The conflict in Ukraine may have had less systemic impact on day-to-day business than the lockdowns and disruption from COVID-19. But the SME market is likely to have experienced some significant impacts.
Skyrocketing global prices for a range of commodities - from wheat to industrial metals - will have shown up on the purchase orders of wholesalers and manufacturers and, perhaps, passed on to their customers. Steel rebar prices, for example, reached a near-five month high earlier this month, while higher oil prices may have bumped up factory costs as well as at the petrol pump.
For those companies that also import, it is vital they keep up to date with how this conflict is impacting the currency markets. Movements in exchange rates have a direct impact on the total cost of companies’ procurement costs – true enough in times of peace and stability and exacerbated in times of uncertainty and market volatility.
As expected, in times of geopolitical tension, the dollar benefited from its safe haven status. The DXY index (the dollar’s weighted performance against a basket of currencies) rose more than 3.8 per cent between the day before the February 24 attack and its high on March 7.
This added to the greenback’s general rally coming out of 2021 as the impact of COVID-19 reduced and the US Federal Reserve gave signals of interest rate increases. The euro, in turn, hit a 20-month low after the first week of March to $1.085 – easily below Dh4. For UAE companies, that’s more than Dh30,000 in buying power for every 100,000 euros of goods over the last six months. Similar dips were seen for pound sterling, the yen and others.
This represented good news for UAE companies buying these currencies to pay invoices, on the face of it.
Stretched finance teams
The problem for the countless busy finance teams I encounter is that they get little external support from their providers when it comes to integrating currency into their overall P&L. Finance managers have little bandwidth to do more than compare on-the-day spot rates of exchange from their bank - and when a payment needs to be made.
Such comparisons can be misleading when it comes to savings, since a large movement on the currency market against them (such as the euro rising) means the difference between these offered rates may be insignificant to the total higher cost. More critically, SMEs get little guidance in how to apply the present exchange rate to their ‘budgeted levels’ – i.e., the maximum exchange rate before it starts to impact the profit margin when buying from abroad in one currency and selling locally in another.
This is a significant issue. Companies forecast their future revenue - if currency is a floating cost impacting procurement and profit margins, it needs to be integral to that forecasting.
It’s a common process for Ebury to learn the budgeted levels of a company and help them plan accordingly. Fixing exchange rates over a series of upcoming payments, or even a single invoice, allows finance departments to know in advance how much their next foreign currency payment will cost in dirham terms.
When the dirham (dollar) is strong, as now, companies may be well within their budgeted levels and can lock in the cheap currency level while they deal with unavoidable cost pressures such as shipping. Managing foreign exchange can have wider benefits too. A company that bullet-proofs its profit margin and removes FX losses can provide an improved complexion to its main banking relationship when negotiating credit lines.
Crises often hide opportunities - now is a great time to look at this area of treasury and start to quantify its impact on your procurement.