Since the UK’s EU referendum on the 23rd June 2016, the UK’s political and economic trade agenda has radically changed, challenging assumptions, and has been the backdrop of UK trading relationships for goods and services both within, and outside of the EU.
But what does this mean for your business?
Santander’s ‘Trade Barometer’ survey late last year showed that businesses in the UK were deeply concerned about the risks of Brexit and how it might affect their operations; some 73% of 1000 businesses surveyed said that a UK economic slowdown would negatively affect their business.
Graph: The UK’s business community as a whole is confident, but concerns regarding wider geopolitical and economic influences have risen since April 2017.
Following the triggering of Article 50 last year and the beginning of the two year negotiation period to exit Britain from the EU, ‘Brexit means Brexit’ is far from certain, with much debate, unknowns and risks.
We spoke to Trade Finance Global on some of the tangible considerations trading businesses face as we head into March 2019, the date at which the UK formally leaves the EU and is set to lose its passporting rights.
Weakening of the sterling – who benefits, importers of exporters?
The UK economy fared well immediately after the referendum, with banks choosing not to suddenly leave the UK, the Bank of England’s strong prudential measures helping minimize volatility and stabilise markets.
However, the sterling weakened significantly against the US dollar and euro, which arguably helped UK exporters, especially in the services industry.
That said, import prices have risen as a result of a weak pound, causing rising inflation, which went to 3.1% in November 2017, and food price inflation was at 3.6%. For households and businesses, increased oil prices and service costs didn’t fare well when real income wasn’t growing at the same rate, leading to slowed economic growth and a sluggish 1.4% growth forecast for the UK in 2018.
There are however easy ways to mitigate currency risk. Brexit has of course presented an interesting problem that many businesses did not prepare for, which had a huge impact on unhedged currency. GBP weakening is forecasted to continue the closer the UK heads towards a ‘hard’ Brexit, and conversely, a soft Brexit would anticipate a strengthening of the pound, as seen by FX movements during High Court rulings on the direction of the UK’s relationship with the Europe. The 12% drop in the value of the GBP against the USD reflected a 30 year low, and for any trading business importing from the US or paying for goods and services in USD, this would have significant impacts on a P&L.
For businesses, having a currency strategy in place can help smooth out the bumps of potential currency volatility, as well as help protect the bottom line using hedging arrangements and competitive rates.
UK goods trade overview
Interestingly, the UK’s trade position has weakened remarkably over the past 20 years. The UK’s share of trade has dropped by 30% in terms of imports and by over half in terms of exports. The UK was in the top 6 exporting nations, alongside US, Germany, Japan, France and China, and has since dropped in place of South Korea (using 2016 data).
Britain however continues to be Europe’s primary destination for foreign direct investment; the UK exporting over £41bn of goods last year. In addition to this, Britain are set to looking outside of the EU towards Commonwealth and broader markets such as Malaysia, India and Kenya, as well as looking at Mexico to the NAFTA trade agreement countries and free trade zones.
Why trade financing will help businesses trade
Trade finance is the umbrella term for the financing of both international and domestic trade, incorporating Letters of Credit, Bank Loans and Guarantees, Export Credits, Receivables Finance and Structured Finance.
As one of the oldest forms of financing, trade financing helps exporters and importers finance trade without relying on balance sheet / working capital finance within the company to finance the entire trade. Astonishingly, over 80% of trade is done on Open Account terms, which opens businesses up to risk, fraud, uninsured transactions and hinders businesses from opening up and doing business in many markets. Trade finance allows for structures and finance to be put in place which allows small business competing for large supplier projects across multiple jurisdictions with bigger end clients, which helps diversify revenue streams, open corridors in new markets and to new customers, as well as compete in the global marketplace.
Trade finance houses work with guaranteeing and confirming banks across the jurisdictions of a trade to insure, finance and structure a trade and mitigate the risks of no payment, goods getting lost / damaged whilst in transit, and the ability to pay up front / in escrow. TFG have put together a trade finance guide which can be accessed here to find out more about trade finance.