Philippe Gelis, CEO and co-founder of Kantox explains why UK SMEs should keep an eye on what happens in Greece.
We’ve watched the situation in Greece play out through the media over the past months, and if it has taught us anything, it’s that the unexpected can happen. Last Sunday we saw capital controls in place and the first wave of people in Greece queueing at ATMs desperately trying to retrieve their cash. A week later we witnessed the Greek public vote ‘no’ in the referendum, with 61.3% rejecting the terms of an international bailout.
Greece’s governing party, Syriza, had tirelessly campaigned for a ‘no’ vote, claiming that the bailout terms were humiliating, while in the UK, George Osborne has warned that no one should be in any doubt, “the Greek situation has an impact on the European economy, which has an impact on us, and we cannot be immune”. But what does this all mean for your business? The future of Greece is still fairly uncertain, but it’s vital to get up to speed with any possible outcome now so that you’re aware of how these could affect your business, and how you can be prepared.
Prepare for the unexpected
Whilst you might not have assets or operations in Greece currently, that doesn’t mean that you’re exempt from being affected by the unfolding crisis, as Osborne rightly pointed out, and it’s important not to become complacent. If Greece is to leave the Eurozone – it could destabilise the Eurozone in its entirety and potentially end up damaging it beyond repair.
The future of Greece still hangs in the balance. The country could leave the Eurozone resulting in a cut off from long-term funding from the European Central Bank. If this happens, Greece will begin printing its own currency, and is likely to revert to the Drachma. Alternatively, a deal still could be struck, with French President Hollande seemingly being the biggest advocate of this.
Nevertheless, stock markets around the world have already reacted to the ‘no’ vote, with £1 now buying €1.41 – 11% more than a year ago – and the currency will continue to be volatile. The best way to safeguard against FX fluctuations is by factoring any potential fluctuations into your business forecast from now onwards as much as possible. FX volatility can seriously affect profits, so now would be the best time to review your business forecasts to take into account any further fall of the euro.
The euro could even fall below parity, so you must hedge the risk with a forward contract strategy and plan for the ‘worst case’ outcome to avoid any nasty surprises. This worst case scenario might be that you lose 30% of revenue due to market volatility. If the profit margin was planned above 30%, your company would lose no more than they are able to cope with. If the profit margin was optimistically planned much below 30%, you would have credit problems.
While the Eurozone is the region to watch primarily, even areas outside of Europe could be affected by this crisis. The indirect effect of the crisis will mean a general increase of uncertainty in the financial markets, whether this is EUR/USD or EUR/GDP. For example, the developments in Greece are likely to reinforce the weakness in emerging-market currencies. The ringgit (used in Malaysia) has declined this week, along with the Polish zloty and Turkish lira.
While these could be temporary fluctuations, if your business has operations in any of these further flung destinations, it would be wise to reconsider your business operations and put into place solid plans that address the risks that could be faced. You should work with the whole senior management team, to create an up to date scientific and mathematical strategy that considers the company’s current FX risk exposure. With a contingency plan already in operation, this can be reviewed easily to ensure that a business can cope with the changing FX landscape.
It would perhaps also be wise to conduct any new business in USD or GBP for the time being whilst the Euro fluctuates. Within your FX strategy, it’s important that you consider limiting your exposure to the euro, without this impacting profit margins.
However, while your export partners might have problems, you can take advantage of cheaper imports and cheaper human resources if you are paying in euros. These benefits will be welcomed by many small businesses, but don’t become naïve – we’re in a situation where anything could change.
It’s easy to forget that your business could be affected by the crisis in Greece, but if the country does exit the Eurozone, a Brexit will also be much more likely.
Mitigating against the risk that the crisis currently poses, whilst also keeping in mind future risks, requires continual assessment of risk exposure, profit margins, business profitability and risk tolerance. All of these factors will vary as events unfold, and each possibility must be taken into consideration to establish a coherent and well-prepared FX policy.