Managing fluctuations in currency and interest rates

Most businesses in the healthcare sector are affected by fluctuations in currency and interest rates. NAB’s Head of Corporate & Institutional Markets, Darren Hooton, cautions against complacency and suggests strategies for mitigating risk.

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From dental chairs to pharmaceuticals, many of the products which are fundamental to Australia’s healthcare sector are manufactured overseas.

“There are some local manufacturers but the bulk of the goods used are imported,” says Darren Hooton, Head of Corporate & Institutional Markets, Interest Rate Risk Management at National Australia Bank. “As a result, many healthcare businesses are exposed to fluctuations in currency.”

The exchange rate had been relatively steady for a couple of years when, in April, a sharp fall took many people by surprise.

“Some business owners found themselves paying $115 for something that had cost $100 just three months earlier,” says Hooton. “That’s a big difference, and you can’t just pass that kind of increase on to your customers. It’s important not to become complacent – an exposure needs to be managed.”

One mitigating strategy is to lock in an exchange rate with a forward foreign currency contract. This can provide some security on pricing months or years into the future.

“The length of these contracts will vary according to circumstances,” says Hooton. “Some are as short as three months but many companies provide 12 to 18-month forecasts for their equity shareholders so they’re looking for a degree of certainty over this time frame. Longer contracts are less common but can be useful.  For example, if you had a five-year agreement with a hospital to supply equipment at a fixed price you would want to review all your options to find the most suitable.”

As currency can appreciate as well as depreciate it’s common to retain a little exposure. “If you calculate that you’re going to be paying $100 a month, you might lock in a rate to sell at $75 a month so you can still benefit from any positive shocks,” says Hooton.

The cost of borrowing

Consistently low interest rates could also be lulling business owners into a false sense of security. “It’s easy to forget that, just a few years ago, the cost of borrowing was twice what it is now,” says Hooton.

“There’s no evidence that rates will return to pre-GFC levels in the near future but, again, it’s important not to become complacent. You should be thinking about how you’d manage any increase and factoring possible rises into your budget. ‘An option available is locking in a fixed rate on at least some of your borrowings. As with a locked-in currency exchange rate, this can potentially offer a degree of certainty.’

The one sure thing about the future is its unpredictability. “Every business needs to identify risks and put strategies in place to mitigate them,” says Hooton. “Even doing nothing could be a reasonable strategy if that’s an active decision based on a careful assessment of your business, the economic environment and your goals. But, in these uncertain times, no business owner can afford to sit back and hope for the best.”

Find out more about managing interest rate risks.

The information in this article is current as at the date of publication. While every attempt has been made to ensure the accuracy and reliability of the information, it is not guaranteed in any way. The above information is general in nature and does not take into account your personal objectives, financial situation or needs. It is recommended that you seek professional advice on any information contained within this document.