As
one of the most liquid foreign exchange markets in the world and the gateway to
the African continent, South African businesses need to understand developments
in the global foreign exchange (FX) markets to plan for the future. 

South
African corporates felt the unforgiving effects of the coronavirus several
weeks prior to the official lockdown on 26 March 20, as disruptions in business
activity emerged worldwide at the onset of global markets lockdown. At a time when the market had all eyes on
US-China trade war, Covid-19 lockdown restrictions were enforced setting off
global supply-chain disruptions. 

Global
supply chain disruptions in the form of shipment delays, logistics hurdles, and
an unquenchable demand for resources necessary to complete certain production
cycles had dire effects on revenue and growth for corporates. 

The
price action in the wake of Covid-19 saw the oil price plunge to historical
lows, with the US Crude Oil Benchmark trading below zero.

Emerging
market equities and FX markets felt the worst sting as global investors flocked
to safe haven assets as trade shocks took hold. The Rand plunged to new
historical levels against the dollar to only find some solace around R19.35/$
from opening the year around R13.93.

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Source: ABSA Research

Winners and losers

Given
this backdrop, most corporates have been stuck in-between a rock and hard place
as the initial wave of Covid-19 triggered liquidity constraints and the ability
to raise short-term funding has become a serious hurdle. Predicting and
managing cash flows efficiently has become nearly impossible for treasurers due
to shipment delays and disruptions in the production cycle. 

It
goes without saying that businesses or sectors that are classified as providing
essential goods and services, would have performed better.

According
to Absa research, top performing sectors where productivity levels have been
slightly up included the agriculture, communication and water. Mining,
manufacturing, construction, retail and tourism have been hit the hardest. 

The shift to alternative hedging instruments

In
an effort to manage FX exposure, local importers seem to have shifted their
focus away from longer term hedging instruments to trading mostly in the spot
market. The accelerated pace at which the Rand initially plunged made it
impossible for corporates to formulate a strong medium-long term view on the
direction of the currency. Following the South African Reserve Bank’s (SARB)
decision to increase dynamic FX hedging tenor from six months to 12 months, a
large number of importers were seen taking advantage of the new regulation
amendment and were able to lock-in attractive forward rates towards the end of
2019.

While
the importer hedges in place may have attracted significantly positive mark to
market as the Rand weakened, most corporates were unable to fully utilise the
contracts due to shipment delays during the global lockdown. 

Importers
who had entered into medium-long term FX contracts prior to lockdown at fairly
attractive rates have faced a number of operational challenges and some had to
close-out at prevailing market rates, taking profit and boosted cash-flows
because of the inability to utilise the contracts due to shipment delays. This
may provide short-term relief but as lockdown restrictions begin to loosen up
and activity picks up, the corporates have had to purchase currency at
prevailing [expensive] market exchange rates.

Where
clients did not close-out unutilised maturing contracts, they entered into
expensive FX swaps which allowed them to extend the contract to a later date.
Traditionally, where corporates encountered shipment delays, exchange control
regulations permit for funds to be kept in a customer foreign currency (CFC)
account for only up to 30 days in order to preserve the value of the funds
without encouraging foreign currency hoarding. 

Macro policy response

In
response to the Covid-19 pandemic, a number of economic initiatives have been
implemented across the globe by central banks, financial institutions and other
regulatory bodies. In South Africa the government injected a R500 billion
stimulus package with R200 billion of this package allocated as a loan
guarantee scheme to assist businesses remain afloat. 

On
the back of this local banks were able to offer loan repayment holidays to
struggling businesses. 

The
SARB so far has cut interest rates to historical lows in order to
support growth and give some relief to consumers from interest loan
repayments. 

In
addition to this, the SARB embarked on a Government Bond Purchasing program via
the secondary market in order to reduce excessive volatility.

Across
the African continent, Central Banks have illustrated a strong commitment and
are doing as much as possible through tax relief and growth incentives. 

So, what has worked well?

Covid-19
has changed the way that the world works and highlighted the importance of
adopting technology in order for business to survive.

Digital
trade execution and payment platforms will continue to be
relevant and complementary to our clients businesses. 

In
terms of future themes, I expect the global economic environment to remain
relatively weak for some time and businesses funded mostly in foreign currency
denominated debt to remain vulnerable to currency fluctuations. Managing cash
flows will take precedence more than ever as global supply chain disruptions
and uncertainty continue to dominate.

As the world economy sails through this clouded period,
corporates will look for FX hedging instruments that offer guaranteed
protection against adverse movements in the currency while giving them the
flexibility to take advantage and participate in favorable market movements.

Bulelwa Soyamba is Head: FX
Options Sales, Absa CIB. Views expressed are her own. 

Source

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