THE BUSINESS OF INTERNATIONAL TRADE
THE BUSINESS OF INTERNATIONAL TRADE
BExA is calling on UK exporters and industry stakeholders – including other trade associations – for their input, as it seeks to persuade UK Export Finance on the vital need for the implementation of new cover to protect companies against foreign exchange rate risk.
A major financial and competitive barrier for British exporters is foreign exchange (FX) risk in the tender to contract (pre-contract) phase. BExA believes that a simple, portfolio-based approach to mitigate against such risk could be set up by UK Export Finance (UKEF) to run at no net cost to the taxpayer.
BExA’s proposed UKEF product, Tender to Contract FX Cover (TTC), would enable exporters to confidently bid for overseas contracts with minimal up-front costs, certainty of their margins, and the ability to manage the risk of bidding in foreign currency. TTC would be especially beneficial to SMEs, who often report that foreign exchange rate risk is the reason why they do not export, or do not export more.
Ultimately, this suggested extension of UKEF’s product range will change the face of UK exports and provide a tangible boost to the UK market, which is recovering from the effects of Covid-19 and Brexit.
BExA has produced a paper which outlines in more detail the rationale for the introduction of TTC, and an example of how such a solution could work in practice. The paper can be read on BexA’s website.
What risks would TTC mitigate against, and how would it differ from other FX products?
Bidding on export contracts that are denominated in foreign currencies can involve substantial risks for the exporter.
There is no private market solution to support tender to contract risk periods, leaving British exporters exposed to significant FX risk from the time they submit a bid to the point a contract is signed. A small movement in the exchange rate between two currencies can wipe out an exporter’s profit margin leading to, at best, the exporter walking away from the deal or, at worst, the exporter taking on the contract at a loss.
FX products that currently exist to support exporters are geared towards post-contract risk periods and are typically expensive and inflexible. The simplest product, an FX Forward, requires the exporter to complete the exchange at the forward date regardless of whether the contract is awarded. An FX Option provides more flexibility, with an option to decline the exchange. However, it comes with a significant cost, often two to three times an FX Forward. These products are not suitable for pre-contract negotiations. So exporters fall back to trading at spot FX prices, losing their competitive advantage or taking on significant risk, whilst others don’t export at all.
The introduction of TTC would enable more UK exporters to bid on export contracts, make them more competitive and provide security and peace of mind throughout the procurement process.
What is BExA’s proposed outline for Tender to Contract FX Cover as being recommended to UKEF? The proposed strategy includes:
It is worth noting that TTC is a key recommendation of BExA’s Annual Benchmarking Report, which measures UKEF, the UK’s Export Credit Agency (ECA) against other ECAs around the world, and has become the go-to guide to determine how the UKEF product range compares.
The benchmarking report scores UKEF on product range, and the continued absence of TTC pegs UKEF’s score at 9 out of 10.
Marcus Dolman, Co-Chairman and Campaign Lead at BexA, told The Exporter:
“BExA has long recognised the need for a simple UKEF backed solution to tender to exchange rate risk. By removing one of the main barriers to export, such a solution will allow UK business to bid on overseas opportunities with confidence leading to a boost in UK export activity.”
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