*This content is sponsored by RMB, a diversified financial services brand encompassing investment banking, fund management, private wealth management and advisory services
By Dr. Ebrahim Patel*
Do not overlook the silent threat to your financial wellbeing and your company’s buying power.
Everyone agrees on the importance of saving money and investing for the long term. Often, people are concerned about whether their investments will do well, will the markets rise and have they made the right choices – all very valid concerns that must be addressed. But what about the risk of currency devaluation?
The risk is that the currency in which you have chosen to store your personal wealth or your company’s working capital could devalue on a global scale. South Africa is an emerging market economy, which presents many opportunities for wealth creation and business growth – but, it also carries the very real risk that our currency could decline, leaving us poorer in global terms.
The past few years serve to highlight the extreme volatility the rand has encountered. At the start of the financial crisis in 2008, the rand reached a five year low but soon recovered. Since then it has reached a historic low against the US dollar and other major currencies. More latterly, the rand has seen some improvement but global factors such as commodity prices, a continued slowdown in China and uncertainty in the US and the Eurozone combined with South Africa’s fragile political landscape, credit risk concerns and deteriorating fundamentals mean that further volatility is likely.
Why is this a problem?
We live in a global world, where the best education, goods, services, technology and even employees are priced in global terms, most often dollars. If a company has its working capital and retained earnings solely in rands, it runs the risk of having to pay more for dollarized goods and services as the rand loses value. This naturally, is a risk to the profitability and balance sheet of a company.
Similarly, for individuals, overseas education, holidays, and technology becomes much more expensive with a weaker rand. Further compounding the issues for South Africans, the flow of rands offshore is strictly controlled for individuals and in most cases prohibited for companies by exchange control regulations. These regulations do not allow a South African resident to own foreign currency without having obtained the permission of the Reserve Bank
How is it now possible to invest cash in a US dollar asset?
Through an innovative new product, US Dollar Custodial Certificates (DCCs), listed on the Johannesburg Stock Exchange (JSE), both individuals and businesses will be able to invest cash into a US dollar asset. An attractive feature of the DCC’s is that individuals and corporates do not require SARB exchange control approval to invest.
DCCs represent the first inward listing of US Treasury notes on the JSE giving investors direct exposure to the Treasury notes. Investors are able to invest in a global currency, therefore avoiding the potential devaluation of their rand savings and working capital.
The instruments may therefore benefit investors who take the long term view that investing in a dollar asset may preserve their assets, while businesses can take advantage of dollarized working capital. It should be noted, however, that the investment outcome will vary from time to time, based on interest rate differentials. It should also be noted that should the rand strengthen there is a risk of capital loss.
Because investors own the Treasury notes directly, and have their credit exposure with the US Federal Reserve, they are protected from any bank insolvency.
Returns of the DCCs are earned through the coupons on the US Treasury notes, giving investors an income stream in US dollars, which is settled in rands. Investment performance is directly related to the US dollar/rand exchange rate and the price performance of the US Treasury notes.
US Treasury notes were selected as the underlying instrument based on their track record and for their reputation as stable, profitable investment instruments.
RMB, which created, issued and listed the instruments, will act as the market maker providing liquidity in the product. The issuer is subject to certain limits which may restrict the total number of securities on offer and securities will be allocated strictly on a first come, first serve basis.
- Dr. Ebrahim Patel is an alternative asset specialist at Rand Merchant Bank.
