The sharp drop in the pound should force some UK companies to downsize or shut down if their costs/fees in currencies increase by 20 %.Philippe Gelis, CEO of Kantox.

Only one month before the referendum in the United Kingdom, the campaign is in full swing. The future of the country in the EU is at stake, and companies are currently going through a turbulent period. What are the risks of yes and no? How to limit them?

Unsurprisingly, the Pound Sterling was tremendously impacted by the imminence of the referendum, especially as Brexit is increasingly possible. After the tragic attacks in Paris last November, a survey of the ORB indicated that the trend was for the first time in favor of the “yes,” with 52% of Britons supporting the exit of the EU.

The reaction of the financial markets provides some guidance, and between December and March, the pound fell 10% against the dollar and 16% against the euro. This decline, which lasted until March, is unprecedented since 2008, the year of the collapse of Lehman Brothers and the global financial crisis. Fortunately, since then, the pound has regained some ground, although, according to many observers, this recovery is not fast enough.

In The Case Of Brexit, Three Scenarios Are Therefore Possible:

1. The United Kingdom retains most of its financial agreements with the European Union, without being subject to regulation. In other words, the British will be free to sign separate contracts with other countries such as China or the United States. In this ideal situation, the pound would be stabilized.
2. If the perfect scenario above can be attractive, it would seem that in the case of Brexit, the transition is not painless. Indeed, the European Union does not seem to want the United Kingdom to have both “butter and bucks.” Discussions on these new agreements are likely to drag on, creating a long period of uncertainty. In this scheme, the English currency could fall sharply.
3. In the worst case, leaving Europe would be disastrous. If the European Union decides to restrict access to specific markets, British exports will necessarily pay the price. As a result, low economic growth and a high trade deficit. Moreover, the pound would suffer the full consequences if the negotiations between the United Kingdom and the European Union turn out badly.

And If The “No” In The Referendum Prevailed?

Even if the United Kingdom remains in the European Union, companies could have been impacted by a long volatile book. According to analysts, if the country does not come out of the euro, the price of the pound should increase by 6 to 10 %. Exporting companies could pay it when they convert their international profits because they will benefit from an unfavorable exchange rate.

For Businesses, Higher Costs

In the case of Brexit, which would significantly reduce the value of the pound, companies operating abroad would see an increase in their prices when they pay their employees or their operating costs. The sharp decline in the currency should also force some UK companies to downsize or shut down if their costs/fees in foreign exchange increase by 20%.

To avoid this, risk management strategies must be put in place by managers. This strategic decision must take into account the company’s exposure, margins, profitability, and risk tolerance. The chief financial officer must put in place tools to analyze market rates in real time, to inform his management and thus guard against currency risks.

In the same way, companies that currently benefit from the decline in the pound should guard because a rapid rise in the currency could also have an impact on their margins.

We can not predict which side will vote on June 23, and it is precisely this uncertainty that plagues the markets. Companies with international activities must prepare for the worst scenario: if there is not a crystal ball, establishing a good exchange rate strategy will allow them to maintain stability regardless of the outcome of the vote.