LAST week’s warning by the ESRI about diminishing export competitiveness will have come as unwelcome news to many businesses. But as if falling market share isn’t bad enough, the indications are that Irish exporters are also taking unnecessary risks with currency markets.
The Irish Exporters Association 2005 review found small firms are becoming increasingly vulnerable to foreign exchange rate fluctuations.
“This year’s review confirms that too many Irish-owned SMEs are taking unacceptable currency exchange risks,” said Jim Somers, president of the Institute of International Trade of Ireland.
While the euro has eradicated exchange risks for those trading with mainland Europe, Irish firms invoice just 45% of their export sales in euros, leaving 55% issued in other currencies, mainly sterling and US dollars.
“This large portion of non- euro transactions gives rise to exchange rate risks that, at the very least, have the potential to undermine the certainty of export revenues,” said Somers.
“It is most disturbing that 10% of those surveyed do absolutely nothing to manage foreign exchange risk.”
Kenny’s, the Galway-based international book exporting company, is one such firm. “We don’t manage our currency risk. Our business is based on a large volume of small invoices, so we can’t manage it,” said Conor Kenny of the family firm. “It simply isn’t commercially viable for us to buy (currency) forward.
“We deal with institutional libraries in the US a lot. For large-scale sales such as, for example, a literary archive costing $200,000, we are often paid in instalments over three years. In our experience during that time the currency fluctuations typically balance out. In the case of other sales, sometimes we win, sometimes we lose, but so far, so good.”
Kenny’s “swings and roundabouts” view is one that John Whelan, chief executive of the Irish Exporters Association, cautions against. “Companies are in business to do business, not to play the currency markets,” he said.
Currency exchange risk should be included in overall debt risk. “There are three parts to this — currency risk, failure to pay or delayed payment and the risk of suffering damage or loss of goods in transit. All should be included in the contract of sale at the outset,” said Whelan.
“The currency you are going to trade in should be listed in the contract, too. If it is in euros, the customer takes the risk. If it is in, for example, rupees, you are taking it.
“Try to get the customer to agree to the currency you normally trade on. If not, on the date of the sale go to the bank and get a forward contract that locks in the debt at that rate.”
He added: “Unfortunately small firms typically don’t do this, either because they think it is costly or complicated, which it isn’t, but more often because they reckon they might make money on the markets.”
Larkin Engineering supplies around 75% of street furniture to local authorities around the country. Two years ago it began exporting to the UK.
“The way we manage our currency risk is by ensuring that, in any tender we submit, we reserve the right to take subsequent currency fluctuations into consideration,” said Noel Larkin, the managing director, who employs 30 people at his Tuam plant.
“At the moment we are getting a good competitive edge with sterling, so a one or two per cent fluctuation wouldn’t be a significant problem. But a larger swing would see that clause put into use.”
Taking a “win some, lose some” approach to exporting outside the eurozone is a risky business, according to Aine McCleary, head of retail sales at Bank of Ireland Global Markets.
“There was a time when treasury risk management was geared towards and confined to corporate and institutional Ireland. These days risk management strategies are becoming more the norm for small firms needing to protect their business models,” she said.
“It is arguable that SMEs have a greater need than larger companies because they do not have the same scale to cope with exchange rate shifts as big companies.”
Currency fluctuations can have serious implications for importers sourcing goods outside the eurozone as well as for exporters.
If the currency strengthens the price of the goods increases, making it difficult for companies to plan accurate revenue forecasts and ultimately putting stress on cashflow. Exporters selling into foreign markets face the risk of the currency weakening.
Ted O’Morchoe set up Bannow Exports in 1994. The company sells waste water treatment plants throughout the Asian Pacific region, with most sales being transacted in dollars.
“Currency management is an area that is very difficult for small companies such as mine to do much about,” said O’Morchoe.
“Whereas large companies might have a steady stream of business, ours depends very much on large projects that come through relatively infrequently.”
He doesn’t believe buying forward is an option for him.
“You can’t buy forward at the time you give the quote — you can only buy forward at the time you get the contract, which in our case might be too late,” said O’Morchoe, whose contracts vary between €50,000 and €500,000.
“Because we deal in large capital projects we might have made the quotation in the hopes that the business would come through in three months, but it could be a year before we get the job. In the meantime the currencies can have moved quite significantly. If we’ve quoted in dollars, we really just have to take it.”
Bannow deals in euros whenever possible. In markets such as the Caribbean or China, however, US dollars are demanded.
“You can put a get-out clause in the contract that if the currency swings more than 5% you can try to get more, but you can only try,” said O’Morchoe.
“In most cases you’ll be told ‘take it or leave it’. It’s a big consideration when quoting for a project. What you are really trying to do is strike a balance.”
SMART WAYS TO HEDGE YOUR BETS ON INTERNATIONAL DEALS
OVER the past 12 months, the currency market has generally been good for exporters and not so good for importers. The euro has weakened from $1.30 to a low of about $1.17 in November, as American interest rates continued to move higher and the ECB kept its rates on hold.
The trend, however, is expected to reverse. “The euro has since moved up to $1.21 after the ECB raised its rates in December, and is seen continuing long after US rate hikes die down,” said Alan McQuaid, the chief economist at Bloxham Stockbrokers. The euro has also weakened slightly against the pound, from 70.69p to 68.06p.
Currency exchange risk can be “hedged” in several ways. The most common are forward foreign exchange contracts, where you agree to buy or sell a specific amount of foreign currency at a certain rate, on or before a particular date.
These protect against adverse movements in the exchange rate so your financial planning can be done knowing exactly how much the exporting transaction will cost you. The price is included in the rate so no further payment is necessary.
An alternative is opening foreign currency accounts, where, if possible, you can hold money until the exchange rate favours you, or opening an account with a bank overseas.
You can also consider buying currency options, which are more flexible but more expensive than forward contracts. Currency options offer the right to buy currency at a specific rate by a specific date, but if circumstances change you are under no obligation. An up-front premium is paid, with minimum dealing amounts, typically €100,000.
