Published: December 01, 2009
After the currency crises hitting the emerging markets in 1997-98 and 2001, there was a period of good, steady results from both income and equity markets, but even before the global crisis took hold in 2008 it was becoming evident that some emerging market economies were experiencing systemic problems. However, the general opinion was that the crisis would be confined to a few developed countries and that the markets in emerging economies would only feel a minimal impact.
As a result, currencies in emerging markets mostly strengthened before the crisis spread around the world, and those in the main emerging countries rose by an average of 4.8% against their base between the last quarter of 2007 and August 2008. But once trouble became global, emerging markets suffered major problems.
The reasons for this included exposure to bad or ‘toxic’ loan in the banking sectors of most of the developed countries, and the ‘easy’ money of the preceding years which had allowed mounting structural problems in several emerging markets such as Hungary, Ukraine and Argentina. The so-called credit crunch in mature economies saw many investors obliged to liquidate their positions in emerging markets, so that there was a strong downward pressure on the value of local currencies. As a result of this all emerging market currencies with a flexible exchange rate weakened significantly in the six months following September 2008, although after that most of them began to rise, helped by central bank actions plus fiscal expansion under the aegis of the International Monetary Fund (IMF).
The currencies of emerging markets in Africa have long been known to have their own special characteristics, which frequently prove baffling to other FX dealers, particularly in North America and Europe. One of the leading operators in the region, South Africa’s Standard Bank, recognises that they have significant differences from the more recognisable G7 currency pairs, with a tendency to be considerably more volatile. The nominal CFA franc zone, the common currency of several countries in western and central Africa, swung wildly in the last months of 2008, depreciating overall by around 15% against the U.S. dollar. The South African rand was particularly affected in October of that year, as investors sold off assets that they judged to be risky, although in fact the country had hardly any exposure to toxic assets, but the currency recovered sharply in the second quarter of 2009.
The currencies of emerging markets in Africa have long been known to have their own special characteristics.
This rapidly changing scene is the backdrop against which the FX team in the Standard Bank is accustomed to operate, and they are very familiar with the ups and downs of the likes of the Zambian Kwacha, Botswana pula, Kenyan shilling and Ugandan shilling and the other currencies of the region. They are also experienced in trading the rand. The all-round expertise of those working on the spot and derivative desks gives them a competitive edge when pricing for foreign exchange management, and above all it ensures that clients have access to the liquidity which is vital to successful FX transactions.
Richard de Roos, head of the bank’s FX department, notes that their research now points to a recovery in the region. While corporate FX transactions have slowed owing to lower business activity and newly-tightened lending criteria, the rand’s strength in recent months is highly encouraging, as it provides an improved environment for exporters to hedge and for importers to firm up their foreign commitments. One UK report echoed these sentiments, saying that “We think that emerging market currencies are in the process of reclaiming back the losses suffered in September and October last year, and that they are likely to reclaim all the losses by the end of this year”. [[[PAGE]]]
Some foreign direct investors are attracted by South Africa’s on-going capital-intensive projects such as infrastructure development, while others are seeking a return on the country’s yields which are relatively attractive compared with, for instance, the low-interest scenarios in UK and the Eurozone, characterized by hefty lending from central banks under quantitative easing programs aimed at boosting the faltering economies. All this activity means that Standard Bank’s FX team is developing strong links with foreign direct investors. Much of it is due to the strength of the rand, as the country’s exchange controls successfully quarantined it from the worst effects of the credit crunch – and they are likely to be liberalized only slowly.
The most consistent source of FX inflow is that of portfolio capital invested in bonds and equity, says de Roos. Forty per cent of the top 40 shares on the Johannesburg stock exchange are now owned by foreigners, and 2009 has seen a renewed interest in JSE shares and South African foreign debt. There have also been significant capital injections in the telecoms sector for Vodafone and the Indian conglomerate Bharti Enterprises.
Local knowledge is at a premium in cross-border transactions throughout the region, where myriad foreign-exchange regulations can prove a minefield, not to mention the fluctuating currencies (which used to be known as ‘yo-yo’ currencies before investors began to look beyond them to appreciate the underlying strengths in Africa economies). But as the global situation eases, and Africa’s emerging markets begin to recover, the bank expects that currency flows will be directed firstly to the countries whose domestic economies lead the way forward. Standard Bank research indicates that April 2009 was the lowest point on a monthly basis, and predicts positive growth in GDP during the final quarter of this year.
Tito Mboweni, governor of the country’s central bank, the South African Reserve Bank, feels that to a certain extent the country was an innocent victim of the global crisis. “Emerging market economies in general and South Africa in particular have proven to be remarkably resilient in the midst of this financial market turmoil,” Moboweni said recently. “The impact on South Africa has been indirect, mainly through financial market volatility and the resultant economic slowdown in the U.S. and other major industrialized countries”.
As well as expertise in African currencies, the bank is also a global player with 30 dealing rooms across the world.
Research from Standard Bank supports this theory, showing that while most currencies within the region were badly affected, Africa fared better than it would have done previously because of reduced levels of foreign debt and other improved fundamentals. The research also shows a definite improvement in South Africa’s economic performance as the rand strengthens. And as well as its expertise in African currencies, the bank is also a global player with 30 dealing rooms across the world. While the dollar and the euro are its most actively traded currency pairs, it is now handling more Asian currencies, as Asia is now South Africa’s chief export region. It has a dedicated team for Asian currencies and expects the yen and the won to become increasingly important. All in all, the Standard Bank is in an excellent position to capitalize on the shift of global finance towards emerging markets which has been widely predicted by many commentators in recent months.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
