“Where will the Rand be next year? You pose this question to 100 people, and you will probably get 100 different answers. Yet, it is a crucial topic to consider if you are an Importer or Exporter.”
The South African Rand is one of the most fascinating currencies in the world and businesses who can manage their currency risk are likely to enjoy enhanced profitability.
Consider for a moment that the Rand is one of the top 20 most actively traded currencies in the world. Simultaneously, it is also one of the top 10 most volatile currencies according to some recent research out of PwC.
Now imagine running a business where you are pushing through millions of Rands of imports or exports each year. It only takes a knee-jerk reaction to an interest rate fluctuation or a geo-political event in Russia, China, Taiwan or any of the other global hot-spots and you could find your business plans de-railed as profits deteriorate.
This is where it makes sense to consider outsourcing your Treasury and Foreign Exchange activities to industry experts which allows you, as an entrepreneur, to focus on running your own business.
Let’s look at a practical example why this is a good idea.
Exporter X received an order of $100 000 for their products in September 2022 when the Rand, Dollar exchange rate was trading at around R18.1460 to the US dollar. Our exporter worked out that they would be receiving R1 814 600 in three months’ time when the customer pays them. They took the view that with the Rand mostly weakening, they might even get a bit more upside which could assist them to generate a slightly higher margin on their products.
Their view on the currency market was in fact incorrect and the Rand started strengthening and it became a waiting game for our exporter who was constantly hoping that the local currency would weaken again. Enter the next part of the equation: The exporter is not sure of the exact date of when they would receive the Dollars.
The Dollars eventually arrived at the end of December 2022 and the bank converted the currency at R17.00.
They had planned on receiving R1 814 600 but now only received R1 700 000 which translated into a loss of R114 600 This was greater than the profit margin that they had built into their price – for every Dollar of the contract, they had lost more than one Rand.
The advisable procedure for the exporter should have been to have hedged their exposure in September 2022 – on the day that they received the order – and to sell the Dollars 3 months forward. In other words, they could have fixed their exchange rate for the date of the expected receivables. Had they sold their Dollars forward on that day they would have in fact received at least an additional 15 cents in their favour.
This is the reality for many exporters and importers – factors out of their control can make the difference between realising a profit or loss on their contracts and it is critical that they try and put in place strategies to mitigate these risks.
The question for business owners is whether they have the expertise and skills to be tracking the currency markets and making informed decisions or whether they rely on experts who can guide them. For the example which we have outlined above, we have touched on the exchange rate but there are many other moving parts that impact the profitability of a transaction including interest rates, commodity prices and liquidity.
Importantly, an external party can introduce an element of independence which brings a fresh set of eyes to each transaction and eliminates bias that might creep in when the entrepreneur prices their deal or has an allegiance to a specific financial institution.
Importers and exporters who are transacting in Rands operate in one of the most challenging Emerging Markets in the world. The introduction of high-quality professionals to support the Treasury function of your business could make a material difference in profitability and should be a key consideration as part of your strategy in 2023.
Carlos Martins has over 30 years of financial markets experience. His treasury management skills were gained and honed over his 24 years spent in large South African corporates, various treasury service companies and the South African banking sector. His practical exposure to both the corporate and the banking financial risk management philosophies and processes enables him to devise risk management strategies which are best suited to corporate South Africa.
Carlos is a co-founder and director of Change Financial Solutions, a licensed FSP, where he is responsible for Advisory Services, Compliance and Financial Management.
