Andris Lāriņš: Do Baltic companies pay enough attention to financial market risk management?

Baltic-listed companies lag behind in the use of derivatives – only 28% manage loan interest rate risk and an even smaller number – only 14% – pay attention to the risk of currency fluctuations, although financial markets are increasingly volatile, he concluded. “SEB In the meantime, almost all major companies listed on the German, Swedish and British stock exchanges are very active in managing these risks, according to the latest study of Latvian, Lithuanian and Estonian companies listed on Nasdaq Baltic.

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Price fluctuations in the financial markets caused by the Covid-19 pandemic have once again shifted the priorities for financial risk management to the corporate agenda. It is not that financial risk management was not relevant before, but given the decline in interest rates observed for several years and the relatively calm currency markets, this focus was at the bottom of the list of priorities.

“Last year, no one predicted that the price of oil could be negative (in the US market, the situation in the futures market was on April 20), rarely who allowed the currency of the AAA-rated country to fluctuate within 30% (Norwegian krone did so) and interest rates. rates were expected to be cautiously stable rather than fluctuating within 100 basis points (different interest rates in different markets fluctuated even more in the spring due to increased risk). We also see that in the year-end “In the survey of SEB Finance Directors“, for example, the risk of currency fluctuations has been assessed by entrepreneurs as one of the lowest.

Baltic companies manage loan interest rate risk three times less actively bornas elsewhere in Western Europe

In order to find out the current approach of Baltic companies to financial market risk management, SEB banka analyzed the financial statements of 13 Lithuanian, 4 Latvian and 12 Estonian companies listed on the Nasdaq Baltic stock exchange (excluding financial sector companies) and focused on their risk management. We compared the results of this analysis with the financial risk management practices of the companies listed on the German DAX, the Swedish OMXS30 and the British FTSE100.

Of all the analyzed companies in the Baltic States, only 28% manage loan interest rate risk, converting floating interest rates to fixed ones (usually using interest rate swaps (IRS)). Meanwhile, almost all major companies listed on the German, Swedish and British stock exchanges actively manage interest rate risk through derivative financial transactions – this figure reaches as high as 85-96%. It is worth noting that some Baltic companies, which currently borrow at floating interest rates, are exposed to this risk, but point out that they are actively monitoring the market situation and plan to take measures to manage and mitigate this risk in the face of rising interest rates.

There are many untapped opportunities in managing currency risk

Baltic companies also pay less attention to exchange rate risk management compared to Western European companies. Companies registered in the Baltic States present their financial statements in euros and make most payments in local currency, but companies also use currencies such as the US dollar, the Swedish krona and the Norwegian krone. An example of the risk posed by exchange rate fluctuations could be the fluctuation of the US dollar price, which has been in the range of more than 6% since the beginning of the pandemic in March.

Although financial markets are becoming more volatile, only 14% of Baltic companies claim to reduce the risk of currency fluctuations through derivatives, while in Germany – as many as 92%, in the United Kingdom – 93%, in Sweden – 87% of the analyzed companies manage this risk regularly. As in Western European countries, Baltic companies mainly use forward exchange contracts to manage exchange rate risk and use options very little. In addition to these popular tools, large European companies use modern, option-based insurance strategies, which companies in the Baltics unfortunately use little.

More than half of the Baltic companies have offices outside the euro area, but they do not mention currency risk management measures or consider this risk insignificant, so we can say that Lithuanian, Latvian and Estonian companies still have many untapped opportunities for more active and effective exchange rate risk management. . However, some companies, in cooperation with export and import partners abroad, are likely to avoid foreign exchange risk because contracts are signed in euros or it is agreed to pass on the exchange rate effect to consumers by changing the price lists of goods or services.

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