How development organizations can save money in a world of fluctuating currencies

Attention to foreign exchange rates can create major savings and provide predictability for donors, foundations, nongovernmental organizations and government agencies that regularly send and receive money in different currencies. One organization, the Global Fund, claims to have saved tens of millions of dollars this way. This is particularly important at a time when major political events have the potential to dramatically affect exchange rates. Last year’s Brexit vote sent the British pound into downward spiral. It had fallen almost 20 percent against the U.S. dollar and 14 percent against the euro by January 2017. In the week following the U.S. elections, the dollar strengthened but many other currencies fell. In addition to being affected by global political events, emerging markets also experience volatility as a result of local geopolitics. The Turkish lira fell 17 percent against the dollar during 2016, for example, in part as a result of a failed coup in July and risks from the Syrian civil war on its border. At the same time, international financial rules designed to prevent money laundering and terrorist financing, known as AML/CFT regulations, are making it more difficult for organizations to send and receive money abroad, especially to developing countries. Given these challenges, how can NGOs and foundations minimize the risk of losing out during currency conversions, while ensuring that money is delivered quickly and safely to the intended recipient? Devex spoke to two organizations tackling this in different ways. Cambridge Global Payments is a U.S.-based company that provides foreign exchange services to foundations, banks, NGOs, government agencies and companies. It advised on shopping around for the best FX deal when making payments in foreign currencies. The Global Fund is a public-private partnership disbursing resources for the prevention of HIV, tuberculosis and malaria. It has managed to stretch funds further through FX hedging. The organizations operate in different parts of the development sector but share a belief that aid organizations could be doing much more to capitalize on FX savings. Getting the best and safest FX deal when sending money abroad “Foundations and NGOs can expend huge time and focus on fundraising efforts only to let precious resources slip away by neglecting to focus on the currency with which they make payments to foreign beneficiaries,” veteran FX exchange advisor Nancy Kuenstner, who currently works with Cambridge Global Payments, told Devex. It is standard practice for charitable organizations to send dollars, or another relevant originating currency, to beneficiaries in developing countries without asking which foreign exchange rate will be applied to the transaction, Kuenstner explained. As a result, neither the sender nor the recipient knows exactly how much local currency should appear in the beneficiary’s account. More importantly, the sender may not have achieved the best exchange rate for the transaction. Instead of sending payments in U.S. dollars or another originating currency, she recommends getting quotes from multiple payment remitters or banks — such as Cambridge Global Payments, which is a wholesale non-bank payment company — and negotiating a foreign exchange rate before sending the money. This could lead to significant savings, Kuenstner said, especially for groups sending money to developing countries: when dealing in less used currencies, exchange rates can vary by several percentage points between different payment providers. Agreeing on a fixed FX rate before sending payments can also help NGOs and foundations better manage their budgets, she said. “Unless you secure a fixed FX rate you won’t know how much money you are sending and the person on the other end won’t know how much money to look for,” Kuenstner explained. In addition, it can mitigate regulatory risks associated with sending money abroad and prevent funds being exchanged on unofficial or black markets, Kuenstner explained. Ricardo Faillace, managing director of FX Emerging Markets at Cambridge Global Payments, added that "Given the enormous challenges of making local currency payments — murky exchange rates, delayed transfers, beneficiary deductions, high volatility and the difficulty of tracking and communicating locally — dealing with a trusted and experienced FXEM team is of paramount importance.” Hedging FX to create predictability and save money Organizations that regularly receive funds and revenue in non-U.S. dollars can save money, reduce risk and increase predictability within their budgets by adopting “hedging” strategies, according to the Global Fund Director of External Relations Christoph Benn, who said the fund saved approximately $55 million in 2015 by doing this. It was able to reinvest these savings into its grant program. The Global Fund receives approximately $4 billion a year from governments, foundations and private donors, which it then grants to countries to support work on preventing and treating HIV/AIDS, TB and malaria. Approximately half of this annual funding is received in U.S. dollars, while the remainder is pledged in other, mostly European, currencies. When the U.S. dollar is strong, as it has been recently, organizations receiving funds in weaker currencies but spending mostly in U.S. dollars stand to lose out when they convert those funds. This is especially the case for organizations like the Global Fund, which receives and allocates money over three-year cycles. Foreign exchange hedging is a financial strategy designed to minimize such currency exchange losses. The currency holder purchases a forward contract with a bank to lock in an exchange rate at which the currency transaction will occur in the future. The Global Fund has been practicing hedging on a percentage of its non-U.S. dollar funding portfolio since 2015, and now hedges approximately 75 percent of all non-U.S. commitments, according to Olivier Lachambre, a member of its treasury team. But the financial savings are only part of the story. The main benefit derives from the predictability hedging brings to the fund, Benn said, enabling it to be “100 percent” sure it can meet its commitments to developing country governments. “Through hedging we can fix the exchange rate in advance and so have certainty and predictability in our budgets, which is of the utmost importance when providing antiretroviral treatment to people, for example,” said Benn. Hedging has also freed up additional funds that can be spent on programs, Lachambre said, since it has reduced the need to set aside money as a “buffer” or insurance against volatile currency markets. “Since we started hedging operations, we have saved money since most currencies we received money in have decreased against the dollar. However, that could change next year as what we have done is insulate ourselves. We will never take active speculative positions — it’s more like insurance and designed to reduce risk and volatility,” Lachambre said. Check out more practical business and development advice online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.