Monday 14 October 2019

Companies eyeing slice of export growth need to manage foreign exchange deals

Barry O'Neill

IN the current economic climate many companies in Ireland will struggle to survive if they just focus on the domestic market.

The success of Irish business in targeting export sales has been one of the positive stories of recent years, with exports topping €92bn last year.

While the size of the potential markets in emerging economies, like China and India, offers huge possibility for growth, it also comes with significant exposure to foreign exchange risks, risks that small and medium sized companies may find challenging to manage.

The best way to manage risk is by matching local costs and revenues as best you can, but when a business is successful it will hopefully have revenues well in excess of costs incurred in local currency and need to use one of three different methods to manage the situation.

The first is simply to change money in the spot market at the prevailing exchange rate. The danger here is that as you wait to receive payment from customers the market can move against you and you will not get the rate you anticipated.

The second and most popular is locking in a forward contract which takes the rate today for delivery in a date in the future. This creates 100pc certainty and allows an SME to lock in their profit, the only downside is that it offers no flexibility.

The third is a structured hedging solution which offers a 100pc hedge against unfavourable currency movements but can be structured to provide flexibility to take advantage of favourable movements.

Forward contracts and structured hedging may sound like complex solutions only available to large-scale PLCs with their own treasury departments.

However that is not the case, and these days SMEs have a wide-range of options outside their traditional banking relationships for competitive and bespoke foreign exchange solutions.

An independent foreign exchange boutique like Clear Currency is able to access best execution for clients from a range of banking partners, and combines this with proactive advice that allows the Finance Director of an SME to get on with their core job of managing the company and growing the business.

About 70pc of our clients deal mainly in sterling, euro and US dollars, but we have seen a significant increase in requirements for emerging market currencies as varied as the Brazilian Real, the Kazakhstani Tenge, and the Haitian Gourde.

A review of three recent examples is a good way of seeing the different ways companies can be helped in managing their exposure.

First is the situation of an Irish meat exporter making significant sales to UK supermarkets and relying on the razor thin profit margins that are common in this sector.

Early this year sterling experienced a dramatic depreciation, weakening by almost 8pc versus the euro.

A company that was slow to react in this rapidly shifting environment could easily find profit on an invoice due to be paid in 90 days entirely wiped out. A proactive foreign exchange adviser like Clear Currency was able to act as the company's independent eyes and ears on the market proactively calling when we saw a move in the exchange rate in their favour, helping them make a more informed decision on how to manage their risk.

For an Irish software company with development costs in China we were able to offer a full suite of settlement services in the local currency – renminbi.

Traditionally Irish banks have not had a strong capability to settle in these emerging market currencies and would instead settle in US Dollars, meaning the company would incur significant additional transaction costs.

Through the panel of global banks we deal with, our clients can now negotiate and settle directly to suppliers in their local currency.

A final example involves a large Irish manufacturing company that had won contracts overseas at foreign exchange rates well inside their budget levels.

Rather than simply locking in this margin with a forward contract, through a bespoke hedging strategy tailored to suit their business, we were able to lock in a rate protecting them and their budget levels whilst allowing them to benefit from further favourable movements.

Obviously no solution is costless, but companies would be surprised at how simple and low cost it is to gain access to seemingly complex solutions.

The main goal is to save companies money by offering sharper rates and help them manage their risk from an independent transparent perspective.

With every opportunity there will invariably be risks that must be managed of which foreign exchange volatility is one.

I firmly believe that with the right advice every Irish company can look to trade overseas with confidence that this is one area of their business they can mitigate risk, and focus on the core objective of accessing new markets and delivering much needed growth.

Barry O'Neill is managing director of Clear Currency, a foreign exchange and treasury management boutique with offices in Dublin and London

Irish Independent

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