RISK MANAGEMENT | 25 March 2024

Global Events
and The Rand

Chris-Paizis-author

Chris Paizis

Managing Director and
Head of Client Foreign
Exchange, Absa CIB

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How events world-wide will shape the value of the rand in 2024.

Remember the old curse: “May you live in interesting times…”? That’s the story of 2024, as more than 60 countries – including the United States, South Africa, India, and more – will hold general elections against the backdrop of conflict in the Middle East and Ukraine, a sluggish Chinese economy, and a global shipping crisis. Interesting times, indeed. How might those global events shape the value of the rand?

“There’s a lot of talk about South Africa’s internal situation,” says Chris Paizis, Managing Director and Head of Client Foreign Exchange at Absa CIB. “But global events have a serious effect on the rand. We’ve seen, for a long time now, that it’s those global events that lead to the very large moves in the currency.”

Risk-off Environment

Since the Russian invasion of Ukraine global markets have been in a risk-off environment, which invariably caused a flight from – and a negative impact on – emerging markets (EM) currencies like the rand. “This year is no different,” says Paizis. “The Russia/Ukraine conflict isn’t going away. If anything, it looks like it’s escalating, and the increased uncertainty means we’re going to see more risk-off sentiment in the short term.”

November’s US elections could also be significant for the rand. “South Africa has made noises on the world stage about being non-aligned, for example in Russia/Ukraine or Israel/Palestine, and there could be a negative perception in the US about that,” Paizis warns.

Another global risk factor is the Chinese economy. “China recently said they would like to grow their economy by 5%, but they’re not confident that they’ll achieve that,” says Paizis. “A slowdown in China means a smaller market for many of our exports, which are commodities. That doesn’t bode well for South Africa.”

The Red Sea situation, meanwhile, was a missed opportunity that has become a negative for South Africa. “We could have benefited from 40% of shipping traffic being diverted via the Cape, but issues at our ports meant we have not been able to capitalise,” says Paizis. “Now we have higher global prices for goods and services, along with higher fuel prices and slower transport times.”

South Africa’s rand sits in a category of EM currencies – including the Turkish lira, Brazilian Real, and Argentinian peso, among others – that have various political and fiscal issues.

“South Africa is no different,” Paizis says, “and from a global perspective, we are going to be put in that basket. However, what works in South Africa’s favour is that our financial markets work very well. They’re very liquid, and it’s easy for investors to get in and out. That bodes well for the long-term health of the currency and financial markets, but in the short term it means heightened levels of volatility.”

“Volatility” is the keyword there, he says. “Remember, bad news tends to be built into the currency quite quickly, so if there’s a positive spin on any of those global events, the rand could strengthen substantially. When we look at currency models like purchasing power parity, there’s wide consensus that the rand is undervalued. Unfortunately, we know that when it comes to the value of the rand, there’s a big divergence between what the models say and what the markets do.”

Partnering With Banks Through Uncertain Times

Fortunately, South African businesses do not have to navigate that rand volatility alone – and nor should they. “Work with your bank,” Paizis says. “Your bank is your partner in this. If you do that, there’s no reason to panic, and no reason why you should not achieve your target rates, provided they’re reasonable.”

“Just like when a company shares its financials with the bank to keep the relationship transparent, currency hedging policies should also be transparent so that the bank can help you deliver on those hedging policies,” he says.

As that relationship becomes a partnership, the bank will clearly understand and buy into the client’s ambitions and goals, seeing the impact of what they can achieve. “If you feel that your hedge policy is outdated, for whatever reason, rather work with your bank to adjust that policy to be more appropriate. But be very clear about why those parameters are there,” he adds. “When we see mishaps around hedging, it’s usually because companies haven’t followed their hedge policy parameters.”

After all, he concludes, in interesting times like these it’s easy to panic or get greedy and be tempted to diverge from your hedge.

Chris-Paizis-author
Chris Paizis

Managing Director and Head of Client Foreign Exchange, Absa CIB

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