In a move that has hurt skiers, chocolate lovers and international investment banks alike, the Swiss National Bank (SNB) decided on January 15th to unpeg the country’s currency, the franc, from the euro.
Update – Since the time of writing the Swiss National Bank has signalled it will target a new exchange rate band, to find out more click here
The repercussions of this decision have reverberated across the globe. Despite The Wall Street Journal reporting that J.P Morgan (an investment bank) stands to make up to $300 million USD as a result of the decision, the news for most financial agencies has been overwhelmingly bad.
Citigroup, suggested its losses will be in realms of $150 million USD and exchange agencies from New Zealand to New York City have hinted that troubled times and closures lay ahead after the unexpected currency shuffle.
Even English football has been impacted, with the jersey sponsor of West Ham United, Alpari UK (a foreign exchange dealer), filing for insolvency.
Currency changes and international finance have never been subjects I’ve been comfortably able to wrap my head around. So I have tried to tackle the unpegging of the franc from an entirely pragmatic point of view. What happened? Why did it happen? And what is the impact on procurement professionals?
Why was it pegged in the first place?
The Swiss government has traditionally been seen as a sound custodian of financial affairs, its stable government and balanced economy has seen business and investors flood the country with foreign cash. While this sounds like good news, the tide of foreign money drove up the value of the franc, which had a severe impact on the country’s significant export sector. Essentially, Swiss goods became expensive, too expensive.
In 2011, as European consumers remained dormant in wake of the credit crunch, the Swiss National Bank made a perhaps short-sighted decision to peg the value of the franc to that of euro, thus making Swiss goods more affordable across the continent.
Why did they unpeg it?
A number of different theories have been banded about as to why the bank elected to unpeg the franc – some of the more popular are listed below:
- The SNB held fears that the consistent devaluation of the euro (in recent months and years) would be detrimental to the Swiss economy. This uncertainty is supported by political instability in some of the Euro zones more debt-laden countries.
- The SNB was pre-empting the European Central Bank’s decision to introduce another quantitative easing program and decided that the printing of money required to carry out this program would further weaken the euro.
- The SNB was responding to public concerns that the enormous $480 billion USD of foreign currency the bank now holds (as a result of its euro pegging) could lead to higher inflation levels, or even hyper-inflation.
Potentially, the bank simply wanted to unmake a poor decision it made in 2011. As the Economist magazine suggests, “When central banks manipulate exchange rates, it almost always ends in tears”.
What should procurement teams do?
Whether the euro pegging was a good idea or a bad idea is now irrelevant, what we are left with is a situation where the Swiss franc is worth significantly more than it was two weeks ago. The valuation of the franc is likely to fluctuate further in the coming weeks, but experts are predicting it will remain high against the euro and other currencies.
Below are some points procurement teams should consider addressing when determining how this currency shift will impact their operations:
- Understand the exposure of your supply base to the Swiss franc. If you have got strategic suppliers based in Switzerland, their products and services have just got significantly more expensive, perhaps its time to look for substitutes.
- Understand your company’s internal exposure to the Swiss franc. The secure economy and friendly tax rates in Switzerland encouraged many international businesses to set up their European operations in the country. As a way to reduce their exposure to the now expensive franc, these businesses (as well as many native Swiss firms) may now be looking to ‘internally restructure’ as our friends in HR like to say.
- Prepare for a more competitive outsourcing environment. Swiss companies (and international firms with a Swiss presence) could try to minimise the impact of the strengthening franc by leveraging lower cost destinations and start outsourcing more work.
How is the changing value of franc impacting you? Fill us in on your concerns in the comments below.