The Foreign Exchange Landscape - The South African Link

The Foreign Exchange Market plays a pivotal role in South Africa’s political and economic landscape. Its numerous influencing factors and their complex effects on the economy make foreign exchange rates both fascinating and essential to understand. Contrary to what we might think, foreign exchange impacts everyone, from the government and Reserve Bank to multinational companies and private households.

Foreign exchange rates are crucial in determining the cost of investing in South Africa, the cost of imported goods, and the revenue from exports. These factors, along with the value of our currency relative to others, directly influence our economic development.

Several local and international factors are currently affecting the Rand and the South African economy. While our local challenges are significant, South Africa’s status as an emerging market economy means that local events have a relatively limited impact on the Rand’s performance. Major ongoing political processes also significantly impact our currency. The primary global issues influencing the Rand and the broader economy are the aftereffects of the Coronavirus pandemic and the impacts of major global conflicts. These issues have had widespread ripple effects, impacting all sectors and industries globally.

The traditional ways of living and doing business have changed, leading to a “new normal” for the future. This situation worsens the dire state of some of our key State-Owned Enterprises, and the impact on businesses and households is placing much strain on our economy and growth prospects in the short to medium term.

The Bank for International Settlements (BIS) recently published its latest Triennial Central Bank Survey, tracking global foreign exchange activity. According to the BIS, trading in global foreign exchange markets reached USD 6.6 trillion per day in April 2019, up from USD 5.1 trillion three years earlier. The US dollar retained its dominant status, involved in 88% of all trades. The share of Euro trades expanded to 32%, while the Japanese Yen’s share fell by five percentage points, remaining the third most actively traded currency at 17% of all trades.

Emerging market currencies gained market share, reaching 25% of global turnover. Turnover in the Chinese Renminbi grew only slightly faster than the aggregate market, maintaining its position as the eighth most traded currency with a 4.3% share, just after the Swiss franc.

South Africa’s Rand was ranked as the 18th most traded currency in the world, up from 20th three years ago. The Rand accounted for 1.1% of the average daily turnover in April 2019, compared to 1.0% in 2016. Over the last 15 years, the Rand has been used more in trades, despite higher rankings in 2004 and 2007, when it accounted for 0.7% and 0.9% of daily turnover, respectively. The Rand’s trade share is on par with other emerging economies like Russia, India, Brazil, and Turkey.

South Africa has a very open economy, with imports and exports of goods and services contributing nearly 60% to our GDP. In 2019, South Africa recorded over R2.5 trillion in global trade, showing exponential growth since 1994. However, South Africa anticipates a decline in trade, mirroring the global trend. When considering all capital investments in and out of South Africa, it is estimated that up to 80% of our economy is connected to cross-border payments.

One of the biggest challenges for those involved in cross-border currency payments and investments is managing and mitigating the impact of volatile currency markets on business operations, cost competitiveness, and profitability. Without a proper foreign exchange management policy and risk management tools, companies cannot control the adverse effects of currency movements, leading to increased costs and reduced market share and profits.

The demand for Forward Cover/Hedging depends on expectations for the currency, business risk appetite, and the extent to which price increases from exchange rate fluctuations can be passed through. Companies with low-risk appetites will take Forward Cover on all exposures, while those with higher risk appetites will leave exposures open, based on their view of the currency.

In my experience, very few companies or individuals have formal risk management frameworks, relying instead on hope and greed in managing foreign exchange exposures. Decisions on when and how to buy foreign exchange are often emotional and reactive. Importers exposed during recent Rand depreciation may hope for recovery and delay purchasing, while exporters may wait for further weakening to lock in greater profits, driven by greed.

In contrast, companies with a proper risk management framework manage their exposures consistently, resulting in less uncertainty over profitability and greater sustainability.

-Herman Bezuidenhout

Founder of International trade/banking FSP BeztForex.co.za and the global trade AI platform Zynched.com.