How to blunt effects of the volatile rand on your finanaces
It’s no secret that the rand is highly volatile, with big swings (mostly in the wrong direction) every time there’s a major economic event at home or abroad.
An IMF report found that in 2010-19 the only currencies more volatile than the rand were the Russian rouble and the Argentinian peso.
More recently, there was a 37% fluctuation in the currency’s value against the dollar from February 2022 to February 2023.
Those fluctuations aren’t just interesting footnotes at the end of a financial news bulletin. They have very real effects, covering everything from how much we pay at the pump and in grocery stores to the cost of cellphone contracts.
But it also has a direct effect on every foreign exchange transaction, by businesses and individuals alike. This volatility can be extremely frustrating. Fortunately, there are ways to mitigate it and bring a little more certainty to the foreign transaction process.
First, it’s worth taking a deeper dive into the effects of big currency fluctuations.
If you’re an individual investing offshore, for example, a sudden weakening of the rand could mean that the amount you set aside for investment each month won’t go as far. The same is true for people who have offshore home loans (perhaps as an investment or with the aim of eventually moving to another country).
IMPORTS
That means you could end up paying thousands of rand more one month for a flat in London or Dublin than you did the previous month, due to factors beyond your control such as a diplomatic dispute on the other side of the planet.
Meanwhile, for businesses the impact of currency fluctuations can be even more significant. If you’re an importer and the rand weakens dramatically, for example, you could end up paying significantly more for vital stock than you did the previous month. Business owners are then forced to either take a cut in their profits or pass on the costs to their customers.
It’s also worth pointing out that while the rand is volatile, the general trend has been downward. For example, in November 2013 one dollar would set you back just more than R10. Today you’re paying closer to R19. That means even with occasional recoveries, international transactions have become far more expensive, and if the trend holds the situation will not get any better.
While there’s nothing any individual (outside of a few top cabinet ministers) or business can do to prevent that slide, they can give themselves some protection against currency fluctuations.
An important part of that protection involves choosing the right international payment provider. And for most people and businesses that isn’t their bank. Thanks to opaque pricing structures, bank customers can end up paying far more than they should on every transaction, making every downward fluctuation that much more costly.
But individuals and businesses should also ensure their international payment provider has forward exchange cover as part of its offering. Simply put, this is a financial tool used to manage the risk of fluctuations in exchange rates.
In essence, the company making an international payment enters into a contract with the payment provider to exchange a specified amount of one currency for another at a specified exchange rate on a future date. So, regardless of the currency fluctuations in between, the company knows exactly how much it’ll pay for that transaction, providing much-needed certainty.
Given how powerful a tool forward exchange cover can be, it’s incredible that it is so underutilised in SA. A survey we ran in 2023 aimed at importers and exporters found that 61% never make use of it, while 21% only use it some of the time. That those numbers are so high suggests there is still widespread ignorance over the availability and value of forward exchange cover.
Going into 2024 it will also be more important than ever for businesses and individuals to take whatever protective measures they can against rand volatility.
In addition to the current forces driving that volatility, 2024 is a big election year. That’s true not just for SA but also for major economies such as the US and India. The outcomes of those polls will all affect the rand.
So, if you’re planning to move money internationally in the next few months, make sure you’ve given yourself or your business as much cover as possible.