Banking News

EXECUTIVE INTERVIEW: Tony Crivelli, UK & Europe Vice President - Western Union Business Solutions

EXECUTIVE INTERVIEW: Tony Crivelli, UK & Europe Vice President - Western Union Business Solutions

In this interview with East & Partners Europe, Crivelli offered his thoughts on recent currency volatility, the economic backdrop and the outlook for the UK’s smaller businesses.

44.1 percent of UK SMEs state ‘credit availability’ as a major concern
Currency volatility is rated as the biggest barrier to growth by 59.5 percent of small businesses
Less than 50 percent of SMEs named Europe as their primary export market, compared to 80 percent 3 years ago
One in two small businesses expects the Pound to strengthen in the next 12 months

Currency hedging: WUBS predicts a bumpy ride ahead

Hedging products are the fastest-growing area of the WUBS business

For customers at Western Union Business Solutions, the past 12 months has been a bumpy ride on the currency markets, with the euro weakening as the US dollar once more flexes its muscles. As companies approach the 2016 currency hedging season and treasury departments review the past year’s performance, set budget rates, collect forecasts and plan their currency strategy, there appears little prospect of calmer waters ahead.

Tony Crivelli, UK & Europe vice president for Western Union Business Solutions says:
“Many businesses have based their plans for the year ahead on sterling maintaining a rate of US$1.50. However, with expectations rising that the Federal Reserve will finally raise US interest rates before the end of 2015, a growing number of currency analysts are doubtful that this level can be held.”

“Much of the 10 percent budget rate buffer that companies typically allow for in currency fluctuation has already vanished. Sterling could easily head back to $1.40 or even lower, so there’s concern that the ability to hedge 2016 at $1.50 or above is seriously at risk.”

In this interview with East & Partners Europe, Crivelli offered his thoughts on recent currency volatility, the economic backdrop and the outlook for the UK’s smaller businesses.

You joined Western Union at the start of 2015. Has the general economic mood clouded since then and if so, is the economic slowdown in China the main contributing factor?

China’s slowdown and the UK’s political and economic relationship with Europe are jointly top of mind for our clients at present.

The former is obviously a concern as it has depressed commodity prices globally and the UK isn’t immune to feeling this impact - as has been evidenced by the recent closures of some major steel manufacturers and resulting job losses.

And while a GDP rate of more than six percent is still impressive, the fact that China’s economic growth has fallen back from more than 10 percent is concerning. It has affected commodity-reliant currencies such as the Australian and Canadian dollars - both down around 30 percent - as well as international trade.

As for the UK, our clients’ main worry is the forthcoming referendum on whether to exit the European Union. This uncertainty over the timing of referendum and the outcome will continue to weigh both on the market and on economic sentiment. If your company is already trading in Europe or considering expanding into that market, this may impact on your plans.

Less than two years ago the renewed strength of the euro was a concern for many European companies, but early 2015 was marked by forecasts that the currency could reach parity against a resurgent US dollar. Is the single currency’s volatility of concern, or are companies feeling the benefit of a softer euro?

Generally, a rise in currency volatility is a concern for companies. The euro’s sharp movements during 2015 have given rise to both risk and opportunity for international businesses.

The proportion of small to medium enterprises (SMEs) that discover the exact amount of their foreign receivables - either when an invoice is due or after an invoice is made - continues to decrease. From just under one third in 2014 it has fallen to under 25 percent this year. Following a 15 percent swing in the euro over the past 12 months, if you had entered a deal then for, say, €100,000 what you would be receiving today is some £13,000 less.

For the 25 percent of companies that enjoy good visibility of their currencies and have a balanced hedging programme in place to protect their cash flows, the rise in currency volatility has obviously created advantageous opportunity for them. They are still enjoying exchange rates some 10 percent higher than where we are today.

In the opening weeks of 2015, the euro appeared to be heading for parity with the US dollar, until the European Central Bank stepped in and provided forward guidance. However, the general market consensus is that while parity was put back it will still happen at some point during 2016.

Your poll in late July attracted much attention, as it found that British SMEs had reduced their reliance on Europe for their operations and were focusing on markets further afield. Has the slowdown in China and other major emerging markets such as Brazil halted or reversed this trend?

That’s correct; the Western Union International Trade Monitor is a semi-annual economic confidence survey of more than 1,000 SMEs across the UK engaged in international trade. For the first time since its launch, the survey showed the number of SMEs that named Europe as one of their primary import markets fell below 50 percent in the latest survey. Just three years ago, eight out of 10 SMEs listed Europe as their primary trading partner, so this represents a significant shift in the way that British businesses are trading.

That said the European Single Market remains good for business. It is the biggest trading bloc in the world but there is no doubt Western Union’s research suggests trade trends are shifting. But we’re seeing efforts by the EU to help businesses of all sizes, and it will be interesting to see what impact these changes will make. For example, the creation of a Single Digital Gateway has the potential to be a rich source of data for our customers. Many businesses find significant barriers to trade to due to a lack of information.

Indeed, it would seem Europe’s loss has been China’s gain. More and more, SMEs are turning to China as a supplier of manufactured goods, rather than a customer for Britain’s exports. The slowdown in China has created both rewards and loss for our SMEs. It has resulted in more competitive pricing coming out of China, but with the vast majority of goods still invoiced in US dollars, the rise in the greenback has all but eroded those discounts.

Although still in the minority, a growing number of SMEs have switched to the local Renminbi (RMB) and these companies are enjoying the full benefits of the improved pricing being offered by China.

The ECB’s launch of a quantitative easing (QE) programme last spring garnered much publicity. Is it starting to have any effect, or is it still too early to gauge the impact?

One could argue that it has had a big positive effect. Not only has the weaker currency helped kick-start growth for UK exports but, more importantly, it has provided stability in the currency markets and bolstered business confidence.

For example, the Greek crisis and fears of a ‘Grexit’ that made headlines midway through the year could have looked very different without the ECB’s programme of QE.

However, while QE has mitigated geopolitical risk more effectively, the macroeconomic impact of China’s slowdown on commodity prices - and therefore inflation - has seen the market preparing for a further round of stimulus. Benign European inflation data has caused the ECB to step in again recently; hence the euro’s renewed bout of weakness.

WUBS is one of the more recent entrants into the market for currency derivatives for small and medium enterprises (SMEs). Is interest growing in this product among smaller businesses and if so, what has triggered the interest?

We are definitely seeing interest from a growing number of SMEs, which come to us because they want better visibility of their international business currency exposures.

We can provide it with our specialised cash management platform. With this tool - and using the simple currency volatility slider function - an SME can easily see what the effect of a five percent move in a specified currency can have over their international cash flows over a given period.

All our customers want to reduce risk, while improving cash flow. Our various currency derivatives allow them to achieve both objectives. For that reason, coupled with the marked increase in currency volatility, hedging products are the fastest-growing area of our business. We’ve seen 30 percent growth over the past three years in currency derivatives to hedge risk.

As international trade becomes more significant, any adverse moves in a currency has greater effect, so hedging and simple strategies will continue to fuel growth. Ten years ago, a 10 percent move in a currency over a period of 12 months was considered normal; today that period is more likely to be only three months.

In addition to currency volatility, Basel II must be a concern. The decision by a major UK bank (RBS) to cut back its non-UK cash management and trade finance services has caused some companies to question whether they can still rely on their banks as they feel the new regime’s impact. Are similar cutbacks likely from others in the banking sector?

We expect the banking sector to continue to evolve and react to the impact of the Basel rules. What we have seen from our findings in the International trade monitor is that SMEs continue to struggle on gaining access to credit, so it would be helpful if more funding could be directed back towards businesses rather than the housing market.

There have also been reports that SMEs are not getting this funding and so more could be done to impress on lenders that they must help SMEs. On a more positive note, there appears to be a pickup in both consumer and business sentiment, which has been reflected in recent economic data.

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