Tuesday 12 December 2017

Stepping outside the eurozone is a currency minefield for exporters

Companies looking further afield to boost sales are not helped by rate fluctuations and attitude of banks, writes Donal O'Donovan

THE stagnant domestic economy means Irish companies are looking to exports as the only option for growth. But stepping outside the eurozone brings a whole new set of challenges for managers.

It's never quite as simple as converting your prices in new currencies and sending out sales teams.

Even after perfecting the product and researching new markets, exporters face volatile exchange rates, access to trade finance and, for the new band of services exporters, getting access to performance bonds, which could all scupper hopes of export success.

Johnny Woods is typical of the new breed of small- and medium-sized enterprise (SME) managers. The ceo of Irish-owned label printer Multiprint is based in Dublin, but does almost no business in the home market.

Multiprint prints labels for drinks producers. Founded in 1968, export sales gradually increased as a share of output over the company's early decades. By the 1990s, half of sales were abroad and in the past decade sales abroad came to dominate the business.

"We are an exporter; 85pc of output goes into the UK market. We get paid in sterling but our costs are in euro. You can get caught badly because of that, even with hedging," he says.

"The worst year I've seen was 2008. The euro was worth 70p at the start of the year but ended up close to parity. It was just awful," he said.

That meant Woods was forced to change money from UK sales back into euro at hugely unfavourable rates to cover end-of-year costs, as it happened just days before sterling recovered.

Exporters like Woods can't pass potential currency movements on to customers and that means trying to manage downside risk through products like forward hedging.

A forward currency hedge is a contract to buy euro at a fixed price down the line.

It limits the potential for losses, but at the same time it means losing out if the market happens to swing in your favour in the meantime.

To get around that, many exporters use a mix of what's called "spot" and hedge. That means locking in an exchange rate in advance on, for example, half the expected value of a deal and changing the balance of the deal at whatever rate is offered at the time.

For Wood's the 2008 experience prompted a change of tack. Today Multiprint, like an increasing number of other exporters, has a pool of foreign exchange banks it goes to when it wants to price a trade, using competition to manage down the costs.

It's a trend that's given South African bank Investec an entry into the Irish market, where they actively seek out exporters as new clients.

As an African bank, Investec has a background in some of the more exotic currencies, but Irish head of foreign exchange Justin Doyle says the bulk of activity is in dollars and sterling.

"Sterling is the currency in the main trading partner, and for Irish companies that have moved into more exotic markets it's actually dollars that are paid for goods and services," he says.

In countries such as China and Indonesia, for example, the currencies are tightly regulated so the Irish firm's customer has to pay with something else -- it means that even if the US is a small market for Irish SMEs the euro/dollar rate is crucial.

Unlike traditional exports where one party at least gets to use their home currency it means both sides are dealing with volatile markets.

His advice to corporates is to budget for worst-case scenarios when it comes to foreign exchange movements, even when there is a consensus that moves could be positive.

"Just because the market expects something, you can't rely on it," he says.

In addition to the standard hedging he says clients are now using more complex hedging options.

Rather than a straight hedge, the client can lock in an exchange price with an option allowing them not to convert 50pc of the hedged amount if the market has moved the other way.

"You'll get a slightly worse rate but you have the protection of the hedge and still have the opportunity to take advantage if the market moves the other way," he says.

Doyle says CEOs with eyes on the export markets need to take advice and must constantly monitor the currency markets.

"If your core business is exporting out of the euro area, a 20pc currency move has massive implications," he points out.

Dublin Aerospace, an Irish start-up founded on the ruins of SRTechnics back in 2009, has other ways of navigating the foreign exchange markets.

Its customers are international airlines and aeroplane leasers, dealing exclusively in dollars.

"Our labour and overhead costs are in euro, but when we buy parts, for example, that's also in dollars. It means we never need to convert all of our dollars and are never a forced seller of currencies," says finance director Padraig McHale.

John Whelan, of the Irish Exporters Association, says Irish companies face a whole range of difficulties translating overseas sales leads into profits.

"We'd recommend you hedge as far forward as you can but that creates its own difficulties because of some banks' attitudes," he says.

According to Whelan, banks have started to treat forward currency hedges as part of a company's overdraft facilities.

He says the effect is that prudent risk management ends up eating into the capital available for business expansion.

"Banks just don't understand services exports," he says.

The attitude from the banks is especially damaging, he says, because periods of sales growth are precisely the time when exporters need maximum access to credit.

He also notes that while exports are on the rise, last year's 9pc increase in overseas sales is less than the actual growth in global trade over the same period.

He lists exports of construction and engineering services, architecture and software as particularly badly served by Irish banks' reluctance to issue "performance bonds".

Typically worth 10pc of the value of a contract, the performance bond is a form of deposit put down as a guarantee to service buyers that they won't be left high and dry once a contract is complete.

It's generally backed by a bond issued by a bank but, as with currency hedge, Whelan says banks here want the value of the bond to be included within the exporters credit limit, or else backed by a charge over assets or cash.

Enterprise Ireland's (EI) Eamon May says that attitude from banks is a real concern.

"The problem (with the banks seeking assets backing) is it ties up capital for the duration of a project at a time when capital is scarce," he says. He says EI is tackling the banks on the issue and will sit down with lenders on behalf of exporters if needed.

He's also concerned that in spite of the importance of facilitating exports, Ireland still has a way to go before conditions really support innovative exporters such as the Irish software firms building IT systems for African governments.

"We need an eco system and its not quite there yet," says May.

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