2021: FX Lessons
from a Nervous Year

What did 2021 teach corporates about foreign exchange (FX) amid the ups and downs of a volatile year?

For many, the year 2021 felt like a repeat – or simply a continuation – of the turbulence of 2020. Lockdowns, riots, local elections, global ructions, economic ups and downs… Chris Paizis, Head of Corporate FX and International Banking at Absa Group, reflected on that roller coaster when asked to sum up the year in a few words.

“Relief is one word that comes to mind,” he says. “That’s relief in terms of how certain sectors recovered from what happened in 2020. In the first half of the year I would also have said optimism. However, with lower growth rates, ongoing supply chain issues, the state of global geopolitics and the COVID-19 crisis, that optimism has been replaced by caution as we enter 2022.”

This year was, as Paizis puts it, a continuation of 2020. “It was the new reality, and that was reflected in FX markets,” he says. “Trade flows increased and lots of sectors did very well in terms of their year-on-year performance. But that didn’t mean that all the normal causes of FX volatility disappeared. This year also presented South Africa with the triple whammy of COVID-19, load shedding and internal political unrest. There were also geopolitical issues in Afghanistan, in Eastern Europe and in emerging markets such as Turkey, as well as the ongoing tensions between China and the United States. Events have increasingly shown that if China sneezes, the world catches a cold. So for emerging markets broadly, 2021 has been a very nervous year.”

Issues around global supply chains and higher oil prices have only fuelled that nervousness. “You now have a scenario where China can’t produce things quickly enough for certain industries,” says Paizis. “That’s hitting some of our clients quite hard. At the same time, South Africa has had renewed intensity in load shedding, while the unrest in July created even more supply chain uncertainties.”

For FX markets, the only certainty going into 2022 is more uncertainty. That, says Paizis, is forcing both banks and their clients to change the way they do business.

“From a client perspective, managing your cash flows has become a lot more difficult – so the ability to manage FX has become more relevant than ever,” says Paizis. “You cannot be blasé about your hedging policy, the instruments and banking partners you use or the electronic channels that are available.”

Speed of change has increased, and speed of action (and reaction) has become vitally important in the FX space. “For example, if you are in South Africa and your budget rate as an importer is R15/USD, you’re not going to do anything if it’s at R15.50/USD. But you know how quickly markets can move these days, so you need to be nimble enough to act when it’s below R15/USD,” says Paizis.

As corporates are pushed to become quicker with their decision-making, the quality of their relationship with their bank has become a much bigger factor in the success of their business.

“The year 2021 has taught us that clients have to see their banks as partners, in the truest sense of the word. It’s not about the price you get for your FX. It’s about the quality of the advice, of the systems, of the hedging solutions, of the security of the underlying system and of the speed of the bank for your requirements,” he adds.

This extends beyond FX and into areas such as short-term funding, foreign currency accounts, payments and so on. “The quality of the relationship between bank and client is more important now than it has ever been,” Paizis concludes. “This is a major theme that started in 2020 and it has become entrenched in 2021.”

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