Treasury and Trumponomics  

The global economy is currently in the grips of Trumponomics. The United States, under President Donald Trump, is using volatile and aggressive trade policies to achieve political means, and – as President Trump promised during his election campaign – to get a good deal for America overall.

Throughout his career, Donald Trump has promoted tariffs as a tool for negotiation and for (in his own words) making America great again by boosting the US economy. These Trumponomics, and their related isolationist/protectionist policy framework, have created huge amounts of uncertainty and volatility in global markets to the extent that one would be hard-pressed to name a ‘risk-free’ asset or identify a truly ‘risk-off’ environment.

The effect is that the US is looking to make deals with all its trading partners, including South Africa, which has significant natural resources and minerals. In the long term, the US and South Africa will have to make some sort of sustainable deal, even though South Africa’s association within BRICS will mean less reliance on the US going forward.

Although the South African government has been moving in this direction for some time now, we can’t get away from the fact that the US dollar remains the global reserve currency. Countries like China, which is integral to BRICS, also hold a lot of US debt. The world is very closely intertwined economically – and because of that, politically too.

In the short term, South Africa will continue to experience market volatility, both as a function of the broader global economic scenario as well as some specific issues around South Africa and our political relationship with the US.

In this almost ‘warlike’ environment, corporate treasurers have to buckle down and make sure they are doing the basics as best they can. What are those basics? To ensure that your cash flow remains constant and that you hedge what you can in terms of cost inputs and revenue earnings.

Treasurers must understand that the current market scenario is, unfortunately, not a short-term one. This is a long-term situation, so invest in your treasury capabilities, partner with your bank and – more so than ever – utilise the expertise that banks like Absa have to help you navigate this volatility. The prudent approach is to be as flexible as needed around hedging policies and to work very closely with your bank to make sure that the products you’re using are fit for purpose.

What we’ve seen at Absa, specifically on the foreign exchange (forex, or FX) side, is treasurers relooking their hedge policies, and dusting off some transactions that they might not have done in a while. These would include option-type strategies that allow for protection as well as participation. In a market that can move so violently, these become an integral part of your overall hedge strategy.

Fortunately, we’ve seen very little in the way of panic among our clients. This is good, as it creates market stability. When the rand was constantly weakening, many exporters did smart hedges and locked in their revenues. Importers haven’t panicked either, choosing rather to wait things out.

Ever since the Covid-19 pandemic, banks and treasurers have become used to navigating crisis scenarios. This sense of crisis upon crisis has created maturity in markets, which has translated into our clients’ thinking as well. The conversations we have with our clients are very fruitful and innovative. There’s a lot of collective knowledge in our market, and when clients partner with their banks as required, it’s not very difficult to get through the market volatility.

At senior management level within South African corporates, there’s an acceptance that this volatility is here to stay. At Absa, we’re finding that budget rates and projections are now far more realistic than they would have been in a non-volatile market, where target rates were often very aggressive. There’s a lot more leeway now.

Traditionally, when businesses have had to import during times of excessive rand weakness, consumers have ended up carrying the cost. That’s not always the case in the current environment. We’ve seen a lot of corporates take on that pain – and they’ve been able to do so because of smart currency hedging and treasury decisions.

During this time of Trumponomics, perhaps the biggest takeaway for treasurers is to remember that a lot of the news headlines are just noise. President Cyril Ramaphosa’s televised visit to the White House in May, for example, was very noisy. While it all makes for compelling TV entertainment, the real discussion should be about what’s happening in the background. What is South Africa negotiating in terms of trade deals? What is the long-term view around our relationship with the US? After all, you can’t not have a sustainable trade deal with the world’s biggest economy.

We’re set for a long journey through very volatile markets. But it’s important to point out that the rand does have potential to strengthen. Our currency is coming off a weak base, and Absa’s view is that it has potential to strengthen significantly – especially if South Africa were to strike a positive trade deal with the US. Couple that with the potential for lower interest rates in South Africa over the medium term and you have a pretty positive picture.

Looking ahead, corporate treasurers should prepare for more volatility… But remember that it’s not all bad news.