Global foreign exchange markets hold key to planning
As one of the world’s most liquid foreign exchange markets and the gateway to the African continent, SA businesses should understand developments in the global foreign exchange (FX) markets to plan for the future.
SA corporates felt the unforgiving effects of the coronavirus several weeks before the official lockdown on March 26, as disruptions in business activity emerged worldwide at the onset of global markets lockdown. At a time when the market had all eyes on US-China trade war, Covid-19 lockdown restrictions set off global supply-chain disruptions.
Global supply chain disruptions in the form of shipment delays, logistics hurdles and an unquenchable demand for resources necessary to complete certain production cycles had dire effects on revenue and growth for corporates. The price action in the wake of Covid-19 caused the oil price to plunge to historic lows, with the US crude oil benchmark trading below zero.
Emerging market equities and FX markets felt the worst sting as global investors flocked to safe haven assets as trade shocks took hold. The rand plunged against the dollar, only to find some solace about R19.35/$ after opening the year about R13.93.
Given this backdrop most corporates have been stuck between a rock and a hard place as the initial wave of Covid-19 triggered liquidity constraints and the ability to raise short-term funding became a serious hurdle. Predicting and managing cash flows efficiently has become nearly impossible for treasurers due to shipment delays and disruptions in the production cycle.
While the importer hedges may have attracted significantly positive mark to market as the rand weakened, most corporates were unable to fully utilise the contracts due to shipment delays during the global lockdown
Businesses or sectors that provide essential goods and services have performed better than others. According to Absa research, top performing sectors in which productivity levels have been slightly up include agriculture, communication and water. Mining, manufacturing, construction, retail and tourism have been hardest hit.
To manage FX exposure local importers seem to have shifted their focus away from longer-term hedging instruments to trading mostly in the spot market. The accelerated pace at which the rand initially plunged made it impossible for corporates to formulate a strong medium-long term view on the direction of the currency.
After the Reserve Bank’s decision to increase dynamic FX hedging tenor from six months to 12, many importers took advantage of the new regulation amendment and were able to lock in attractive forward rates towards the end of 2019.
While the importer hedges may have attracted significantly positive mark to market as the rand weakened, most corporates were unable to fully use the contracts due to shipment delays during the global lockdown.
Importers that had entered into medium-long term FX contracts before lockdown at attractive rates have faced a number of operational challenges and some had to close-out at prevailing market rates, taking profit and boosted cash-flows because of the inability to use the contracts due to shipment delays. This may provide short-term relief, but as lockdown restrictions begin to loosen up and activity picks up corporates have had to purchase currency at prevailing (expensive) market exchange rates.
Where clients did not close out unutilised maturing contracts they entered into expensive FX swaps, which allowed them to extend the contract to a later date. Traditionally, if corporates encountered shipment delays, exchange control regulations allow funds to be kept in a customer foreign currency account for up to 30 days to preserve the value of the funds without encouraging foreign currency hoarding.
In response to the Covid-19 pandemic a number of economic initiatives have been implemented globally by central banks, financial institutions and other regulatory bodies. In SA, the government injected a R500bn stimulus package, of which R200bn was allocated as a loan guarantee scheme to help businesses remain afloat.
Local banks were also able to offer loan repayment holidays to struggling businesses. The Bank has so far cut interest rates by 275 basis points to historical lows to support growth and give relief to consumers from interest loan repayments. The Bank also embarked on a government bond purchasing programme via the secondary market to mop up excessive volatility.
Across the African continent central banks have illustrated a strong commitment and are doing as much as possible through tax relief and growth incentives. So, what has worked? Covid-19 has changed the way the world works and highlighted the importance of adopting technology for business to survive.
The global economic environment is expected to remain weak for some time, and businesses funded mostly in foreign currency-denominated debt to remain vulnerable to currency fluctuations. Managing cash flows will take precedence more than before as global supply chain disruptions and uncertainty continue to dominate.
As the world economy sails through this clouded period corporates will look for FX hedging instruments that offer guaranteed protection against adverse movements in the currency while giving them the flexibility to take advantage and participate in favourable market movements.
• Soyamba is head of FX options sales at Absa CIB
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