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Brexit, currency volatility and risk management for NGOs

By the time that you read this, Brexit may have come and gone, possibly happened or not at all, who knows? This type of uncertainty has driven the currency markets for decades and will continue to do so for many years to come.

What we do know however, is that currency fluctuations (especially in the last few years) have caused detriment to many NGOs' capability to deliver against contract and program delivery on a global basis.

How are you expected to deliver a program on budget when the market has moved $5 cents out of favour since you signed the contract? Are Trustees happy that you have to prop the delivery of the project up with your (highly valued) unrestricted funding? Has your organisation’s reputation been negatively impacted when a project has had to be minimised as a result of a lack of funds?

5 steps to help navigate around currency fluctuations

Western Union Business Solutions recently held a webinar in partnership with bond on this subject and outlined 5 key steps that charities can do to help them navigate currency movement, so their hard fought funding is being used to the best of its ability:

1. Establish a Budget rate for each programme or contract that is realistic (as best possible) for the duration of the project. This will allow you to at least benchmark performance of the payments vs the projected costs, and understand the potential impacts on your unrestricted funding.

2. Establish a goal. What is it that you are looking to achieve? A target rate? Certainty of budgetary expectations? What percentage of cover do you want to ensure? Be clear about what a “good outcome” looks like.

3. Speak to your Trustees: is this an idea that can be supported? Is the idea of “Funding protection” something that the Trustees understand and/or appreciate? Understanding your organisation’s risk policy for using derivative products is very important. Some NGOs do not have a policy in place, which might leave you open to a lack of guidance or governance.

4. Gain support from an accredited and regulated supplier. All hedging products are regulated by the FCA and practitioners should be certified accordingly.

5. Remember not to speculate. When you have come to the end of a contract, do not review it against historical positive market movements. Mark the success against what your goals were at the beginning of the programme.

There are many products that can enable you to take advantage of positive movements, however these come at a premium and may not answer the needs of the organisation. Normal circumstances are about removing “risk from the table”, nothing more. Pick the right product for you. While NGOs operate in a similar fashion, individual organisational needs will likely determine that a different strategy or approach is needed, compared to your peers.

Hedging: Myths vs Truths

We would also like to dispel some common misunderstandings around Hedging products:

  • Entering into a contract will not usually affect your cash flow. Funds are generally not required up front, and if so, then only in line with the Option product that you would be using.
  • Forward Contracts require settlement at the point of drawdown only, unless the market rate has moved adversely 5-10% from the contract start point, in which case a percentage of the outstanding value would be requested as a surety against the contract.
  • “Drawdowns” can be flexible to suit need. This is the point, whereby you are paying for the portion of the contract that you are looking to ‘spend’. As such, you can ‘draw down’ at a fixed point in time (Closed) or within a selection of windows (Open).
  • Organisations entering into a contract do not need to hold the funds once bought. In this scenario, Western Union Business Solutions would purchase and hold onto the funds on your behalf - you do not have to have a currency account in that of the currency purchased*.

So, while not all factors can be accounted for, NGOs can take a considerable amount of risk off the table by taking the time to understand and appreciate what foreign exchange (FX) is and how you can get support from experts in the field.

If you would like to find out more, please visit the webinar recording here. In this recording we look at Brexit, what affects currency movements and how to mitigate negative affects to our clients’ funding.

You can also get in touch with a Western Union Business Solutions specialist directly by emailing BespokeNGO@westernunion.com

Bond and Western Union Business Solutions are here to support NGOs, no matter your cause.

The authors of this article were:
Mark Tait – Senior NGO Consultant at Western Union Business Solutions
Onil Banerjee – Senior Corporate Hedging Manager at Western Union Business Solutions

*Please note that hedging products come with disadvantages, and may not be suitable for every NGO.

This paper has been prepared by Western Union. The information contained within this paper does not constitute financial advice or a financial recommendation, is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Views reflected in this paper may not represent the views of Western Union.