EXPORTERS IN THE UK WORRIED OVER SURGE IN POUND'S VALUE

EXPORTERS IN THE UK WORRIED OVER SURGE IN POUND'S VALUE

Britain's exporters are in a far-from-happy mood. Having enjoyed a relatively stable exchange rate environment until a month ago, especially against other key European currencies, they are now faced with a strengthening pound that threatens to hit overseas sales and eat into profits.

The country's textiles industry is particularly alarmed by the recent advance of sterling because of the added threat of cut-price imports from low- cost producers in the Far East. The auto industry is taking a slightly more relaxed view but acknowledges that a further rise in the value of the pound against the deutsche mark would be bad news.The United Kingdom's biggest exporter, Imperial Chemical Industries, hopes the present situation proves to be only temporary and that stability will be restored, a view echoed by the Confederation of British Industry, which represents some 250,000 U.K. companies.

It is not generally recognized how sensitive the economics of exporters are to movements in exchange rates, said John Banham, director general of the CBI.

Abrupt and unpredictable upward movements in sterling can be very damaging, he warned.

The pound climbed to a two-year high on a trade-weighted basis this week, advancing to DM3.14 against the German currency at one stage and above $1.88. A month ago, the pound was trading below DM3.00 and around $1.77 before an apparent difference of opinion between Prime Minister Margaret Thatcher and Chancellor of the Exchequer Nigel Lawson over exchange rate strategy led to the sterling being uncapped.

Although Britain exported some 11 billion ($20 billion) worth of merchandise to the United States last year, representing almost 14 percent of total U.K. exports, British industry is less worried about the dollar exchange rate than the pound's value against the German currency.

More than half Britain's overseas trade is with other European Community countries, most of whose currencies are linked together through the European Monetary System.

Mrs. Thatcher has persistently resisted full EMS membership for Britain despite pressure from industry and most of her Cabinet colleagues.

The shift in policy comes at a time when Britain's international trade account is under pressure. After several years of surplus, the balance of payments current account moved into deficit last year, while the monthly shortfalls widened sharply in January and February.

For some companies, the appreciation in the value of the pound against the

dollar from $1.48 at the end of 1986 to $1.88 at the end of last year has had more of an impact on corporate profits, after converting dollar earnings into sterling, than on trade flows.

BAT Industries, the company trying to buy Farmers Group, said last month that its pretax profit of 1.4 billion would have been 192 million ($360 million) higher had exchange rates remained unchanged.

A well-balanced and geographically diversified company like BAT is more vulnerable to the translation than the transaction effect of currency shifts, and the company said the recent advance of the pound is likely to have relatively little influence on corporate strategy or sales.

Likewise, ICI points out that only 9 percent of its products sold in the United States are not actually manufactured there, thus minimizing the company's currency exposure. And, whereas losses may occur when earnings are translated back into profits, there can be corresponding benefits when buying

dollar-priced bulk commodities.

We're not whining, a spokesman said, but ICI would certainly be concerned if the pound showed signs of returning to the DM4.0 level that prevailed in the early '80s, a view shared by many others.

That would be a cause for great concern, a CBI spokesman said.

Auto industry sources concurred.

Anything close to DM4.00 would have a very harmful effect, the Society for Motor Manufacturers and Traders said.

Britain's carmakers are not too worried about the sterling-dollar exchange rate right now, pointing out that most U.K. car exports to the United States are in the luxury bracket, which is generally less price-sensitive than the cheaper end of the market. But a stronger pound against the deutsche mark would draw in more West German imports.

Even the present sterling-deutsche mark rate is upsetting the textiles industry, though.

It's uncomfortably high, admits Colin Purvis, assistant director of the British Textiles Confederation. Likewise, the pound's strength against the

dollar has implications not only for British exports to the United States but for imports from Southeast Asian countries whose currencies are pegged to the

dollar.

It's high time those countries cut links with the dollar and allowed their currencies to appreciate to a more realistic level, Mr. Purvis said.

In the services sector, U.K.-based companies with sterling costs but

revenues largely in dollars are reviewing their overheads. This is particularly true of the insurance broking industry where something like 60 percent of income is dollar-denominated.

Companies involved in low margin business could find themselves in awful trouble says Hady Wakefield, chairman of C.T. Bowring Reinsurance Ltd., part of the Marsh & McLennan insurance broking group.

Nevertheless, Mr. Wakefield is confident that C.T. Bowring will be able to live with currency fluctuations now being experienced, just as the industry has in the past. They have to be regarded as an act of God, he said.

Generally, though, most British companies involved in international trade would like dearly to return to the environment that existed until a month ago when the pound was shadowing the European Monetary System currencies and industry felt confident of a fair degree of exchange rate management.

Stability rather than uncertainty is the key factor, the CBI insisted.

Impact of Dollar-Sterling

Exchange Rate*

Pre-tax Profit or Loss, 1986

(Millions of Pounds)

Exchange Rate Profit/Loss (-)

1 = $2.00 -22

1 = $1.80 - 7

1 = $1.60 14

1 = $1.40 39

1 = $1.28 61

* Table shows how different dollar/sterling exchange rates can affect the profits of a British company with a large exposure in the United States. The company is a member of the Confederation of British Industry. The figures have been adjusted to disguise the company's identity.

Source: Confederation of British Industry