Firms fearful over financial market risks to their stability

BUSINESS confidence has recovered to a two-year high, but firms are increasingly worried about financial market risks upon their businesses, particularly when it comes to commodity prices, interest rates and inflation, research today reveals.

The latest Business Risk Report by Lloyds TSB shows that a growing number of companies across the UK are worried about adverse developments in financial markets.

Despite this increasing anxiety, the survey of more than 1,700 British firms highlights the fact that nearly 90 per cent have no measures in place to counteract these risks.

Clare Francis, managing director with Lloyds TSB corporate markets, said UK firms were "clearly" increasingly aware of, and wary of, risks posed by factors such as fluctuating interest rates.

"Particularly on the rise is the potential negative impact of foreign exchange volatility and commodity prices," Francis noted. "Additionally, inflation-linked enquiries from corporates has increased."

In Scotland, 56 per cent of the companies quizzed said they were more concerned about the potential impact of rising commodity prices than they were six months previously.

This represented the largest percentage-point increase across all financial market categories, all of which showed rises.

The number of Scottish firms worried about interest rate volatility rose to 27 per cent, up from 16 per cent in June 2009. Inflation concerns rose to 28 per cent from 20 per cent previously, while 50 per cent of businesses north of the Border said they were increasingly anxious about foreign exchange movements, up from 46 per cent six months earlier.

However, none of the Scottish companies surveyed had mechanisms in place to mitigate against the potential impact of rising raw material costs.

Just 2 per cent said they were hedged against inflation.

The figures were better when it came to foreign exchange, with 13 per cent saying they were prepared to combat the adverse results of fluctuating currency rates. More than one in ten – some 14 per cent – said they were prepared for the possibility of rising UK interest rates.

A spokesman for Lloyds TSB said anecdotal evidence suggested that Scotland's lack of preparation for combating rising raw material costs lay partly in the fact that a relatively high number of its firms operate in the dollar-denominated oil industry, where shifting commodity prices are ingrained in the business framework.

This may also partly explain the low level of foreign exchange hedging reported in the latest survey.

Across the UK, 55 per cent of companies said they were more concerned than six months previously about the impact of foreign exchange movements, up from 45 per cent in June of last year.

Just shy of half the companies said they were more aware of commodity price risks, while the number of firms with apprehensions concerning inflation and interest rates stood at 27 per cent and 21 per cent respectively.

Commodity price concerns were highest among those firms with an annual turnover of 5 million or less, while smaller firms were also most disturbed about inflation and interest rate volatility.

Concerns about foreign exchange movements rose across the board, but tended to be higher among larger organisations.