UK SMEs fear currency risk

Posted on 25 Mar 2014 by The Manufacturer

Research has revealed that volatility in the value of the pound is hobbling export success for UK SMEs

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 SMEs regarding the effects of currency volatility on international trade.

450 SMEs were surveyed globally for this inaugural Currency Risk Outlook report.

Participants were questioned on their attitude to foreign exchange risk, methods of managing it, and their appetite for global trade.

Fifty nine per cent of respondents said they expected recent volatility in the value of the pound to continue throughout 2014. A further 25% expect increased volatility while only 16% expected FX rates to stabilise 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.

The business impact of this volatility is considerable according to Afex. A third of its survey respondents said they view 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.

Furthermore, almost a third of those questioned (29%) expect to see levels of overseas business drop through 2014 while 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 while 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.” 

Among those UK businesses that are looking to increase international trade, Western Europe is most popular trade partner with 45% of firms looking to expand their overseas trade with the region in 2014.

West Europe was also a popular trading partner for US-based SMEs with 25% of export hungry companies seeking business there in 2014.

Meanwhile, just 16% will seek out relationships with Chinese trading partners and only 5% see likely opportunities in African markets.

In considering those overseas ambitions, UK SMEs, more than those in other countries, are actively looking to manage their FX risk.

Sixty per cent 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.

Other approaches, such as currency swaps and natural hedging remain relatively unused by SMEs.