UK Smes Fearful of Currency Risk

•  Vast majority foresee continued FX volatility
•  Nearly a third expect to reduce international commerce in 2014

A new report by AFEX, one of the world’s largest non-bank providers of global payment and risk management solutions, has revealed high levels of concern among UK small- and medium-sized enterprises (SMEs), regarding the effects of currency volatility on their international trade.

The inaugural Currency Risk Outlook survey questioned over 450 SMEs globally on their attitude to foreign exchange risk, methods of managing it, and their appetite for global trade generally.

Currency volatility and appetite for trade

The Pound has experienced significant volatility since 2008 and 59% of UK-based SMEs expect this to continue throughout 2014, with a further 25% expecting increased volatility. Only 16% expected FX rates to stabilize during 2014. Since the summer of 2012, sterling has fluctuated as much as 12% against the euro. It has appreciated by 13.5% against the dollar in the last six months alone, and by a similar margin against the Chinese Yuan in that period.

A third of businesses (32%) see currency volatility as their primary challenge in doing business overseas and roughly the same number (28%) say they will increase measures to hedge against adverse currency movements in 2014.

The report suggests that currency volatility may be limiting appetite for international trade amongst UK SMEs. Nearly a third of those questioned (29%) expect to see their levels of overseas business drop through 2014. Similar sized businesses in other markets, such as the United States and Australia are more bullish.  Nearly half (45%) of Australian respondents foresee increased international business, as do 39% of those in the US. Only 26% of UK firms were similarly optimistic.

“Opportunities for UK businesses to trade overseas are growing all the time but the risks and challenges are increasingly obvious,” said AFEX Chief Executive Officer, Jan Vlietstra. “We’ve experienced a huge increase in demand for foreign currency payment services as well as currency risk hedging products since 2008 and see that as a result of more businesses looking overseas, who are recognising the risks in a more unpredictable world.

“That many UK SMEs are looking to lessen their international exposure is a concern. If businesses are doing so in light of heightened risk we’d encourage them to consider ways of pro-actively managing that risk, retaining the benefits of international trade.”

Target regions

Amongst those UK businesses that are looking to increase international trade, Western Europe is most popular. 45% of firms looking to expand their overseas trade will look to the region in 2014. The United States is also a sought-after trading partner with 25% of internationally bullish SMEs looking for new opportunities there. 16% will seek out relationships with Chinese trading partners but only 5% see likely opportunities in African markets.

Managing FX risk

In considering those overseas ambitions, UK SMEs, more than those in other countries, are actively looking to manage their FX risk. 60% of those questioned actively use financial products to mitigate risks, with over half of those questioned (52%) saying they will use Forward Contracts in 2014. These contracts lock in a price for a currency exchange up to 12 months in advance, thereby providing certainty and protecting a business’s bottom line.

Other approaches, such as currency swaps, Options and natural hedging remain relatively unused by SMEs. Currency swaps can vary in structure but will typically involve the exchange between two institutions of an agreed amount in a given currency on a fixed date. Options offer the opportunity but not the obligation to buy a currency at a given rate and natural hedging involves matching liabilities with assets in foreign markets such that any currency movement has less of an impact. Most popular of those approaches was natural hedging with 6% of UK respondents looking to employ it in 2014.

“Large multinationals have been managing currency risk for many years but we’re now seeing smaller firms far better educated as to how they can protect profits made through international trade,” said AFEX Global Head of Strategic Management, Guido Schulz.

“The tools and platforms now exist so that even firms without sophisticated financial teams can easily understand their exposure and manage risk accordingly.”