News Column

South Africa: Currency volatility a problem for SMEs

June 18, 2014

Small- and medium-size enterprises (SMEs) with international partners have been facing a challenging past six months due to currency swings.

The challenge has been crystallised by a first half of 2014 characterised by currency turmoil and contradictory market signals, says Ion de Vleeschauwer, Bidvest Bank's chief currency dealer.

Big companies with their own treasuries have the systems to cope with continued turbulence. The risk of mis-reading currency developments is greater among smaller importers and those who have only recently established relationships with overseas partners.

"Currency swings have been so pronounced they could be the difference between profit and no profit at all," says De Vleeschauwer. "This has to be a concern in a country that is dependent on small business for jobs growth."

SMEs with overseas exposure face two pitfalls: 

Over-confidence: They may think they can time the currency market and might begin to behave like traders, with the danger they will get some calls disastrously wrong.

Lack of awareness: They rightly think they should stick to running their own business, but become so absorbed they fail to spot opportunities and may purchase foreign currency at the height of rand weakness.

De Vleeschauwer says SME do's and dont's are straightforward: don't speculate, do prepare. The challenge was showcased in mid-May and early June. Over a three-week period the rand weakened from 10.30 to the dollar to 10.80. "You can't out-guess the rand, but you can lock in gains when the rand enters a period of relative strength and stability."

One such period occurred between January and February - when the rand hit 11.40 to the greenback - and mid-May. "Importers expecting consignments later in the year had a chance to lock in those gains," he adds. "Ours is a very liquid market. You can buy currency six months, even a year, ahead of settlement. When the chance comes, take it."

Period of stability

In a period of stability, no one knows if the rand will strengthen some more. But some peace of mind can be secured, he says, by buying at least some of a firm's foreign currency at rates that lock in recent gains.

Firms should not make ad-hoc arrangements when settlement dates approach. Facilities with the bank should already be in place, enabling buying orders to be executed after a call to the dealing room or via online global payment systems.

Guessing currency movements was particularly difficult at present. "There's more volatility ahead," says De Vleeschauwer. "Markets are becoming schizophrenic. Domestic inflation is up, suggesting rates will rise, prompting foreign inflows and perhaps strengthening the rand. But GDP growth is negative, suggesting rates will stay low and foreigners will stay away. However, lower European rates can also have impact.

"Amid the uncertainty there will be pockets of stability - a chance for business to manage the volatility and achieve peace of mind. It's vital SMEs optimise those opportunities," he concludes.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: CPI Financial

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