Assessing risk in a volatile global economy

Growth may have slowed inside Canadian borders heading into 2013, but the anomaly that has become our national economy has remained resilient despite increasing outside pressures.

Amid global fiscal uncertainty and borderline meltdown in some regions, experts say Canadian firms shouldn’t get too comfortable with the current state of affairs.

Anil Sawrup, vice-president of payment and risk solutions with Toronto-based financial consultancy Cambridge Mercantile Group, says economic uncertainty abroad should be enough to convince manufacturers to assess risk and implement strategies that keep profit and loss (P&L) in check if a worst-case-scenario should arise.

According to Sawrup, the main factors impacting Canadian manufacturers at the outset of 2013 are the fragile state of the U.S. economy, the slowing economy at home and the strength of the loonie as it compares to other currencies, with Europe’s teetering on the edge of crisis posing a potential risk down the road.

“The U.S. … slowly continues to be in recovery mode,” he says. “Because of that, I think the appetite for risk in terms of some of their contracts and their inventory management is still in a shorter timeframe than usual.”

Sawrup says the Canadian economy will sustain some semblance of growth, but much of that will depend on the direction of the housing market.

“We’re starting to see a slowdown in the housing market,” he said. “People are probably spending less money on big-purchase items, so I think Canadian companies are starting to realize the economy is only going to go so much further.”

While consumer goods purchases may not directly impact most Canadian goods producers, they can often paint a picture of the tides of the economy as a whole and could lead to an across-the-board slowdown.

With the strength of the Canadian dollar spearheading growth, it still poses risks to manufacturers and distributors, Sawrup says.

“Since 2008, a lot of businesses were able to sustain a parity business model and be competitive domestically and internationally,” he says. “But when the Canadian dollar trades stronger than the U.S. it’s still a big factor, and if the Canadian dollar continues to strengthen it does impact overall sales.”

Outside of the U.S., Sawrup says now may be the time for firms to expand their reach to emerging markets around the globe, though some pose bigger risk than others.

“I think China and India (are) sustainable markets,” Sawrup says. “Russia and Brazil continue to represent challenges because of their banking regulations.”

Regardless, Sawrup says Canadian companies are overcoming barriers in emerging markets to move product and sustain growth, but with the U.S. dollar acting as a benchmark, requires adaptability.

“Some of the policies most companies are installing today (are) simple foreign exchange policies (and) simple risk management tools where they’re protecting their sales for a future event,” Sawrup says. “A lot of Canadian manufacturers that we deal with today (implement) a risk strategy protecting their overall sales.”

Sawrup says, for example, when a firm sees the U.S. dollar trading stronger than the loonie they can implement a hedging strategy to protect receivables when converting U.S. to Canadian funds.

“There are many factors, but if they don’t manage risk properly it is a direct impact to their P&L,” he says. “Most businesses factor in a budget rate for their sales, for example, at parity and they’ll cushion a couple percentage points for the foreign exchange market.

“But if the market moves against them five or 10 per cent that’s a direct impact to their P&L.”