Corner the global market

Finance | Mon 8 Dec | Author – Business & Finance

Barry O’Neill explains the potential pitfalls of ignoring currency movements and outlines Ireland’s growing diversity in global markets.

Irish global businesses are at the forefront of the Irish economic renaissance. From Rio to Riyadh, burgeoning new economies are providing new market places for Irish products and services. The global profile of these businesses makes them inherently better able to weather economic cycles.

However, if the new Irish global leaders are to avoid the folly of hubris that engulfed the Celtic Tiger, they should be aware of the potential headwinds.

Rising from the ashes

In what could be described as one of the greatest comebacks since Lazarus, the Irish economy is roaring again. The economy has defied the doomsayers by posting astonishing growth figures when one considers the nation was staring into an economic abyss. Looking at the data, we can see that gross domestic product rose 2.7% in the first quarter of 2014 – far quicker than most economists had expected.

The growth in output moved the annual rate of growth up to 5.1%, similar to the Celtic Tiger boom years before the financial crisis started in 2008.

Year-on-year, taking May 2014 as an example, exports were €660m (9%) higher than in May 2013, with organic chemicals seeing a 14% rise and medical and pharmaceutical products up by 12%. It is clear; the new breed of global Irish businesses are beginning to reap their rewards.

During the financial crisis, the economy used its thriving property and banking sectors as leverage for unsustainable growth – one was a proxy for another – and the fall-out, as we all know, was a catastrophic meltdown of the economy.

Dynamic deals

In 2010, during an icy winter, like the coming of the Ghost of Christmas Past, the Troika arrived from Europe tolling the bell for the Irish economy. Sovereignty gave way to austerity.

But since then, we have seen a tremendous surge in growth. But what have been the key catalysts for this extraordinary turnaround? In short, lower government borrowing costs, a cheapening euro, and a new breed of dynamic, diversified and global Irish business that is mapping a new Irish route traversing the globe. The CSO figures show just how global Irish trade has become.

Again, taking May as an example, half of all exports during the month went to EU countries, with the US accounting for 23% of all exports. This means that 27% of exports are being bought outside of what would have been deemed our traditional trade partners. Ireland’s presence in global markets is fast-expanding.

It is critical that companies have full visibility of their overall exposure to currency so that they can mitigate balance sheet risk.”

We have been facilitating Irish businesses in Far Eastern currencies, including deliverable Chinese yuan, for several years.

Now, growing demand by Irish companies doing business in the Middle East has made this region an additional focus.

We are seeing deals being struck across the world; trade missions have put Ireland on the map thanks to efforts by Enterprise Ireland and the Irish Export Association. They have provided the necessary links for Irish-based businesses to trade further afield than their traditional export markets. Improving technology and transport links has also allowed Irish businesses to look at new markets. Saudi riyal and Qatari rial, Bahraini and Kuwaiti dinar are examples of the major currency flows we are seeing in the Middle East.

We are also seeing our clients increase their presence in China as they look to harness the demand from the region’s middle class. We are now also in a unique position of having multiple counterparties that can facilitate Irish companies growing their businesses into new regions.

Across a number of sectors, including engineering and IT, we have seen a significant rise in Irish-based companies growing their operations in multiple international markets. This is a trend in both the developed and emerging markets.

Market volatility

ECB chief Mario Draghi has actively weakened the euro by taking a razor to ECB deposit rates. The euro was dealt another blow by the announcement of further ECB liquidity measures. The dovish Draghi and the ECB’s actions have left the single currency at fresh lows against the dollar and sterling.

Of course, this is all great news for Irish export-led businesses.

Economies around the world with strong currencies substitute local product for relatively cheap euro-denominated imports – hence, we are likely to see an upsurge in Irish exports as the euro continues to freefall. But as in life, markets are always in a constant state of flux.

Irish businesses must see foreign currency as a zero-sum situation. ‘Good’ news for sterling or euro means ‘bad’ news for another currency and vice versa. They must also recognise the volatile nature of currencies, and while it looks like the ECB will look to keep the euro cheap, a long-term trajectory of a falling euro is by no means a certainty.

The lesson for many export-driven economies has been that currencies endure value cycles – just as a rise is precipitated, so will its fall.

Diversifying your business on the world stage is important for growth, but there are inherent risks – and currency exposure is a potential major pitfall.

Currency movements are notoriously volatile and can be painfully acute – the value of the euro has fallen against sterling as much as 9% in the past 10 months; it just depends on what side of the trade you happen to be on.

Managing the risks

It is critical that companies have full visibility of their overall exposure to currency so that they can mitigate balance sheet risk. Companies with overseas trading partners will soon build up a tangled web of currency liabilities or revenues, so managing these accounts and recognising the current value of future payments or receipts is extremely important.

If a currency fluctuates significantly downwards, it can have a devastating effect on a company’s finances.

Possessing a clearer view of currency exposures ensures companies are in a better position to actively manage their risk. We are all now part of a global economic community that from time-to-time can be infected with contagion – currency volatility can often be a symptom of a contagion.

The good news is that there are preventive measures that companies can take. Since the start of the financial crisis in 2008, we’ve seen an increasing number of our clients doing just that.

Currency volatility has prompted a surge in demand in the use of forward contracts, options and other hedging tactics by our clients over the last five years.

At home and abroad 

Irish companies are reacting to increased volatility, and are gaining a better understanding of currency risk.

Irish banks had the monopoly on foreign exchange. Their fees reflected their phlegmatic approach, where high fees and generic service underlined their lack of understanding of their clients’ needs and unwillingness to get to know their businesses.

Now, more nimble competitors have entered, unencumbered by large debts and overheads they can afford transparent and affordable consultation that addressees and mitigates balance sheet risk.

Ireland will always be an export-led economy and it is important for businesses to make hay while the sun shines.

However, to ignore the potential pitfalls of currency movements is to ignore the very nature of financial markets – and, worst of all, imperil a balance sheet of an otherwise healthy business. Fortunately, Irish businesses now have plenty of options to manage that exposure, and plan effectively for the future.

Barry O'NeillBarry O’Neill is the founder and managing partner of Clear Treasury – an Irish leader in treasury management and foreign exchange.