Risk Management
Published  6 MIN READ

Corporate FX Hedging in Evolving African Markets

Unprecedented economic shifts in global markets have created uncertainty across the board, fuelling currency volatility particularly in emerging market economies. As a result African currencies tend to take the brunt the most, when compared to that of developed countries. Recently, major global central banks, such as the US Fed and ECB, have turned significantly more dovish, indicating their preparedness to ease monetary policy in the face of weaker economic growth. The implication is that, if global growth slows materially, commodity prices may follow suit. Consequently, emerging market economies, in particular Sub-Saharan Africa, with high exposure and dependency on commodity exports tend to be hammered the most. Given that most African economies have very fragile economic fundamentals, weak growth and fiscal risks egregiously high could hinder their ability to benefit from the currently on-going global rate cutting cycle.

These economic disparities are not entirely on the back of shifts in supply and demand dynamics across the continent, but are largely driven by economic structural makeup, liquidity constraints, heightened political risks and restrictive regulatory environments just to name a few.

Liquidity constraints

Corporate FX hedging in our African economies often encounters considerable pitfalls due to largely unpredictable dry liquidity spells when compared to more developed countries. Although in recent years there may have been slight improvements in some parts when hedging FX exposure, global corporates with African footprint still feel the brunt and inherent costs of liquidity shortages. Whilst the South African rand may be considered high beta currency with minor liquidity constraints, large local multinationals remain subject to cash flow uncertainties when transacting across the borders.