State of the Rand: Should local entrepreneurs be worried?

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The weakening rand has been on everyone’s lips in the past few weeks. But should entrepreneurs be worried?

Entrepreneurs trading internationally will no doubt feel the bite of the weakening rand much sooner than their locally based counterparts. While a weaker currency may stimulate exports, it will not necessarily make the entrepreneur more profitable.

South Africa's banknotes, which features an image of former president Nelson Mandela on the front in Pretoria November 6, 2012. REUTERS/Siphiwe Sibeko

The expectation is for the SARB to respond by increasing interest rates.

Steven Panos, Head of Treasury at Mercantile Bank, is not impressed with the country’s Q2 GDP figures and said he was looking forward to better figures which are only likely to come in Q1 of 2016. “Currently the economy is inconsistent on a month to month basis, it would not have made sense for SARB to raise rates in September, unless we started to see a trend of the economy starting to fly and inflation picking up,” he says.

This impact is not only a reality for the South African entrepreneur exclusively as the Fed may still hike interest rates later this year. Such an increase will only serve to further worsen the condition of the South African entrepreneur who has already been hit by the slump of the rand.

Panos says that the Fed should assess its interest rate decision in the light of the current global situation. “If the Fed had to really look at the interest rates in the context of what’s currently happening in the global economy, it would be irresponsible for them to raise the interest rates now. It would just put pressure on the emerging markets growth engine”.

Locally-focused entrepreneurs will feel the secondary effects of a weak rand through higher costs for imported raw material in their value chains. This will spell bad news for the South African consumer, whose cost of living may spike up as businesses pass on the costs by raising the prices of basics and increase interest rates.

Given the current circumstances, is it all doom and gloom for the South African entrepreneur? The SA entrepreneur will need to manage their cash flow very well. The increase in the cost of doing business will mean that the entrepreneur cannot afford to be reckless with his finances.

Does it follow then that the entrepreneur should avoid taking up credit to grow his business?

“Not in the least,” says Panos: “Expansion plans need to be discussed with a reliable credit provider who has the ability to advise on the hard facts, and not one just trying to make a quick buck,” he advises.

On the brighter side, the weakening rand should bolster the tourism sector and undo some of the decline reportedly caused by the widely publicised visa legislation.

Looking ahead, Panos predicts the rand might trade at R13.50 to the dollar and around R21.50 to the pound by the end of the year. “It’s going to remain volatile. It will depend on how the dollar performs and what the FED decides on rates. The euro picked up strength extraordinarily quickly on the back of FED rate uncertainty and the rand suffered however it has now retraced to reasonable levels and we are seeing a bit of stability for now,” he concludes.