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Volatile Czech currency requires consistent risk management

Local companies should pay great attention to currency risk management in the present period of CZK volatility and uncertainty about its future heading. The number of companies that have to deal with currency hedging is growing rapidly. “As new countries decide to join the Euro, we can assume that the number of companies using IFRS that will be required to account in euro will grow,” said Petr Kříž, a partner in Assurance services of PricewaterhouseCoopers Czech Republic, at the currency risk conference.

If the Czech government agrees to join the Euro this year, it will become the Czech national currency 1 January 2013, at the earliest. In such a small open economy as the Czech Republic is, the Euro has already become a cross-border currency. But those companies that are not active in international trade and do business only in CZK should also pay attention to the exchange rate.

Petr Kříž emphasise:

„Our advantage here in the Czech Republic is that many prices have still been negotiated in the local currency. That is true for the average enterprise, but not for every industry. In many cases the prices are set in a foreign currency even though they are settled in CZK. Or the contracts include a currency clause exposing them to currency risk.“

The urgency of consistent currency risk management increased due to the enormous exchange rate volatility caused by the global financial crisis. Lower trade volumes also mean fewer monetary transactions, which contributes to the exchange rate volatility. Frequent and hard to assess exchange rate movements can be crucial for the economic results of companies.

Petr Kříž said:

„Exchange rate gains or losses recognised as such in the income statement are only a part of currency risk the company is facing. A company runs this risk from the time it receives an invoice to the moment when the company pays it or from the time the company issues an invoice to the moment when it gets paid. This part of currency risk is clearly seen in the income statement. It my view the more significant part of currency risk is not that evident from the income statement. It is impacted by exchange rate movements from the moment the company concludes a contract to the time it issues an invoice or from the time the company concludes the contract to the moment of delivery.”

These exchange rate movements directly impact volume of company sales or the cost of purchased goods. Every company has an option to off-set part of or the whole currency risk using so-called hedging. If the company decides not to use hedging, it loses control of how the currency movements impact its net profit.  It can be higher or lower. But in every case the volatility will increase. And hence the majority of Slovak companies appreciate when the country has joined the Euro, according to Branislav Sušila, Manager, Advisory, PricewaterhouseCoopers Slovakia.

Sušila advise Czech enterprises:

„Exporters to Slovakia should consider closing contracts in CZK as long as CZK starts to appreciate significantly against the euro again. Companies operating in both countries should consider which purchases or sales are more profitable in the Czech Republic and which in Slovakia.“

Companies should always understand the risk they decided to hedge against. Understanding the instrument used for the risk elimination is crucial. If a company decides to use complex hedging instruments, it should be informed about their risk profile and such instruments will in most cases not be eligible for hedge accounting. And hence the company should consider using them only in specific situations.

Other PwC press releases, publications, surveys and expert articles can be found at www.pwc.cz/engpress