South Africa is currently facing a number of economic challenges including weak economic growth prospects in an environment where consumer prices and interest rates are on the rise.
To add to this bleak situation of economic uncertainty, the credit rating agency Moody says that South Africa would be one of the worst hit countries in Sub Saharan Africa after the Brexit; although the effect would be minimal.
A few weeks after the Brexit vote on June 23rd, the rand has experienced high volatility against both the dollar and the sterling pound, triggering fearful sentiments from international business owners in South Africa.
Multinationals always get worried about the foreign exchange movements, since this can result to very high costs on their businesses when transferring the money from one country to the other.
International business owners monitor the exchange rate between the rand and the US dollar since most of their business transactions are paid for using the dollars. However, when the parent companies for multinationals, most of which are located outside South Africa, transfer money to their local subsidiaries, the dollars have to be converted into the local rand for them to be used to make payments back at home.
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This explains why international business owners keep their eyes very close to the currency markets at all times; and why the latest volatility of the rand is a concern for them.
South African Rand after Brexit
After the Brexit vote the sterling pound lost about 9% to the US dollar the following day on Friday. This was quite close to what the global hedge fund investor George Soros had predicted a few days before.
The ripple effect of the exit vote is now being felt far and wide including in the emerging and developing markets, which were initially thought to be out of reach.
In South Africa, the rand price in the currency markets has been fluctuating randomly mirroring the uncertainty being experienced currently in the global economy following the Brexit vote.
In the last week, the rand reached highs of 19.50 against the sterling pound on Tuesday and closed in a much lower rate of 18.77 against the pound. The South African rand also ended the week at a low rate of 14.46 against the US dollar.
Viewed against the fact that it has gained about 25% since the beginning of the year, the rand seem to be generally performing well against its international counterparts. However, volatility is what is instilling fear in investors and business owners.
Since the Brexit, the South African rand has been fluctuating against the dollar within a wider range between 2% to 8%.
These wide variations could mean losing, or gaining, a lot of money for international investors and business owners in South Africa during their currency conversions; and depending on the direction of the price movement.
Multinationals currency risks mitigations
To mitigate these kinds of risks, international business owners are resorting to various strategies to lessen their currency exchange risk exposure.
For most multinationals, hedging against currency fluctuations by use of plain vanilla options comes in handy; where they have the right to exercise their options if the market moves in their favour.
Other international business owners prefer forward contracts, in which case parties to the contract are obligated to exercise the contracts at the expiration of the forward contract period.
In both options, the business owner enters into an agreement with another party to make payment in the future at an agreed upon price today in either the local or foreign currency. This protects the business owner by ensuring that any price changes will not affect the value of their pre-agreed business deal.
Even with the above hedging options and forward contracts in place, multinationals and other international business owners will have to transfer money from one country to another. Whether you are transferring money from UK, USA or EU to South Africa, the current currency volatility will have an impact on your transactions.
To overcome this challenge and reduce the costs of money transfer, it will therefore be prudent to look for commercial foreign exchange companies that will give you the best deal in the market any day.
As the Brexit waves calm within global financial markets, we expect the rand to also gain stability and be more predictable.
This will then help international business owners in South Africa to make more informed investment decisions, without the fear of currency volatility.