean further salary adjustments. Increases in inflation may also mean the need for further salary increases to cover the host element of salary.”

But in the case of a salary paid entirely in the home or a third hard currency, the expatriate will feel much better off, as the same dollar or euro or pound will buy more pesos, for example.

Neil Krupp, national practice leader for the International HR Consulting group within the International Assignment Services (IAS) practice at Deloitte & Touche, has a word of caution regarding frequent updates on cost of living.

“Prices frequently fluctuate up and down in high inflation/soft currency locations and over time these 'spikes' tend to be less pronounced. It is for this reason that most consultants issue updates on a quarterly basis rather than more frequently," says Krupp.

“Subjecting assignees to arbitrary, frequent adjustments for only local currency and without the benefit of actual price data provided by a consultant will generally penalise expatriates and lower their allowances since only one side of the full equation has been considered,” he adds.

To further insure themselves from currency fluctuations, expatriates should not be in a hurry to convert stable currency to local currency.

“When companies pay in a stable currency, they should advise expatriates not to convert their money to local currency until they are ready to spend it,” says Denise Oemig, director of international services at Runzheimer, which provides compensation solutions.

But what if the banks close?

Oemig's advice: “It is recommended that expatriates in high-inflation locations not keep their money in a local bank. It is best to have the company deposit funds in a home country bank and let the expatriate draw needed funds via wire transfers.”

The issue of savings in a local bank is also crucial, as expatriates will end up with devalued savings. Therefore expatriates should be strongly discouraged from saving money in the host country.

A few general recommendations can be made:

• Pay a split salary that allows expatriates to face home commitments with a host part that can be updated depending on the situation.
• Agree on a guaranteed exchange change before sending anyone on assignment.
• Adjust the expatriate’s host salary as quickly as possible when the crisis hits.
• Monitor the situation closely to be ready to act quickly if necessary.
• Pay salaries in a third country or in the home country, if possible.

Keeping frequent contacts with your expats will also show them that you are watching the situation and they can rely on your support.

August 2002

Christine Scholtes is a freelance journalist based in Brussels.