TransferMate are warning that Irish SMEs are leaving themselves exposed to fluctuations in Sterling as the currency plummets in value. The currency experts say that they forecast Sterling to drop to 90 pence by Dec 2016, but are advising Irish business who trade with the UK to move now to hedge against Sterling, in order to protect their already significantly impacted profit margin.
Barry Dowling, Co-Founder of TransferMate Global Payments explained,
“Only 12 months ago your Euro would have bought you 70 pence, however post Brexit and the subsequent 21% drop in the value of the pound, it is now heading for 90 pence. Irish businesses importing from the UK are likely to welcome a sharp drop in the price of imports from the UK. Irish exporters, on the other hand are left with having to seriously consider ‘hedging strategies’ to guard against a likely further decline in the pound.
In order to figure out what to do next, it’s very important to consider where sterling is headed and what exactly that means for your margins. With many businesses working of a profit margin of 10% – 15%, a 20% plus fall in price could push many into the red threatening their variability and many jobs.
Reports from the UK earlier this year suggested that 80% of larger corporates have hedged against sterling exposure however only 22% of UK SMEs have – however, we would guestimate that less than half that number of Irish business have taken steps to protect themselves”.
The short-term future of the Pound?
TransferMate say that markets are currently pricing sterling to drop to an expected 90 pence and possibly even parity by the end of 2016, a potential further decline of close to 20% is also being considered.
In recent weeks, Bank of England board member Ian McCafferty suggested that further interest rate reductions and additional QE purchases may be required if the UK economy shows further signs of a slowdown.
“One of the first things a business should do if they are sourcing from the UK is to contact suppliers and lock in pricing. With sterling weakening, more and more UK suppliers will look to pass on price increases to Irish buyers as the cost of their own source of materials increase”.
A Weak Pound & Irish Business…
The currency experts say that at this stage all businesses adversely affected by sterling weakness should be seriously investigating how to protect themselves against further currency fluctuation.
Barry went on to say,
“You can understand how an Irish business wouldn’t be so concerned if they were an importer paying sterling in the face of a weaker pound. However, any business being paid in sterling would be strongly advised to hedge against at least a portion of their exposure.
In our experience, businesses tend to have an accepted exchange rate in mind and would build forecasts on their business based to some degree on that assumed exchange rate. Businesses are quick to bag a bargain i.e. as soon as they feel that exchange rates are ‘as good as they’re going to get’ they make steps to lock in exchange rates and buy forward. Yet, when exchange rates are going against a business, which is the case for exporters and sterling, many business often delay protecting themselves hoping that exchange rates will simply recover”.
What options are available?
TransferMate are advising Irish businesses who trade with the UK to consider 3 options available to them to protect their business from currency fluctuations:
1. Flexible Spot Facility
“Similar to a forward contract, a Flexible Spot simply allows you to guarantee today’s exchange rates for future currency exchange for a period of typically 6-12 months. Businesses may take the view that it is best to lock in today’s exchange rates for a period i.e. up to 12 months. This way you guard against currency fluctuation affecting your margins and know today what sterling is going to cost to convert in advance”.
Irish food distributor supplies Tesco and Sainsbury in the UK with product and invoices amounting to approximately £150,000 every month. Over the course of the next 6 months, that business will receive £900,000 or close to €1,058,823 at today’s exchange rates if fixed. Should sterling move to parity, that £900,000 will yield over €150,000 less.
2. 50/50 Approach
The FX experts say that some businesses will decide that protecting against the full exposure has the same risks as not protecting at all. In this case, an approach might be taken whereby the businesses calculates their total exposure and protects against half of that exposure. In this instance above, this business may decide to protect against £450,000 of exposure.
“The benefit here is that the approach will be neither right nor wrong as you simply balanced your exposure”.
3. Live Orders
“A further demonstration, an Irish business needs to pay £50,000. The exchange rate today is .86 and they feel that it may hit .87 this week, so they request an order for .87 with our team. This order is now placed on the market and will be filled as soon as .87 hits. If sterling strengthens they can simply cancel the live order in the meantime. If .87 lands, the business saves close to €600”.
“Whatever step you take the message is clear – you need to act now. Those Irish businesses who fail to move in advance of further drops in the Pound are likely to suffer from their inaction further down the line”.