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Businesses Idle As FX Volatility Hits Profits Hard

Analysts have been abuzz about the potential – and realized – impact of Brexit on businesses in the U.K. abroad, with far-reaching ramifications of the U.K.'s departure from the European Union.

Among the largest Brexit-related risks for U.K. companies is foreign exchange fluctuation, and new data from Western Union suggests businesses have already been hit hard by the volatility.

Today (March 27), Western Union released the results of its latest research, which surveyed 1,110 U.K. companies as part of its FX Barometer report and analysis.

According to the data, U.K.-based importers suffered average profit decreases of 12 percent since the EU referendum, and that decline is linked directly to FX volatility and the depreciation of the sterling. More than a fifth of importers – an estimated 50,000 businesses – saw their profits drop by 12 percent, Western Union said.

Importers are also struggling with higher costs linked to a weakened sterling. While 61 percent of companies surveyed said they source internationally in search of lower prices, 41 percent said the sterling's depreciation has made cross-border trade more expensive for their supply chains. Two-thirds of U.K. importers said they have been forced to absorb these higher costs, while 63 percent said they passed those cost burdens on to their own customers, averaging a 17 percent price increase.

As companies grapple with the weakened sterling and its impact on trade, Western Union also highlighted the pressure of inflation on the U.K. economy at large: Inflation was at its highest level in six years in November 2017, the report said, though it has since dropped back down to 3 percent, according to the Office for National Statistics.

“Importers have taken a real hit in profits since the EU referendum, caused by the depreciation in the sterling amidst political and economic uncertainty,” said Western Union’s global head of FX services, Tony Crivelli, in a statement. “Even a small fluctuation in FX can make a huge impact on profits – particularly for SMEs.”

FX Management Tools Go Unused

While economic uncertainty and financial impacts of FX volatility continue to stress U.K. companies, Western Union's report found that use of FX management tools to mitigate these risks remains depressed.

Just 22 percent of companies that import said they have increased FX management via greater use of tools like forwards and options. Sixteen percent said they expect FX volatility to even itself out over time.

“A robust FX strategy can make a significant difference to the bottom line,” added Crivelli, “but unfortunately, many businesses continue to operate without having a clear plan in place to mitigate future risk.”

Small businesses struggle to adopt FX hedging and management solutions, according to separate research from East & Partners, which found that less than a third of small businesses across the globe use options to protect against FX risks.

But companies of all sizes are facing heightened pressure from FX volatility linked to Brexit. Analysis released last year from Deloitte concluded that corporate treasurers are largely struggling to adopt new FX hedging and risk mitigation technologies, which can be a particular problem for U.K. businesses.

Deloitte treasury and capital markets partner Steven Cunico spoke with InvestorDaily at the time, noting that while previous years have seen relatively stable and predictable currency fluctuations, volatility has increased recently, “particularly ... sterling with Brexit.”

Deloitte's 2017 Global Corporate Treasury Survey found that 52 percent of treasurers cited FX volatility as a top challenge, yet more than a fifth of treasury management systems are managed in spreadsheets – including FX management.

“Given that FX volatility is the major concern for treasurers, there is significant opportunity for treasurers to invest in technology to deliver more sophisticated real-time analytics,” Deloitte's report concluded. “CFOs and boards should expect more dialogue in these areas.”

But small businesses shouldn't ignore the importance of sophisticated FX risk mitigation tools. According to Crivelli, technology is critical to mitigating risk and understanding how small businesses compare to their industry peers.

“FX management can be a complex task, and with a multitude of other business functions to consider, SME leaders often struggle to manage this on their own,” the executive said. “But with the right support and a clear benchmarking process to help them understand how they compare to their peers, SMEs can protect themselves from the damage of unexpected market volatility, setting themselves up for business success.”



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