For companies operating globally, this often means they have assignees working overseas and therefore require international payments including salary, expenses, invoices, and tax to be made. However, shifts in macroeconomic trends or geopolitical issues can have a significant impact on the cost of these international payments. COVID-19 is the latest challenge and it’s changing everything at an extraordinary speed, especially the outlook for global currency markets. This means that international companies should plan forward and consider what new scenarios may play out over the next 6-12 months, and their potential financial impact.
To help understand this a little more, our partner Western Union Business Solutions has provided new insight for companies into potential economic recovery and currency scenarios, and most importantly how companies should think about planning their international payments relating to Global Mobility.
By George Vessey – Currency Strategist, Western Union Business Solutions
Currency volatility – the current state
The coronavirus crisis presents extraordinary challenges to organisations operating globally. One of those challenges is currency market volatility, which has spiked to levels last seen during the financial crisis in 2008. As coronavirus infections spread globally, forcing nations into lockdown, and choking economic activity, financial markets began to unravel, causing huge price swings amongst different currencies. In mid-March, during the height of the turbulence, the British Pound tumbled 13.6% against the US Dollar in just nine trading days, hitting a new 35-year low of $1.14 having been above $1.32 at the beginning of the month. Against the Euro, the pound climbed to 3-year highs in February before plunging nearly 13% in four weeks to record fresh 11-year lows near €1.05.
GPB/USD exchange rate
The mechanics behind currency fluctuations
In times of heightened uncertainty and elevated volatility, the pound tends to fare poorly against its currency peers. Since the Brexit vote in 2016, the pound’s trading nature has been likened to that of an emerging market currency – more politically driven – making its price action more unpredictable and volatile. Now, faced with a global pandemic and an uncertain economic horizon, investors are more likely to invest in safer assets and sell riskier, less attractive currencies, meaning the pound is at risk of being sold and weakening further against the US Dollar and Euro. Although the whole world is suffering from the pandemic and facing recession, the pound remains at risk of depreciating in an environment where there is more pessimism about an economic recovery as fears of a second wave of infections grips nations as economies are gradually reopened.
The UK’s gradual lockdown easing has been met with confusion by the British public. A Brexit trade deal still hangs in the balance, adding to the uncertainty of the UK’s economic outlook. Britain has a large current account deficit, which has not been offset by the usual capital inflow due to foreign investors preferring safer and more liquid assets in these uncertain times. Taking all these factors into account makes sterling a risky bet in such an uncertain and volatile environment. Therefore, as rapid economic recovery hopes fade, the pound is more susceptible to being sold, weakening against its counterparts. The analysis of the pound is key as this is where the currency risk lies. For companies with assignees abroad, a weak pound means you cannot buy as many Euro or Dollar and therefore would make the international payments needed to fund global mobility programs, more expensive. Yet if the pound strengthens, means you can buy more currency bringing costs down.
How do these fluctuations impact Global Mobility Programs?
- The assignee – if they are transferring money from one location to another (i.e. from host country to home country) it may cost them more. You want your assignees focusing their time on core services and not worrying about how to understand and counter currency volatility.
- The business – the flip side of the above is that the business is unable to control costs or guarantee payment amounts. One month paying a foreign invoice may cost more than the previous month.
- Sterling/US Dollar average annual exchange rate
Impact on Global Mobility
Research shows employees on assignment cost 3 to 5 times more than a domestic employee. Using a 100k home salary example, the split is as follows:
- Salary and benefits 150k
- Expenses or vendor fees – 100k
- Tax and social security – 150k
Looking at this example, for 1 assignee over the course of a year in 2017 the actual cost would be $516,000 but in 2018, due to currency fluctuations this would cost the company $536,000 – an increase of $20,000. When multiplying that impact by 10, 50 or 100 assignees it starts to give scale and highlights the gap of how global mobility teams and the business more widely can control or budget for these costs.
Future COVID-19 scenarios to consider
The hot topic of debate amongst economists is what letter the path of the economic recovery will most resemble. A U-shaped recession is arguably what financial markets are pricing in at present – whereby economies fail to respond immediately to exits from lockdowns and we see a slow and gradual recovery. An L-shaped scenario is characterised by a slow rate of recovery with persistent unemployment, low inflation and stagnant growth. This scenario lends itself well to traditional safe-haven currencies like the Japanese Yen, Swiss Franc and US Dollar. The British Pound, however, would likely depreciate due to its correlation with risk sentiment as detailed earlier. A fall below $1.20 and potentially towards $1.14 again versus the US Dollar cannot be ruled out in this situation.
Rosy predictions of a best-case V-shaped recovery still exist amongst some economists including the Bank of England (BOE). The BOE’s forecasts the UK economy will bounce back strongly in 2021, despite expectations of the worst recession in 300 years in 2020. Such a scenario has been dubbed overly optimistic by many economists though, fearing the scale of bankruptcies and unemployment in the UK is being understated.
Companies should prepare for different outcomes
Looking ahead, we understand there are many unknowns still, as well as other global factors to consider. For example, will global emergency stimulus measures help mitigate deep recessions? What if a European government faces financial difficulties like in the past? What about Brexit and the upcoming US election?
There are also additional complexities to consider when it comes to Global Mobility more specifically. Some assignees have be repatriated home but still working for the host country entity, there could be immigration restrictions in place due to the closing of country boarders and the potential rise of ‘virtual assignments’ leading to compliance questions around taxation, payroll and social security for the individual.
In times of heightened uncertainty like we have today, and potentially several more months yet, unfortunately financial decision makers and Global Mobility leaders must still plan forward. To help, here are some recommendations to consider:
- As part of each company’s urgent COVID-19 response and forward planning, decision makers should assess how this crisis may evolve, and conduct various types of scenario testing. One of the economic inputs for companies with cross-border cross-currency needs will be FX scenarios. For Global Mobility Leaders, understanding changes and mechanisms to help ensure the assignee is not impacted is vital. For example, regular reviews of FX rates, split payroll and flexibility on allocating funds between home and host bank accounts.
- Future scenario planning is a highly effective tool for companies to develop strategies; however, the aim of FX scenario analysis is not to try and predict the future, but rather anticipate what might happen in such a volatile currency market. It requires imagining all possible outcomes, both positive or negative, and forming a wider picture of the future.
- If this process uncovers that your company may be exposed, you may need help with developing a counter strategy. Consider seeking further guidance on what types of currency products and strategies are available for companies with global mobility programs.
This article has been prepared solely for informational purposes. It 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.
Services in the UK are provided by Western Union International Bank GmbH, UK Branch and Custom House Financial (UK) Limited (which does business under the trade name of Western Union Business Solutions. Western Union International Bank GmbH, UK Branch (WUIB) (Branch Address: 131 Finsbury Pavement, London, EC2A 1NT) is a branch of Western Union International Bank GmbH (registered in Austria, company number FN256184t, VAT Number ATU61347377, with its registered office at The Icon Vienna (Turm 24), Wiedner Gürtel 13, 1100 Vienna, Austria), which is licensed by the Austria Financial Market Authority (Finanzmarktaufsicht). Custom House Financial (UK) Limited (registered in England, Company Number 04380026, Registered Office Address: 200 Hammersmith Road, London W6 7DL) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 (Register Reference: 517165) for the provision of payment services and is registered as a Money Service Business with HM Revenue & Customs (Registered No: 12140130).