Brexit: How NGOs can prepare for exchange rate volatility

BARCELONA — Experts are warning NGOs to plan ahead and mitigate financial risk as the Brexit deadline, currently set for March 29, looms without a deal in place. If politicians fail to agree on a withdrawal agreement before the United Kingdom leaves the European Union, the pound is almost certain to fall further, according to Alex Lawson, hedging director at Western Union Business Solutions, leaving NGOs exposed to volatile exchange rates. “The expectation is that the pound would become less valuable in pretty much all currencies so that scenario would mean a negative outlook for NGOs” in most cases, he said, adding that while it’s difficult to know how long volatility could last, a year or more isn’t out of the question. British Prime Minister Theresa May is set to put her amended Brexit agreement to a parliamentary vote by March 12. If a no deal Brexit does happen, and the pound drops against other currencies, British-based organizations funding and implementing projects overseas may see their work — and those most in need — significantly impacted. “It's just simple math,” said Geoff Prescott, CEO of Lepra, an NGO focusing on people affected by disease, poverty, and prejudice. “If a pound buys you less, that has a considerable knock-on effect toward people we’re trying to assist and the people affected by leprosy because that will mean a careful rethinking of programs and projects to keep them within budget … whether that means less reconstructive surgeries [performed], information, education and communication, training, or cobbler-deigned fitted shoes.” In the few years since the Brexit referendum in June 2016, organizations have already felt the effects of a pound struggling to find its footing in the messy political landscape. Caron Bradshaw, chief executive of Charity Finance Group — which works to create a financially confident charity sector — said she knew of charities that lost money when the pound stumbled after the referendum. “Conversely, we also had examples where organizations’ investment portfolios have taken a significant improvement because they invested in dollar dividend shares, so it hasn’t been all one way,” she said. Regardless, interviewees agreed that market uncertainty is not helpful for NGOs. “Delivering aid and development programs needs a level of predictability. Currency volatility affects predictability, long-term planning, and therefore sustainability,” Claire Godfrey, head of policy and campaigns at Bond, the U.K. network for NGOs, wrote in an email. “[It] can also mean less money to deliver vital programs and support the most vulnerable, meaning the Department for International Development’s money might not go as far as it would previously would have done.” With further uncertainty ahead, how can NGOs prepare for a fluctuating exchange rate? Solutions to exchange rate volatility Glenn Uniacke, director of corporate foreign exchange and international payments at Moneycorp, which offers foreign exchange and global payment services, suggested that, like businesses, NGOs consider hedging — the process of locking in an exchange rate for a certain amount of time. “We can take away one of those aspects of uncertainty. We can help businesses mitigate that foreign exchange risk by locking in rates for up to two years,” he said. That means that for two years, organizations could continue aid and development projects overseas, receiving funds and sending money to in-country teams without fear of a major exchange rate change eating away at their funds. On the other hand, organizations would be taking a gamble that the pound wouldn’t rise and their money could potentially go further. Lepra’s Prescott said: “If you’re going to take a risk on currency, you have a duty of acting prudently and responsibly if you’re a U.K. charity. Therefore the amount which you would hedge — particularly in a situation that is extremely unstable as it is at the moment — should be little.” “It’s an easy flippant thing to go ‘you get that rate if you forward buy and hedge, so why don’t we hedge the lot.’ You don’t do that because it’s a risk and people give charities money with the expectation that it [is] carefully martialed.” However, for some organizations, knowing the rate with certainty outweighs the risk that they could do better by not hedging. Bradshaw explained that “an example might be where a project is potentially unviable if the rates drop below a certain level so the chance to secure the rates means the project is certain to go ahead. In such a scenario, of course, the charity risks that they could have got a more favorable rate but the risk to the project would cause greater damage.” In less severe circumstances, Prescott said that using reserves for situations such as these may be a better alternative. “Charities have and should have reserves to get them out of a bad patch,” he said. But he added a further concern: “If the banking sector, because of a hard Brexit, cracks and there are delays in transferring money, that will also have an impact so it's not just an exchange rate issue, it's also a systems issue. It's no good transferring a couple of hundred thousand [pounds] from A to B if it’s going to arrive a week later. That’s going to cause headaches for everyone.” Other ways to mitigate risk include building relationships on the ground to find out which currencies are acceptable in the locations where a charity works, Bradshaw said. From there, you can consider which types of currencies to exchange and if there are any consolidations you can make. “If you’ve got a common denominator across the multiple countries you’re working in — say they all accept U.S. dollar — that may be a way in which you can reduce your exposure to different types of risk,” Bradshaw said. She also recommended considering the timing of when to convert currencies and urged charities to see Brexit as an opportunity to go back to basics and think about risk more widely. “It isn’t just an economic challenge, but one that will test their processes on workers, demand for services, supply of products, flexibility, [and so on]. Knowing really clearly what their priorities are and the risks involved can help a charity better respond to the challenges and continue to meet beneficiary need.”