World First SMEGlobal Trade BarometerQ1 2017 | ISSUE NO. 5

Executive SummaryMany SMEs will have entered 2017 cautious, yet optimistic about their future. It has

become clear that UK businesses face a new set of challenges, including rising inflation,

a fall in consumer spending and a year full of potentially market-moving events, including

European elections and the triggering of Article 50. In this edition of World First’s

Global Trade Barometer, we look at shifts in attitudes and behaviour of SMEs towards

international trade.

Value of Trade falls by 17%

UK SMEs are more cautious than ever, scaling back their overseas business and trade. Fewer SMEs are trading internationally and those that are, make fewer deals of less value.

SMEs pessimistic about international growth

SMEs are also expecting little to no growth internationally, at a time when the UK’s economic performance will be increasingly dependent on businesses opening up international trade routes.

World First transaction data shows that SMEs are increasingly hesitant to manage their currency risk. Hedging strategies being deployed are increasingly cautious with longer term contracts favoured.

UK SMEs average monthlycurrency transfer amount SMEs expectations of business

revenue growth throughinternational trade

Percentage change in hedging products bought against currencies by World First clients

Q4 2016

0

EUR-32.56%

GBP-8.63%

USD +9.69%

Q1 2017

No growth or O% 44%Decline 3%Grow 23%Don’t know 20%

CHALLENGING TIMES AHEAD FOR UK SMES

£48k £40k

The first quarter of 2017 witnessed a sharp decline in SMEs trading internationally, with

the number of businesses not making any foreign currency transfers in an average month

jumping from 28% in Q4 2016 to 64% in Q1 2017.

SMEs already operating internationally have also slowed down international transactions.

The average currency transfer fell by 17% from £48,000 to just under £40,000.

The number of SMEs making multiple transfers also decreased with only 10% firms

making more than five transfers a month.

% of SMEs not making a foreign currency transfer

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017

THE STATE OF TRADE:SMES START TO LOSEAPPETITE FOR GLOBAL TRADE

27% 31% 33% 28% 64%

Figure 1.1. Approximately how many foreign currency transfers in total would you say your business makes in an average month?

Number of currency transfers SMEs made in the average month in Q1 2017

None 1-10 11-20 21-30 31-40 40+

50%

60%

40%

30%

20%

10%

0%

What do the experts say?

Jeremy Cook, Chief Economist at World First, said: “SMEs are doing less business abroad. This isn’t unexpected, but it does raise some concerns for the UK economy. Higher costs of importing materials and paying suppliers abroad is clearly having an impact on UK businesses operating internationally. Fewer transactions of lower values might be less risky for business owners, but could have a negative impact for the UK economy in the long run.”

London 39%

East Midlands 32%

Yorkshire and Humber 30%

West Midlands 29%

East of England 29%

North East 28%

Scotland 26%

South East 25%

North East 25%

North West 24%

South West 14%

Wales 12%

London 39

East midlands 32

Yorkshire and humber 30

West Midlands 29

East of England 29

North East 28

Scotland 26

South East 25

North East 25

North West 24

South West 14

Wales 12

Figure 1.2. Map showing percentage of SMEs that made a foreign

transaction each month by region

Where are the UK’s Mini-Multinationals?

SECTOR FOCUSHalf (47%) of businesses in transportation and distribution

regularly make international transfers, in comparison to just

12% of real estate businesses

REGION FOCUSBusinesses in London make the most foreign transfers

(54%) whilst only one in ten (12%) of Welsh businesses

trade internationally

Approximately how much, if at anything, does your businessplan to grow its revenue by?

In addition to the decline in international trade, SME confidence in overall business growth

is waning. Nearly a third (31%) of SME decision makers have no expectations for revenue

growth over the next quarter, whilst a further 20% expect growth to be less than 5%.

Expectations for international growth and expansion are very low. Nearly half (48%) of SMEs

do not expect their business to see international revenue growth. Whilst a third (32%) expect

some international growth, a majority of these respondents expect less than 5% growth.

SMEs were slightly more optimistic about domestic revenue growth, as only a quarter (25%)

expect no growth or a decline in domestic revenue. Three fifths (62%) indicate they expect

their revenue to grow domestically.

<5% 5 - 10% 10 - 20% 20 - 30%

No growth>50%40 - 50%30 - 40%

20%

1%

18%

1%

18%

2%

9%

31%

FUTURE TRADE:SME CONFIDENCE BEGINSTO FALTER

Trade routes - Where do UK SMEs import from and export to?

Whilst international trading has slowed for many SMEs in the first quarter of 2017, for those

still dependent on international trade, Europe, and in particular, Western Europe, remains a

key market.

Import Export

• Western Europe is the most popular destination for mini-multinationals with one in

ten (13%) importing from the region and a quarter (24%) exporting to the region

• Australia and Nordic countries are shown to be a key destination for SME exports

with 11% of SMEs exporting to both

SME TIES WITH EUROPEREMAIN STRONG

North America(excluding USA)

2% 10%

Nordics

3% 11%

CentralEurope

5% 12%

Africa and Middle East

1% 9%

WesternEurope

13% 24%

EasternEurope

4% 10%

Rest of Asia (excluding India)

1% 6%

South Korea

1% 5%

Japan

2% 7%

China

8% 6%

India

2% 7%

Australia

2% 11%

South East Asia(excluding China and South Korea)

2% 7%South America

1% 6%

USA

10% 16%

Gainers

Losers

While Western Europe and the US remain key markets for UK firms, currency flows show

SMEs are diversifying trade towards emerging markets, particularly in South America and

Africa. Payments to Chile jumped by 178% between Q4 2016 and Q1 2017, while payments to

Jersey, Costa Rica, Belarus and Botswana also increased by over 100%.

Luxembourg tops our list for payment destination losers, experiencing a 60% decline.

Madagascar (-51%) and Tanzania (-44%) also experienced significant declines between Q4

2016 and Q1 2017.

*Only includes destinations where over 100 payments were made

PAYMENT FLOWS HIGHLIGHT NEW TRADE HOTSPOTS

Chile

Jersey

Costa Rica

Belarus

Botswana

Iceland

Rwanda

Morocco

Luxembourg

Madagascar

Tanzania

Cyprus

Namibia

Dominican Republic

Barbados

Malta

Argentina

Bangladesh

When asked about future plans for international trade, the outlook was not promising for

many SMEs. Only a quarter (24%) of SMEs plan to export in Q2, compared to the third (33%)

of SMEs who currently export. Declines are expected to all regions according to our data

detailed in the map below.

SMES PLAN FOR LESSINTERNATIONAL TRADE

What do the experts say?

Jeremy Cook, Chief Economist at World First, said: : “With ever squeezing margins, we are seeing businesses pull back from international trade, favouring growth from domestic trade. Overall, businesses are sceptical about the potential for large scale growth over the next quarter, wary about what the markets hold in store.

“Europe remains the most important international market for SMEs and whicheverUK government finds itself in power come June 9th, ensuring that SMEs interestsare protected should be paramount to trade negotiations with the EU.”

% of SMEs currently exporting % of SMEs with plans to export

North America(excluding USA)

10% 8%

Nordics

11% 7%

CentralEurope

12% 8%

Africa and Middle East

9% 4%

WesternEurope

24% 15%

EasternEurope

10% 8%

Rest of Asia (excluding India)

6% 4% SouthKorea

7% 1%Japan

11% 2%

China

5% 1%

India

7% 1%

Australia

6% 2%

South East Asia(excluding China and South Korea)

7% 4%

South America

6% 4%

USA

16% 2%

+178%

+133%

+111%

+1110%

+100%

+86%

+71%

+70%

-70%

-51%

-44%

-42%

-42%

-40%

-35%

-34%

-33%

-32%

The only currencies to buck this trend, however, were the US dollar and the South African Rand. This is due to political upheaval in both regions: the election of Donald Trump as President in the US and the controversy surrounding South Africa’s finance minister and investment credentials sent the currency into a tailspin.

This resulted in UK firms hedging in greater numbers against the dollar and the rand, where forward contracts rose by 10% and 27% respectively.

SMEs are doing less to protect themselves from currency volatility.

• The popularity of currency hedging fell by 9% in Q1 as less forward contracts were booked. • Clients were less likely to protect themselves against Euro volatility, with forward contract bookings falling by 30%.• A decline in contracts was also seen against the Swiss Franc (-21%) and the Pound (-8%)

UK SMEs aren’t hedginglike they used to

SMEs attitudes towards forward contracts have also changed over the last quarter. Firms are looking at longer-term contracts with contracts over six months rising by close to 40% quarter-on-quarter and by 5% year-on-year.

Shorter contracts or contracts for a period of one month or less fell in popularity by 25% over the quarter and 17% over the year.

HEDGING BEHAVIOURS OF UK SMES: INERTIA SETS IN

Change in maturity of hedging contracts bought

0-1 month 1-3 months 3-6 months 6+ months

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

Q/Q Change Y/Y Change

• Three in five (59%) SMEs admitted to having no strategy in place to protect themselves from future currency volatility• This is worrying as over half expect some impact to their business should Sterling fall further• Nearly two fifths (37%) of SMEs believe a further fall in Sterling will negatively impact their business• Over a third (35%) of SMEs are still worried about impact of currency volatilty

Utilising hedging contracts

to help manage the business’

currency exposures

0% 10% 20% 30% 40% 50% 60%

Actively reduce the business’

activity in certain markets

Review the markets in which

we currently do business

Diversify the business’

product range

Look at how the business can

improve its supply chain to

minimise currency risk

Other

Don’t know

My business is unlikely to

do anything in particular to

protect itself against future

currency volatility

SMES UNPROTECTEDFROM FURTHER SHOCKS

If the value of sterling was to fall,what impact would it have on your business?

Which, if any, of the following is your business likely to doto protect itself against future currency volatility?

What do the experts say?

Jeremy Cook, Chief Economist at World First, said: “The volatility of foreign exchange markets over the past twelve months, combined with the current political and economic uncertainty, has made the task of approaching foreign exchange markets with clarity and confidence even more difficult. This has been broadly reflected in the changes we’ve seen in UK SME hedging activity in Q1 so far this year.

“Hedging fatigue has clearly begun to take hold, leaving SMEs more exposed to further currency movements. Our data shows that most SMEs do nothing to protect themselves against future volatility, despite understanding that currency swings could significantly impact their business. Whilst the unpredictability of markets may have business owners scratching their heads, we would always advise firms to be proactive in managing their currency risk and protect themselves from future shocks.”

Positive18%

Negative37%

_

No impact37%

+

Don’t know9%

?=

Rise in inflation, fall in consumer spending and currency volatility are the three most

pressing issues for SMEs at the moment, with a fifth of SMEs expecting these three issues

to negatively impact their business.

• Only a quarter (26%) of SMEs believe there will be no external negative impact

on their business in the next quarter.

THE SME SENTIMENT TRACKERSME trading confidence is on the wane - but what is affecting it?

Which, if any, of the following issues do you expect to impact your business negatively? SECTOR FOCUS

Increased consumer debt 8%

Fail in consumer spending 22%

European elections 4%

Increased regulation in countries abroad 5%

Rise in inflation 22%

Change in governement 18%

Increase in business rates 16%

Increase in interest rates 10%

Increase in taxes 14%

Increase in VAT 10%

Increased regulation in the UK 14%

Limited talent/issues with recruitment 13%

Cash flow 15%

Currency volatility 19%

SMEs in the retail sector are particular worried

about consumer spending with two-in-five (43%)

expecting some negative impact over Q2 whilst

almost a quarter (24%) believe rising inflation will

also have a negative impact.

Whereas medical and health service firms were

more worried about limited talent and issues

with recruitment, as over a third (34%) expect it to

negatively impact their business compared to an

average of 13% across all sectors.

Those in hospitality and leisure also predict

to be negatively impacted by a fall in consumer

spending (40%) and rising inflation (31%)

Research MethodologyAll figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1114

senior decision makers in small/medium British businesses. Fieldwork was undertaken

between the 3rd-11th of April 2017. The survey was carried out online. The figures have

been weighted and are representative of all British business sizes.

World First data on client contracts was collated between 1st January 2017 and 31st

March 2017 and refers to UK corporate desk clients only.

NOTESA forward contract is a contract to exchange a specific amount of one currency for another on a future date, at a predetermined rate. A deposit is normally required for forward contracts.

To hedge or hedging is to protect against future currency movements.

In this report, ‘FX’, ‘foreign exchange’ and ‘foreign currency transfers’ refer to the buying/selling of international money (including the payment of international money).

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