International trade risk mitigation strategies and risk evaluation
Proactive planning can go a long way toward mitigating your international trade risk.
Talk of global economic activity slowing has dominated the headlines recently as businesses face rising inflation, continued supply chain disruptions, and geopolitical tensions. As concerns of a recession rise, so do protectionist measures that can create volatility and uncertainty.
Companies relying on international trade must assess their risk management strategies. Balancing risk with growth means keeping a close eye on country risk, credit quality of foreign customers, currency movement, and volatility. Companies should also be increasingly vigilant and take steps to protect interests and prepare for scenarios that might impact their ability to operate successfully.
Preparing for uncertainties
Global trade uncertainty affects everyone. Regardless of size, all companies often rely on certainty when moving products, collecting payments, and growing their businesses. When this activity becomes less reliable and the perceived risks increase, it creates a trickle-down effect.
Companies typically plan and budget for the current year and, in some cases, a portion of the following year. Trade uncertainty, especially during an economic downturn, creates a challenge to making informed strategic decisions with a long-term perspective.
“The question has become, how are companies going to protect themselves in the context of a much slower global economic environment? How can companies continue to grow in today’s risky environment?”
SVP, Senior Managing Director, Global Advisory and Working Capital Finance, Huntington Bank
Gaining visibility into cash flow goes a long way in helping importers seek growth abroad while guarding against trade risk. Taking measures to improve transparency allows organizations to gain insights into operational efficiencies and better align investment strategies to the fluctuating global market.
Companies could also consider trade finance and structured financing for facilities to optimize their working capital and increase their ability to engage in international trade. Traditional payment risk mitigation techniques like letters of credit, documentary collections, and credit insurance could reduce risk in current customer relationships. These strategies could help enable companies to opportunistically onboard new customers and markets in the face of tougher market conditions.
Gauging the future
Implied volatility describes the market’s effort to predict where inevitable volatility can occur. The COVID-19 pandemic and Russia’s invasion of Ukraine demonstrated how quickly the global environment could shift and impact volatility. Companies selling abroad need to pay attention to the risks on the horizon and adjust their strategies to help protect against them.
Supply chain constraints have put immense pressure on certain industries. As global trade risk rises, companies might consider shifting manufacturing closer to home to shrink their supply chain while continuing to take advantage of low-cost markets. However, considering bringing supply chains closer to home through nearshoring shouldn’t be done lightly.
“There are numerous factors to moving production that companies should first consider,” explains Arduini. “Sales goals, the feasibility of moving into a new market, and the ability to make local connections to make it work are all part of our discussion with customers considering this move.”
The impact on currency
Trade uncertainty puts pressure on current accounts with different countries, which leads to the possibility of capital controls, particularly when it relates to emerging markets. If a company is selling into emerging markets, it must be aware of this risk. Concerns about a global recession could also lead to tightened currency controls and fund restrictions. Rising rates and expenses could also lead to companies weakening depending on their financial profile.
Businesses operating in emerging markets or selling abroad should consider developing a plan to mitigate their foreign currency exchange risk, such as identifying optimal hedging instruments and strategies, as well as working with currency risk advisors. Another concern with emerging markets is political changes can have significant impact on currency rates. So if, for example, a more socialist regime emerges, the market might exit investment and cause the currency to depreciate sharply. In this situation, any business done by a U.S. company is worth much less in terms of U.S. dollars. These potential risks illustrate the need to be diligent in protecting against emerging market exposures.
“Be mindful that even the best constructed hedging strategy provides no assurances of payment,” says Arduini. “Companies operating abroad will still face credit and country risks with which they will need to contend.”
Hedging and traditional trade techniques do not protect against currency controls and other methods of government intervention entirely. A comprehensive credit insurance policy should be considered to help protect organizations against these risks.
In a global environment of volatility and uncertainty, businesses should understand their risks and develop mitigation strategies to help them survive and thrive in the event of a worst-case scenario. Contact your relationship manager to learn more about managing your company’s international trade risk and protecting against future uncertainties.
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