South African businesses that import and export goods are being urged to strengthen their foreign exchange (FX) risk management as global economic uncertainty continues to threaten the rand.
The South African Trade Desk has cautioned businesses against becoming complacent following a period of relative currency stability, warning that renewed volatility could quickly affect import costs, export competitiveness and business margins.
The warning comes as businesses navigate increasingly unpredictable geopolitical and macroeconomic conditions, including shifting global trade policies, volatile oil prices, changing monetary policy and South Africa's high public debt levels.
The Trade Desk has advised businesses to regularly review their currency exposure, make use of forward planning, diversify sourcing strategies and strengthen their foreign exchange risk management processes.
Gilbert Punt, CEO of registered foreign exchange intermediary Kuda FX said that the issue goes beyond predicting where the rand will trade next.
Punt said that any South African chief financial officers (CFO) and chartered accountants are carrying significant foreign exchange risk if they have not formally established how much risk their businesses are prepared to accept.
“A view on the rand is not an FX risk management strategy,” Punt said.
According to Punt, businesses can find themselves exposed when currency decisions are made without a formal policy, clearly defined risk appetite or documented rationale.
“Typically, the magnitude of the problem only surfaces when a material FX loss shows up in the income statement. In our practice we regularly meet CFOs who discover the true extent of their FX risk only when a line item of a few million rand suddenly appears in the management accounts,” he said.
The potential impact of currency movements can be significant for businesses with large foreign currency exposures.
Punt used the example of an exporter with $10 million in foreign currency revenue.
“At R19 to the dollar that translates to R190m. At R16 to the dollar it is R160m. That is a R30m swing before anything has changed operationally in the underlying business,” he said.
“The question isn't whether management correctly predicted the rand. The question is whether the business consciously chose to carry that exposure,” he added.
Punt said the challenge was not necessarily a lack of understanding among finance professionals, but rather the absence of formal processes around foreign exchange risk.
“In many organisations there is no formal FX risk policy, no clear risk appetite and no documented rationale behind decisions that are made,” he said.
He added that decisions could sometimes be based on recent news or personal views about South Africa's economic prospects rather than structured analysis.
“This might work out in a calm market, but it is simply not defensible in a board or audit committee discussion when volatility hits. This leaves a CFO extremely exposed, carrying far more risk than they realised,” Punt said.
The rand has demonstrated resilience despite geopolitical tensions and uncertainty around global trade. However, the South African Trade Desk has warned that this stability should not be mistaken for an absence of risk.
Changes in US monetary policy, global trade disputes and commodity price movements could all contribute to renewed currency volatility.
For importers, a weaker rand can increase the cost of goods and inputs priced in foreign currencies. For exporters, large currency movements can affect the competitiveness and rand value of overseas revenues.
PR Nel, specialist FX risk manager at Kuda FX, said the rand's history of volatility highlighted the limitations of relying on informal approaches.
“If a CA’s only strategy is booking at spot and hoping for the best, you’re effectively playing 10 man rugby without a complete backline,” Nel said.
“You’re taking contact with every phase and trusting that it somehow works out. You need a hedging strategy to know when to play smart rugby.”
Punt and Nel believe businesses should move away from treating foreign exchange as simply a question of where the rand is heading and instead establish clear governance around their exposure.
They suggest a three-step approach of identifying, quantifying and managing the risk.
The first step is to identify where foreign exchange enters the business. This could include imports, exports, offshore debt, capital projects, services and royalties.
Businesses should then consider where a significant movement in the rand could materially affect earnings.
The second step is to quantify that exposure by translating potential currency movements into rand values and assessing them against the company's overall financial position.
“When management understands the potential impact in rands, FX risk stops being an abstract market issue and becomes a clear business problem,” Punt said.
The final step is to establish a formal policy and process.
ashley.lechman@nationalmg.co.za