Currency fears haunt Irish business

This is panning out to be a very tricky year for Irish exporters, as slowing international economic growth is being laced with extreme currency movements, led by the British pound falling under the pressure of an EU referendum now scheduled for June 23.

However, not all of the sterling fall can be loaded onto UK prime minister David Cameron’s commitment to an in-or-out referendum on the EU, or his failure to get Boris Johnson inside the tent.

The unexpected under-performance of the UK economy since the start of 2016 and the Bank of England’s delaying tactics on interest rate increases and lukewarm promises on more quantitative easing to support economic growth have also taken their toll.

Today, the sterling to euro exchange rate is down about 12% since November, which in many instances will have completely wiped out Irish exporters’ profit margins.

However, exporters may be faced with even more pain if initial sentiment supporting an exit grows.

Many international banking forecasts are indicating a further 10% to 20% slump in the value of sterling.

We will once again be looking at the spectre of trading ghosts of the years 2007 to 2009, when sterling fell by 30%, exporter sales to the UK slumped, and profitability and jobs were lost.

Of course, if over the next few months there is a clear shift in sentiment towards remaining within the EU, the situation is likely to change rapidly.

The consensus amongst foreign exchange currency dealers right now seems to indicate a return to euro to sterling rate of 70 pence, which was the average last year, if the UK commits to stay in the EU.

Exchange rate volatility will have numerous implications for Irish exporters, once the honeymoon period is over and debtor’s payments protected by forward currency contracts have been used up.

Of even greater concern to Irish exporters is if UK voters decided in June to exit the EU.

There are a number of scenarios independent think tanks, including the ESRI, have highlighted showing that Britain would struggle to maintain trade links with EU members and would give up 30% trade growth if it left the 28-nation bloc.

Some of the negative consequences are undoubtedly arising from the Scottish Nationalist Party’s declaration to push again for independence, in the event of the UK voting to exit the EU.

And there is the unique Irish prospect of the North outside the EU with the rest of the country within.

However, perhaps the biggest trading loses will come in the City of London, where the London financial services sector is by far the biggest centre for foreign exchange trading of the euro, a position it could not possible expect to retain if it was outside the EU.

This exit process is likely to take two years, which will stretch the trading skills of both Irish sellers and UK buyers, particularly if international forecasters’ expectations are right and sterling falls by a further 10% to 20% against the euro.

The UK is the single largest market for our rapidly growing services export sector, buying €23bn of computer software, financial services, insurance services, and accountancy and management consultancy services last year.

And, yes, there is also strong exposure for our agri-food and drink exporters, but it is the much smaller exposure of €4.1bn.

And of course there is exposure by the pharmaceutical exporters of €3.9bn and the computer and machinery exporters of €2.5bn as well as the many other small business exporters who export €3.2bn of their goods to the UK.

A UK outside the EU, a fragmented UK, and a much reduced economic UK will, without a doubt, be catastrophic for Ireland’s export industries.

However, it will still be an important market for Ireland, even if there is uncertainty in regulatory, currency and movement of goods and people.

For many companies both across the manufacturing sector and the various services industries in Ireland, the unsavoury option may be forced upon them to open UK offices and manufacturing facilities to retain market share, with the inevitable loss of jobs.

John Whelan is a leading consultant on international trade.

Sterling hits seven-year low to cap an ugly week on Brexit concerns: https://t.co/0pcDc9GULR pic.twitter.com/8PhwatNEDX

— Reuters UK (@ReutersUK) February 26, 2016