A sterling opportunity

If sterling’s plummet since June’s Brexit vote has caused difficulties for Irish businesses exporting to the UK, it’s a different story for their counterparts north of the border. Indeed, the 20 per cent or so decline in the currency against the euro, as well as a weakening against the dollar, means that for companies located in the north, the cost of their exports has just gotten a whole lot cheaper.

But currency volatility, even when it’s going in the right direction, is not without its own challenges.

Sterling has swung considerably in recent months. Bryan McSharry, managing director at Moneycorp, notes that last December sterling was trading at £0.70 against the euro. In the run-up to the Brexit vote on June 23rd, it began to weaken, and this decline went into overdrive when the UK voted to leave the union. At one point, the euro traded as high as £0.93 against sterling, but it has since weakened somewhat, stabilising around the £0.85 mark.

“We’ve witnessed extreme volatility in the euro/sterling exchange rate; it’s been extremely challenging for companies trading in sterling,” he says.

Indeed, citing a recent survey, Aidan Gough, strategy and policy director at InterTrade Ireland, says almost one in every two exporters across the island of Ireland says currency volatility is the key issue they’re facing at the moment.

As he notes, currencies do move around – sterling was last at this level against the euro back in 2013 – but this time around it’s the added political uncertainty that is causing an extra layer of difficulty.

“The problem is volatility, it all comes down to volatility with exchange rates,” says Gough.

One challenge facing Northern Irish businesses is the cost of imports, with companies who rely on inputs from south of the border or across the eurozone, facing a steep rise in costs.

“It’s still a challenge for them,” says Gough.

Added to this is the political backdrop, and the uncertainty that Brexit is bringing; something that is being compounded by the lack of preparation for the UK’s exit from the EU – from both businesses and politicians alike perhaps.

As Gough notes, when speaking with smaller businesses in the North, he finds their biggest concern is “not coping”.

“Ninety-seven per cent of businesses have no plans in place to deal with Brexit,” he says, “it’s very significant. What we’re going out to businesses to say is ‘don’t bury your heads in the sand’.”

But while it may not be without challenges, the current weakness of sterling should also be seen as a significant opportunity for exporters.

“For Northern Irish businesses, it could be a fantastic opportunity. Northern Irish exporters will be significantly more competitive down in the 26 counties than they would have been prior,” notes McSharry.

With about 38 per cent, or some £2.2 billion, in Northern Irish exports headed for the south, it’s the largest market for the North, accounting for a greater share of exports than Europe (excepting ROI) and Russia, which are the destination for 26 per cent of exports.

Unsurprisingly then, already the retail and tourism sectors in the North are experiencing a mini-boom, as Irish consumers drive north for shopping and entertainment. Some canny operators have looked to maximise sales by offering parity on the exchange rate, although these opportunities may diminish given sterling’s slight rise in recent weeks.

In any case, it’s not just about Ireland and Europe; some 18 per cent of exports from Northern Ireland go across the Atlantic, and with sterling also weakening against the dollar, the potential is significant here too.

“The Americas is quite a substantial market for exports. It’s a real opportunity for businesses exporting to the eurozone/US,” says Gough, adding that companies should take advantage of the moment and “build real value”.

“What you have to do is build value into your products and export contracts,” he says, adding, “build innovation into the product line, and value into the relationship between yourselves and your customers.”

For Northern Ireland-based exporters, taking risks with currency and trying to boost their profits even higher is not advised.

“FX markets are not a casino,” cautions McSharry. “FX isn’t something a business should treat as a profit or loss centre.”

Particularly given that for the short- to medium-term – or at least until the precise nature of the UK’s exit from the EU, be it “hard” or “soft”, is known – currency volatility is likely to continue.

“There is one thing I can say with certainty – volatility will remain for the foreseeable future,” says McSharry.

And it won’t just be pressure on sterling that will cause movements. Going forward, the pressures will come from both sides as political upheaval ramps up in the eurozone, with upcoming elections in France and Germany next year.

“The concern is that the euro project could be put on top of the agenda again as we see populist movements around Europe,” says McSharry.

For exporters then, the advice is simple.

“The sensible thing is to lock it in [current exchange rate], as no one knows where it will go in the future,” advises McSharry.

Destination of Northern Irish exports

Percentage of total

ROI 38

Europe and Russia 26

The Americas 18

Asia Pacific 10

India, Middle East & Africa 8.3

Source: Department of Enterprise, Trade and Investment