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Mitigating Currency Exchange Risk For International Businesses in South Africa

The Brexit Vote brought about changes that South Africa didn’t forsee coming. This is how South Africa can mitigate risks with overseas.

Jeff Broth

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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.

Mitigating currency risk usd rand

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.

Related: The Role Of Foreign Exchange In The Economy

Large-multinationals-brexit

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.

Related: Fintech: Fusing Finance And Technology

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.

Jeff Broth, a business writer and advisor. Consulted for SMB owners and entrepreneurs for 7 years now. Mainly covering finance, stocks and emerging fintech trends.

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Business Landscape

Medium-Sized Businesses Reap Greater Rewards In Tough Times

With prominent industry names being added to business rescue reports almost every week, risking it all in times such as these may sound ludicrous.

Kristly McCarthy

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We’ve said it before: Diversifying, streamlining and investing in new ventures during the tough times is vital to a company’s survival.

Running a successful and diverse business requires resources, passion and an unwavering vision. Poised for continuous growth, a company looks to its team of forward-thinking, calculated risk takers to help prepare and invest for the future, now.

Investing in the future and creating wealth means doing things right – right now. With headlines such as ‘real estate investments in SA increase by R28 billion’ and ‘the industrial sector is the top performer in the SA property market’, it makes sense to put your money where your mouth is in 2018.

Bartlett Construction is one such company. Wayne Bartlett, Contract’s Director for Bartlett Construction says that the company opened its property division several years ago in a quest to gain more market share and use its expertise to cultivate a robust property portfolio.

“Accelerating our economy through investment is key. While there are still high hopes for SA in 2018, applying a long-term strategy to property investment allows you to reap the real rewards in future,” says Wayne.

Related: The Ultimate 101 List Of Business Ideas To Start Your Own Business In South Africa

Acquiring, building and renovating factories and industrial spaces has been a focus for the company over the past few years. “We have all seen the headlines about the industrial sector performing well in terms of property and this is true. It’s truly sad to see some of the big names (in all industries) undergoing business rescue but ultimately, waiting for times to change and focusing on one strategy is never advisable – especially not in a market such as this one” he continues.

Creating a scalable business in times such as these is key. Wayne notes that medium-sized companies have remained notably robust by ensuring just the right amount of resources to remain lean, yet effective.

“The economic downturn has had significant impact on both big and small companies. Companies with high overheads, many employees and massive contracts on the line have been most affected. Small companies, on the other hand, with very little business and resources who rely on business from big and medium businesses have also taken a knock.”

Established more than half a century ago and with Wayne having 30-plus years of experience in the industry, it’s fair to say that he has seen it all. “What’s helped our company through the years is remaining scalable and finding balance. Times are tough, and everyone is feeling the pinch – success is dependent on how the industry performs but we try our best to never over invest or under invest; we diversify whilst maintaining high-levels of competency in our current projects, we are fair and reward long-standing, loyal employees who give us that competitive edge and we adapt according to industry and client needs.” Wayne concludes.

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Business Landscape

How To Leverage Partnerships, Industry Associations & Endorsements

Nobody can succeed in business entirely on their own without personal as well as professional support. ‘Signing up’ can be a deciding factor in the growth of a company, says the Proudly SA CEO.

Eustace Mashimbye

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Leverage by association can be a great business tool. Hitching your wagon to an industry associated body, joining a local chamber of commerce, or seeking a respected contemporary’s endorsement can change your brand recognition struggle to an opportunity. Becoming part of a whole new entity can be one of the best decisions you will ever make.

How to choose your partner or affiliation?

You know the expression ‘Two heads are better than one’ so you should choose a partner or affiliation that exposes you to twice as big an audience as you can reach alone, preferably with a different customer base. Find an association that fits with your own business ethos and has the same goals as you, otherwise you will find you are working against each other rather than complementing each other.

What do you stand to gain?

By association you will appear in listings, on websites, you will be invited to related events where you can network your socks off, and in some cases, doors will automatically be opened for you. Visibly aligning yourself with an organisation that can propel your brand and/or product into the market place should be grabbed with both hands.

What does the partner stand to gain?

Your relationship with a partner should be symbiotic, benefitting from each other’s contacts as well as a platform for sharing ideas.

Related: How Do I Register A Partnership And What Documents Are Involved?

What are my responsibilities towards the other party in the relationship?

Perhaps you will have to add a logo to your marketing collateral or packaging, perhaps you will have to comply to standards even higher than those you set for yourself. Perhaps you will have to pay subs or a small joining fee, or even a large joining fee, so you need to decide what you can afford and when.

But you must view the relationship in a positive light even if it involves redesigning artwork or re jigging your material. There is no point in ‘signing up’ if you’re not prepared to share your brand affiliation with your customers and suppliers. It’s like getting married and refusing to wear a ring.

How long should I sign up for?

You really should take a long-term view of any marketing relationship. Your hook up may take time to filter down into the market place, you may have a lot of pre- relationship stock that doesn’t have the logo of your new partner on it, so you will need to give a fair chance to the whole exercise.

What happens if one party brings the other company into disrepute by association?

No one wants to be brought down if someone or something with which you are closely associated is found not to be quite as ethical or honest as you. Don’t forget this isn’t a JV, it’s a brand partnership, and so as long as you are operating separately, you will always be able to distance yourself from any scandal should the need arise. (But hopefully you chose your brand affiliation well!) , but by and large, being the single part of a whole can only be beneficial when you’re starting to build your brand.

How does using the Proudly South African ‘tick’ logo fit in?

The Proudly SA logo is the mark of an authentically locally grown, manufactured or produced item or service that is of proven high quality. It can be leveraged in the same way as any other brand affiliation and can assist in providing access to market and building trust with your buyers and suppliers.

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Business Landscape

The Differences Between A Supplier Relationship, Agency And Distributor

To a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.

Nicolene Schoeman-Louw

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Many businesses reach the point where they have to consider in which way to best expand its market share and reach. In many industries, a customer and supplier arrangement are sufficient, but in others different arrangements such as agency or distribution are preferred.

So, the question is – what is best and when?

Well, to a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.

1. Supplier / Customer

This is a typical arrangement of a willing buyer willing seller. In most instances this is the typical way in which business is run or at the very least to a large degree this is the starting point. Clients or customers are typically engaged by agreement usually a form of terms and conditions or perhaps even an agreement detailing credit.

Related: Supplier Agreements – Do I Need A Written Agreement?

2. Agency

An agency agreement could either relate to an individual or an organisation. This means an individual or a business could represent the supplier of the goods or services and earn a commission or remuneration for their efforts to sell the goods or services.

In this context an individual is often referred to as a “rep”, which is a typical arrangement for wholesalers marketing products to retailers.  In many instances these agreements do not constitute employment contracts and further, the agent does not buy and on-sell the products.

The agent usually refers orders to the supplier and therefore is cost effective for both parties and further limits risk. This also means that the supplier benefits from a relatively low input cost and commitment but increased sale. An important portion of an agreement such as this is that the agent has certain powers in representing the supplier.  It is therefore of crucial importance that the agent’s powers are constructed in such a way as to serve the needs and best interests of both parties.

3. Distribution

A crucial difference between agency agreements and distribution is twofold – one: that the distributor does not have any power of representation as an agent would typically have. Secondly, that the distributor usually purchases the goods / products from the supplier and then stores, transports and sells, as the case may be. In most cases these agreements are confined to goods.

It is therefore important for the business to assess what would sell the most products or services in the shortest space of time. Then to seek professional advice to construct the most suitable agreement.

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