CFA: Digital Markets
Keep your business in balance with these foreign exchange (FX) strategies for COVID-19 and beyond.
Right now, the only thing that’s certain is uncertainty. As any entrepreneur will tell you, the COVID-19 pandemic – with its lockdowns and downturns – has brought confusion and volatility to almost every aspect of doing business.
Exchange rates are no exception: between March and July 2020 the rand-dollar exchange rate shifted between R16.50 and R19, with significant weekly (and even daily) fluctuations that left many businesses flummoxed. Compounding the problem is the fact that few smaller business owners understand the intricacies of the FX world, and fewer still appreciate the options available to them, even without a global pandemic to navigate.
Surviving this kind of volatility takes information, preparation and knowing where to go for help. Here is a roundup of FX strategies for entrepreneurs and SMEs.
1. Spot for now, fix for later
When it comes to payments, there is always the choice of paying on demand (known as “spot”) or, in the case of a future obligation, fixing the rate now. “Each choice comes with risks, and there’s no ‘perfect’ model,” says Paul Fenwick, CFA: Digital Markets at Absa Group Limited. He warns that foreign exchange rates fluctuate all the time (not just during health crises), with the rand being a notoriously volatile currency.
“It is therefore important for clients to understand these risks,” says Fenwick. “If I know I have an order coming in six months’ time, I can wait until those goods arrive and then book my FX rates on that day. If I do that, I’m exposing myself to whatever the spot rate is going to do for the next six months – and all the political and economic noise that comes into the system. Alternatively, I could decide that I like where the rate is today, and I’m willing to bear the risk of locking into that rate. This way I know today what I’ll pay in six months’ time for those goods, and I can budget and prepare for that.”
Don’t go it alone. Contact Absa’s FX sales team for guidance on the approach that’s best for you.
2. Diversify to de-risk
“My recommendation to clients is always the same,” says Fenwick. An advocate of the balanced approach, he recommends that you don’t put all your eggs in one basket. “If you can only trade spots or forwards, maybe put 50% of your exposure in the forward markets and the other 50% on the spot. Then, if the market moves in your favour, you can partake in that, but if the market moves against you, then you’ve got some flexibility, with some of your costs already locked in.”
Of course, this all depends on the type of competitor environment your business is operating and even where along the value chain you operate. “If I have a business with little competition and many clients, there’s no pressure regarding the rate I’m going to book, then I could just book at the forward rate as orders come in removing all currency risk and best prepare myself and my clients for the cost of goods I am going to pass on through the value chain.”
Talk to us about how we can assist you with de-risking strategies.
3. Tap into local expertise
While many small businesses tend to think “local”, there are obvious benefits to thinking bigger. “When you start to engage cross-border, you diversify and open yourself up to new markets,” says Trevonica Naidoo, COO, International Banking South Africa at Absa. “But with that comes the element of risk, in terms of payment. You may be sending goods to somebody in, say, Angola, but are you going to get your money?”
“Doing business in Africa has many advantages, but it’s not easy,” says Fenwick. “You need to understand the markets from a regulatory perspective before you jump in. If you don’t, you’re going to get your fingers burnt.” That’s why it pays to draw on regional experts with the ability to execute across all regional markets. Naidoo added that: “At Absa, our team helps you consider the risks, and might say to you, 'Well, perhaps a regular advanced payment via Swift could be risky' or, ‘Have you considered a letter of credit?'” We’re able to assist in terms of the various pros and cons.”
Speak to Absa’s team of International Banking specialists for guidance on your cross-border needs as an SME.
4. Reverse your priorities
“You’ll find that the average entrepreneur has the following order of priorities,” says Naidoo. “First they’ll chase sales, then they’ll consider what their operational capabilities are. Following that they’ll look at logistical value-chain management, then at finance, then at trade facilitation, and lastly they’ll look at the rules and regulations.”
But, says Naidoo, this sequence is back to front. “They should actually do it in a reverse order, first understanding the rules and regulations of their industry as well as from a Banking and Exchange control perspective. Before even thinking about sales and operational details, first ask yourself: ‘What can I do?’ and ‘What can’t I do?’ Then look at everything else.”
Absa’s team of International Banking specialists can advise you on relevant regulations and the right cross-border sales plan for you.
5. Know the rules
The key for any cross-border business is to seek protection from FX fluctuations. “We find a lot of clients who make, say, a 30% or 40% margin on their goods,” says Fenwick. “But we have an incredibly volatile currency, so if your hedging policy is not monitored, you could also lose 20% or 30% on that margin because of movements in the exchange rate.”
This level of volatility – especially now – is the reason SMEs and entrepreneurs need to partner with FX experts who enable businesses to get business done. In addition to its FX and International Banking specialists, Absa has an award-winning research team that won the Best Research House award for the third consecutive year at the 2019 JSE Spire Awards.
Get always-on access to research that informs the best decisions. Visit this portal and the Absa Access research platform for short daily notes, longer thematic pieces and model-based daily exchange rate forecasts over five years.