EU referendum and currency swings unsettle SMEs

Uncertainty over the UK’s continued membership of the European Union (EU) ahead of the forthcoming referendum-and resulting exchange rate volatility – could damage the growth and profitability of financial services-focused small and medium enterprises (SMEs) that trade internationally, according to World First.

The financial technology group, which specialises in international currencies and money transfer, claims that ‘currency confusion’ is also exposing many businesses to potential further currency volatility in the coming months, due to a lack of preparedness and a knowledge gap.

World First commissioned a nationwide survey of over 1,000 senior decision makers at UK-based SMEs making cross-border payments. It reports that while 77% of SMEs operating in the financial services sector fear that currency volatility from the EU referendum will impact their business, 41% reported that they paid little attention to the foreign exchange (FX) markets, while 48% also believed that having a currency strategy is not important.

The survey responses also suggest that SMEs in the financial services industry remain “dangerously exposed” to currency fluctuations, says the group. Just over half the respondents admitted they have been caught out by a sudden movement in exchange rates and 19% have been severely impacted by market volatility.

The findings also reveal “a stark lack of appreciation [by SMEs] on how exchange rate movements impact their business”. One in three of those in the financial services sector admitted they did not fully understand this, with 48% agreeing that currency markets ‘scare’ them.

Despite this, 89% recognised that having a proper currency strategy could improve profitability suggesting that for many SMEs in the financial services industry, currency confusion and a failure to effectively manage their FX exposure is impacting the bottom line, comments World First.

Sword of Damocles

Based on its own data, World First calculates that UK SMEs collectively would have made a total of £78bn in international payments in 2015. It bases the figure on the UK having 304,200 SME importers and exporters – or ‘mini-multinationals’ – with the average UK SME trading overseas made international transfers to the value of £256,700 last year.

The group adds that the figures set into context the need for businesses to better manage their currency exposure to protect themselves in what is set to be a volatile 2016, given increasing uncertainly around the UK’s membership of the EU, the prospect of further US interest rate rises by the Federal Reserve, slowing economic growth in China and other threats.

“2015 was one of the most unpredictable years in currency market history and there is little reason to expect change in 2016,” says Jeremy Cook, chief economist at World First.

“With the EU referendum hanging like an economic Sword of Damocles, there is an enormous degree of uncertainty and concern in markets and therefore it’s crucial that any business operating internationally has a clear strategy for managing their currency exposure.

“One only has to look at the precedent set by the Scottish referendum, which saw sterling lose around 6.5% against the dollar {USD} in the two months before the vote, to realise how great a threat this could be to the mini-multinationals who don’t have the balance sheet strength to absorb such major shocks. This situation is made all the more grave given the widespread lack of appreciation on how such rate movements impact the bottom line.”

The survey indicated that the USD is the second-most common currency that UK SMEs buy when transferring from sterling, cited by 32% of respondents. The euro (EUR) was mentioned by 54%, the Australian dollar (AUD) by 2.3% and the Chinese Renminbi (RMB) by 1.7%.

“Given that SMEs are the engine-room of the UK economy and key to our international trade, more needs to be done to ensure they are adequately protected from currency swings caused by events such as the EU referendum,” says Jonathan Quin, chief executive officer (CEO) of World First.

“Specifically, whilst there is a lack of clarity about the exact timings of the referendum, SMEs should take the initiative now to help mitigate against the risks of currency volatility that we’ll likely see in the run up to the eventual day votes are cast.

“Supporting UK SMEs on the journey to become mini-multinationals is at the heart of the government’s plans to rebalance the economy and to drive the competitiveness of our exporters. Therefore, collectively, the industry and policy makers need to better educate businesses on the benefits of a well-managed currency strategy, as well as providing specialist advice and products that can help our nations’ business thrive on the international stage.”

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