Currency Risk and Risk Management in South Africa – a Survey
by John Cairns, Rand Merchant Bank, Currency Strategist, and Catherine MacLeod, National Treasury, Director
Companies operating in South Africa consider rand volatility to be a major problem. Ninety-one per cent of respondents to our currency risk management survey rated their companies as being sensitive or very sensitive to the exchange rate. The less systematic the company’s hedging practices, the more likely it was to be highly sensitive to exchange rate moves. Encouragingly, the survey suggests that a sound framework for currency risk management is well entrenched and that hedging instruments are well understood. However, these findings are less conclusive for small and medium-sized firms, which were more likely to have a less systematic approach to currency risk and less likely to be comfortable with hedging instruments and strategies. Views were mixed on whether regulatory issues (exchange controls and hedge accounting) complicate exchange rate risk management.
In July 2013, National Treasury and Rand Merchant Bank (RMB) surveyed companies operating in South Africa in an attempt to better understand their currency risk and currency risk management operations. We extend our thanks to the ACTSA members who participated. The 192 respondents were largely involved in currency decision-making and operated in a range of sectors, with particularly heavy representation from the manufacturing sector and larger businesses. This article summarises the survey’s results.
The impact of exchange rate volatility
The currency is a major concern for South African businesses, with 67% identifying it as one of the top three risks facing businesses. Cash flow (43%), commodity prices (41%) and political risks (36%) were the next most frequently raised issues.
Businesses appear highly sensitive to the exchange rate. Fifty per cent of participants said their businesses were very sensitive to the exchange rate and another 40% said they were sensitive (Figure 1). This is similar to the responses to a survey conducted by RMB in 2010 (RMB 2010 survey). The high sensitivity to the exchange rate came from all industries, across all sizes of companies, and covered exporters, importers and those with relatively limited trade.
Respondents indicated that the main reason for this sensitivity was a high dependence on imports and/or exports (Figure 2). This held even if they classified themselves as having exports and/or imports at lower than 20% of revenue/costs. The second most commonly expressed reason for the high sensitivity was that companies aren’t able to pass currency moves on to customers.
A high 32% of companies believed that currency fluctuations create balance sheet risks. This refers to ‘translation’ risk: under accounting guidelines, foreign operations need to be consolidated into the balance sheet at the exchange rate at the end of the period. As the exchange rate adjusts, so does the consolidated value. Under the Active Currency Management (ACM) exchange control reform implemented in 2010, it is now permissible to hedge this risk. However, while RMB has carried out these translation hedges, this market is still in its infancy in South Africa.
The business impact of a volatile currency seems greater in inhibiting investment than trade. Seventy-seven per cent of respondents felt that currency volatility impacts their long-term investment decisions. This shows that the rand’s extremely high volatility – it competes with the Brazilian real to be the most volatile in the world – has a real negative economic consequence.
By contrast, only 12% of those companies where exports account for less than 20% of revenue gave currency fluctuations as a reason for not exporting more, with more than 50% noting that exports are not part of their business strategy. Around 40% of manufacturing firms raised issues around competitiveness and about half that number raised issues around currency fluctuations when explaining the relatively low share of exports in their revenues. Other export constraints mentioned included high labour costs, unfavourable freight costs and the inability to compete with China and other low-cost producers. Encouragingly, a frequently repeated answer was that exports are a growth area, even though currently only a small part of the business.
Of those companies where imports account for less than 20% of costs, 55% choose not to import more because they find that all their needs can be satisfied locally, with only 17% finding that currency fluctuations inhibit greater imports.