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Risk Management
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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.

Perfectly ideal market conditions would make it simple for a corporate to obtain local or foreign funding while allowing it to manage foreign currency exposure effectively. However, the reality is that transparency in developing markets can be quite opaque, because banks as well as corporates tend to be uncertain about volumes that go through the market and the actual rates being quoted and in periods of high volatility this culminates in thinner liquidity and triggers panic. Secondly, due to the unbalanced nature of some of these economies, the demand from importers tends to exceed that of exporters, implying that the market is often one sided. To smooth out this asymmetry, some of the African central banks intervene at the cost of holding reserves. Another issue is that onshore banks tend to have small limits approved by the regulator and this makes it difficult if not impossible to absorb fairly large corporate flows. This inability to absorb liquidity shocks causes increased currency volatility.