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.
Related: Investing Trends In South Africa
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.
How Investors Can Take Advantage Of The Rand’s Currency Trading Rates
Negative sentiment is likely to be pervasive with the SA economy, and it will take more than a new figurehead in government to right the wrongs of a mismanaged economy.
The USD/ZAR currency pair is trading in the 13.65 range heading into mid-December 2017. Over the past year, the 52-week low was 12.3126, and the 52-week high was 14.5742. As one of the more volatile currencies in the trading spectrum, the ZAR is closely associated with the political shenanigans taking place in South Africa.
The year to date return for the currency pair is -0.50%, after having started 2017 at 13.7351. Much of the activity taking place with the ZAR is speculative. Futures contracts are largely responsible for the whipsaw movements in prices.
Wilkins Finance strategists stress the importance of credit ratings agencies on currencies:
‘Whenever credit ratings agencies such as Moody’s and Fitch downgrade their assessments of the South African economy, this has a negative impact on the ZAR. The impact is not always predictable however – towards the end of November 2017, the USD/ZAR had appreciated after the recent ratings downgrade of the economy.’
Moody’s Investors Service downgraded South Africa’s economy to a rating of Baa3. This is the lowest rating level for Moody’s. Further ratings will be announced in February next year. Fitch has already downgraded the foreign currency and local currency to BB +, but has offered a stable Outlook for the ZAR.
That S&P also downgraded the South African economy to sub-investment grade is an important decision, and one that will have negative ramifications for the South African bonds market. Now, the Barclays Global Bond Index will no longer feature South African bonds. That South Africa’s bond market will be excluded from the World Government Bond Index will also be a bugbear to any hopes of the ZAR appreciating.
Interest Rates in the South African Economy
The South African interest rate is highly attractive to foreign investors, given that the UK, US, Canada, Japan, and European bank rates are at historic lows. There is little to be gained by investing cash in fixed-interest-bearing securities in these economies. The current interest rate in South Africa is 6.75% (as at November 23, 2017). The interest rate has dropped to expand economic activity in the country.
Overall, South Africa’s inflation rate for the year is expected to remain at 5.3% dropping to 5.2% in 2018 and rising to 5.5% by 2019. Global investors remain concerned about the risk/reward environment in South Africa. The country has experienced significant capital outflows in recent years, driven in large part by uncertainty regarding future prospects. The USD/ZAR was trading at 14.60 in late November, and current ZAR strength is being attributed to USD weakness.
Factors on Both Sides of the Atlantic
One of the major economic events affecting exchange rates will be the reconciliation of the House and Senate bills on US tax legislation. Any major overhaul of the US tax code will invariably result in a dramatically boosted USD, and a weakened ZAR. For traders, it appears to be short-term call options on the local currency and long-term call options on the USD.
It is evident that currency traders are hedging against the ZAR over the long-term. The fundamentals of the economy are structurally unstable. The power grid infrastructure, water supply problems, and political instability at the highest echelons are but a few of the many problems plaguing South African growth prospects.
However, the ZAR will draw strength from the election of a credible leader, and this will be particularly noteworthy with Cyril Ramaphosa’s appointment. Overall, negative sentiment is likely to be pervasive with the SA economy, and it will take more than a new figurehead in government to right the wrongs of a mismanaged economy.
For many people, the holiday season represents a time of change.
For many people, the holiday season represents a time of change. Some folks have made the decision throughout the year to start a new business in 2018, and the festive season’s message is one of hope for a bright new entrepreneurial future. Unfortunately, for most, this dream can become a nightmare without considerable amounts of planning on part of the entrepreneur and start-up founder.
So, without sounding too depressing, Christmas and New Year’s should be a time for stringent planning rather than celebration for the season and the year ahead. Call me Ebenezer Scrooge, but hitting the laptop and doing research is the best thing an entrepreneur can do while family and friends are unwrapping gifts or holiday-making.
As a business owner who has used the month of January as a starting block for my foray into a new industry, I can say that one of the problems I encountered was not accurately defining my customer personas, both in real-time and online. It got me thinking; if I can make the mistake when it comes to accurately segmenting customers in real-time, how many people make the mistake of inaccurately creating customer personas for their online brands?
It’s All About the Customer
Creating a customer persona is easy. Most business founders have an idea of who their customer is before marketing their product. And once you know who the customer is, its just as easy to find out their likes and dislikes, as well as their habits.
The best way to create customer personas is to base your personas on research and data. Many established businesses find this a simple task, as they have a wealth of clients from which to draw this data. Unfortunately, this is not the case for business founders, so they must carefully test the waters using surveys, third-party research, and an ear-to-the-ground within the industry.
Once a business understands its various buyer personas, it’s time to start considering the typical online buyer persona…
Just because you can accurately determine your optimal customer due to your created customer personas, you may have to create alternative personas for online consumers. This is because a slightly different person will be looking for your product online.
As an example, Bob owns a pool business, building as well as maintaining pools for residential clients across Johannesburg. Bob’s nominal customer persona is that of Adam, the 40-something business owner who owns a home in a middle-class neighbourhood. Adam is likely to come across Bob’s out-of-home marketing material, or comes to Bob for business through referrals. However, Adam differs from Lerato. Lerato is a different age, race and gender. Even more importantly, Lerato looks for products and services exclusively online. To appeal to Lerato over Adam, Bob’s customer persona must be changed for the online customer, and the online customer must be exposed to tailored content to be appealed to.
Lerato also lives in a middle-class neighbourhood, but Lerato has young children, while Adam’s children have now moved out of home. This means that Bob can take advantage of Lerato’s need for pool safety nets and a custom-built pool fences, and Bob will make sure that Lerato is exposed to content about these services while making her online journey.
When creating online material, ensure that it is developed to take advantage of the online customer. One mistake that business owners make is that, in their attempts to be recognised as industry leaders, they try very hard to use industry specific language. They make attempts toward showing their prowess in the trade and showcase their own certification and business journey.
The online customer persona representing the business’s primary online buyer does not care about the business’s goals and objectives, and they have no clue as to what is being said when the website uses online lingo. They want content created for them; they want to know why they need the product or service, they want to know that they are using the best business for the job, and they want social proof regarding the service offered.
Make sure that you do proper content mapping research, and identify the online journey taken by the consumer through online channels before they make a purchasing decision.
Take this a step further and make sure that you define several online customer personas. Determine the value of each persona and structure content and the consumer journey for the most profitable of the personas. Additionally, determine the lifecycle of the journey, how much attention a segment of online content generates, and capitalise accordingly. For example, if most of the purchasing decision is made on the product or service landing page, make sure that the landing page is optimised as often as possible to increase your business’s revenue.
Hit January 2018 running, and make sure you understand your online client before receiving your first online lead. And if you make a few mistakes initially, don’t worry. 2017 was – and 2018 will be – known for being the year of big data, where business owners make operations and marketing decisions based on the behaviour of customers online. Always analyse the data available to your business when made available, and make changes accordingly. The best of luck for the year ahead!
How South African Small Business Owners Can Overcome Economic Uncertainty
Here are three things you can do to overcome these economic challenges.
South Africa’s entrepreneurs haven’t had it easy. The current political landscape coupled with global uncertainty has brought with it significant business instability.
This is evidenced in Xero’s 2017 State of SA Small Business Report which found that 68% of small businesses view economic instability as their number one challenge, while 38% are concerned about their cash flow.
Within the small business community, the report also highlights a growing frustration with the government’s lack of support to help keep them afloat. Despite being set up to do just that, 89% of small businesses don’t feel that The Department of Small Business provides the right support.
This lack of support extends across government: 48% of entrepreneurs would like to see more funding, 44% want less red tape, 43% call for more tax breaks, and 36% want better access to finance. While these requests are perfectly reasonable, they’ll only take effect if the government gives them the go-ahead.
Implementing more measures to support small businesses will take time. This means 2018 is going to be just as challenging as 2017 – if not more so.
Here are three things you can do to overcome these economic challenges.
Smaller businesses are typically more agile than their larger competitors. This is a huge advantage when navigating an unpredictable market. Macro-economic challenges are, for the most part, beyond your control. Rather than try and ‘fix’ the situation, move with the market and adapt to its changing nature.
The best way to maintain customer relevancy is to review your offer regularly and look for ways to improve it. You could consider lowering your prices – as long as it doesn’t upset the books. Or think about investing money back into the business to yield greater returns.
There’s no one-size-fits all approach, so just make sure you do what is right for your business. Part of this is ensuring you stay fresh in the eyes of your customers by continuing to respond to their evolving needs.
2Invest in new technologies
Investing in the most up-to-date technology will pay off in the long run. For South Africa’s small businesses, technology is only growing in importance: where 19% said it was essential last year, that number has increased to 49% in 2017.
Cloud accounting software, for example, can help you understand your company finances and track budgetary health in real-time. Knowing exactly where your funds are and how they’re being allocated, enables a much faster response time – this is critical during unstable economic times.
Technology can also help you build a more competitive business by reducing wasteful expenses, automating time-consuming data entry tasks and streamlining processes for greater efficiency.
The more knowledge you have, the easier it is to put measures in place that will enhance your company’s operations.
3Deliver superior customer service
Purse strings might get tightened during tough economic times, but there will always be demand for certain products. Ensure you give your customers a superior user experience when they engage with you, and they’ll return.
It’s not always possible to compete on price. Bigger, more established companies generally have the capital reserves to undercut their rivals. But, small businesses can always compete on value. If you can offer a superior customer service, then you’ll receive customer loyalty in return – this is priceless in a volatile economy.
The past year has been incredibly challenging – and it’s unlikely to get easier as we move into 2018. But, the most successful entrepreneurs don’t let the economy thwart their ambitions – they equip their business to weather any storm. The sooner you innovate and adapt your business, the better your chances of success.
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