RISK MANAGEMENT | 28 AUGUST 2020

The COVID currency survival guide for corporates

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Chris Paizis

Head: Corporate FX and International Banking

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What larger companies need to know about foreign exchange (FX), both during and after COVID-19.

The COVID-19 pandemic has plunged communities and economies into a crisis of uncertainty. Tomorrow keeps changing and the future – of business especially – is more unpredictable than ever.

“This uncertainty is reflected in a lot of risk-on and risk-off sentiment,” says Chris Paizis, Head of Corporate FX and International Banking at Absa Group. “Today the world might be having a good day, with scope for a vaccine to come out sooner than expected, so all of a sudden investors are happy to take on riskier assets, and as a result the rand strengthens. But tomorrow might bring a completely different sentiment…”

Clearly, at times like these, currencies flip-flop and exchange rates can – and do – fluctuate more than usual. This volatility can have a significant impact on corporate income statements, as Paizis explains below. Here’s how larger businesses should approach FX in pursuit of a smoother ride.

1. Know where FX fits in

“Under normal conditions I think that FX is one of the most important components in a corporate treasurer’s life,” says Paizis. “If that’s true, then right now FX must be by far the most significant component!” For corporates, FX is – and remains – an income statement item, he adds. “If, for example, you can’t deliver your goods because of lockdown restrictions, and you have to roll your foreign exchange hedge, that might have big repercussions on your cash flows and on your ability to borrow.”

Take action:

“You’re trying to lock the cost of your imports or revenue – if you’re receiving foreign currency – and mitigate the volatility that it can potentially create on your income statement,” says Paizis.

2. Understand the volatility

“Combined, market volatility and uncertainty are the biggest risk that corporates face during this crisis,” says Paizis. “In the early months of lockdown we saw the rand going to all-time weaknesses (about R19 to the dollar), before quite quickly returning to the lower R17s and R16s. The intraday volatility, often as a reaction to news events, is very choppy. Managing that risk and unpredictability is a very difficult task for corporate treasurers, and for corporates in general. Survival has to do with how you manage your exposures to survive the crisis.”

Take action:

With the risk environment changing daily, corporates need an FX platform that enables quick and decisive responses, all online. Check out the new Absa Access platform, which provides research, analysis and expert advice – plus FX and payment capabilities – all in one place. To request an invitation to the platform, phone +27 11 895 7318 or email AbsaAccessSupport@absa.africa.

3. Understand that FX is about more than just FX

FX clearly has an impact on currency exchange and cross-border transactions, but, as Paizis points out, it has deeper implications too. “FX also has an impact on liquidity, on income statements, on a corporate’s ability to borrow,” he explains. “At Absa we’ve stayed very close to our clients, understanding their exposure and providing our ongoing view of how the markets are unfolding. We’ve found this has been very valuable, because standard forecasts clearly don’t count when you’ve got so much volatility on a week-by-week – and day-by-day! – basis.”

Take action:

Find the latest, updated forecasts, analysis and reports on the Absa Access research portal and here.

4. Get your hedging right

Paizis believes that every corporate should have a clear and specific hedging policy. “That policy must offer certainty, flexibility and clarity to your management and banking partners,” he says. But he does add a word of warning: “At times like these, there might be the temptation to over-hedge. Say I’m an exporter and the dollar is at R19. It’s very tempting to then put hedges in place for exposures that I might not yet have, and that creates danger on my income statement and credit lines. It’s tempting to be greedy when you see big moves in the exchange rate, but you have to remember that as a corporate your role is not to speculate, it’s to manage your income statement exposures.”

Take action:

Stick to a known and workable hedging policy, which makes it easier for banking partners to understand your company’s exposures and support you through the crisis. For advice on how to formulate your hedging policy, contact Absa’s Corporate and Investment Banking team on 0860 500 703 or email Rsc.corpprc@absa.co.za.

5. Keep it simple and rational

We keep hearing it, even from the world’s top economic experts: this is unprecedented; nobody has seen anything like it before. In light of this, Absa’s Corporate FX and International Banking team is very excited about the all-in-one Absa Access platform, which has been purpose-built for South African and Africa-based clients and their unique requirements.

“We had a long journey with our previous online trading system, BARX Africa,” says Paizis. “But Absa Access is much nimbler and allows you to do things you couldn’t do on BARX. For example, it’s a single sign-on system; we know it’s a real pain point for corporates to have to log into three different systems to do a payment, check an account and then do a forex trade.”

Take action:

In addition to choosing simple solutions, like Absa Access, now is the time to stay rational. “Every day has a different sentiment,” says Paizis, “but acting on each one is irrational. You need to look through the cycle and know that you can still have a functioning economy during these times of uncertainty.”

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Chris Paizis

Head: Corporate FX and International Banking

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