JOHANNESBURG — When it comes to a South African rand that has traditionally been volatile, knowing when it’s best to make an international transaction could become key to your business’s bottom-line. In this interview, Sable International’s James Edward explains how best to navigate forex waters and what local businesses need to bear in mind when moving money across the globe. – Gareth van Zyl
This special podcast is brought to you by Sable International. It’s a pleasure to welcome James Edward, who heads up the forex team at Sable International. Now, James, Sable International is known for offering a wide range of services, from Golden Visas, to getting mortgages in the UK, but you also have a forex division. How long has this forex division been operating for, and what type of clients does it service?
Sable International’s forex division has been in operation in South Africa since 2010, and recently joined forces with another intermediary called FX Capital, which was established in 2004. Sable International has been trading for the past 8 years in South Africa.
What type of clients do you typically service?
Our client-base consists of two sets of clients. The first set consists of individuals who are requiring personal services for themselves (and that includes expats and South Africans living offshore). The second set of clients would be our corporate companies who require services to facilitate their imports and exports, and the related foreign exchange flows that derive from those activities.
Which locations around the world does your forex service operate in, and can you give us an idea of how many clients and transactions you service each year?
We’re focused on the South African market, but Sable International does have operations in the UK and also in Australia. In each of those jurisdictions, there are separate branch offices and operations, which are subject to the laws and the regulatory authorities in those countries. We’re focusing primarily on the SA market. We operate under the auspices of the Financial Services Board (FSB), as well as the South African Reserve Bank (SARB), but our activities in SA are geared purely towards SA clients or residents. Included in that is also SA expats; South Africans who are living and working in other parts of the world.
Over and above that, it also includes South Africans who, for example, have been out of SA for some time and consider themselves to be emigrants. That’s primarily what our client base consists of, from what we would call a private client perspective. Then, as I alluded to earlier, in SA we also deal with local businesses that require foreign exchange services to facilitate imports, exports, and other services. They could be earning foreign exchange offshore, through overseas customers who are paying them for services. Another example would be that the business is exporting products from SA and receiving foreign income for that. Alternatively, there are also SA companies that are importing goods from offshore and having to pay for them.
We have over 6,000 clients and process over 12,000 transactions per annum.
James, just on the topic of SA businesses. What is the best way for them to use a local forex provider in order to increase their international business’ effectiveness?
Well, let’s first talk about importers. SA has a fairly large reliance on imports. If you just think about electronics, textiles, clothing, vehicles, vehicle parts, just to name a few. Their purchases would be denominated in a foreign currency, and with the exchange rate volatility that occurs on a daily basis, this does introduce risk into their business.
For example, a clothing importer who has sold goods to a local chain-group will have sold them at a fixed rand price, and may have to pay for that in the future in a foreign currency, such as US dollars. He will need to try and cover that risk to protect himself against any adverse changes on the exchange rate, which would not only affect his profitability, but also affect the very existence of his business, especially in the event of a very large negative movement against his exposure.
So, there would be a lot of smaller and medium-sized businesses who would use Sable International for the likes of forward buying, for example?
Yes, that’s right, we have qualified consultants and people who have experience, and knowledge, and skills around advising businesses on how to manage the risk of the exchange rate volatility. We would assist them in terms of transacting and buying and selling their exchange. Also, this will help protect themselves by fixing those exchange rates by, for example, taking out a forward exchange cover is a very widely used protective mechanism to assist businesses in order to manage their risk in a world of uncertainty and volatility.
They want to make sure that there’s no pending or looming risks. You only have to think back in years gone by regarding the currency risks. The removal of the Finance Minister in December 2015 went on to cause a massive exchange rate move of some 20% to 30%, which in some instances could wipe out all the capital in a business because it wipes out all of their capital and forces them into liquidation.
Amid the recent rand strength in 2018, have a lot of your SA customers and businesses been locking in those mechanisms that you’ve been speaking about, in case the rand weakens?
Yes, that’s right. In fact, let’s go back a month before January 2018. You may recall in December, just prior to the ANC conference, there was quite a heavy weakening of the rand in anticipation of the uncertainty of the event that took place. Subsequent to that, with President Ramaphosa having been elected as head of the ANC and replacing ex-President Zuma as President of the country, there was what’s widely known as the ‘Ramaphosa Effect’ and the rand strengthened substantially after that. What that did was that it offered businesses the opportunity to lock-in improved exchange rates. And, as you rightly point out, the rand has weakened over recent weeks, which can seriously impact on a company’s profits, if they have large, uncovered, or unprotected exposures.
What is your take on where the rand is right now? It’s obviously had a strong 2018 so far, but has weakened, as you’ve mentioned, in the last few days. Do you think that its strength is sustainable or is it just dollar weakness that we’ve seen in recent times?
I think that is a question that no one really has the answer to. What I can say is that if you had given businesses, for example, the option to buy dollars or foreign exchange in May 2018 at the current exchange rate of R12.30, when last year the average for the year was probably closer to R14.00, they would probably have leapt at that. So, I think one has to look at everything in context and I think the biggest danger in business is the uncertainty that volatility brings. The absolute level of the exchange rates is important but it’s the volatility that I think affects business the most. Trying to manage a business in an uncertain environment with high volatility is challenging. I think most businesses would be more concerned about the volatility and the uncertainty that lies in front of them.
But if I can also go back to your question of whether I think that the current level is sustainable. By merely looking at the fundamentals – such as the purchasing power parity model (or the Big Mac Index) – these fundamentals indicate that the rand is definitely undervalued at these levels. Perhaps a truer value would be closer to R11.00, and potentially even less than that. However, that’s in a perfect world where economic models are easily quantifiable and work out, but in practice they don’t. There are so many other factors involved, such as emotions and perceptions, and there are a lot of perceptions on the political level, the economic level, and questions about what the credit ratings agencies do. These are things that affect buyers and sellers of the currency, and we also mustn’t forget that it’s not just South African dealers, the rand is a very widely traded currency worldwide, with large volumes traded, and this is where the Rand’s value, to a certain extent, is determined.
The more uncertainty there is, the higher the volatility because people are unsure about where the correct levels should be. I wanted to add that we don’t just experience this volatility in SA, look, for example, at the UK and what the Pound has done versus the USD over the past couple of years, since the Brexit announcement was made. You’ll see that they’ve also experienced volatility, both in the Euro, the Pound, and the USD. So, this volatility is not restricted to SA. It is a worldwide phenomenon and it does make things more challenging and more difficult in the business environment.
Just talking about the business environment. What has the demand been like for Sable International’s forex services, have you seen that demand grow?
Yes, I think that Sable International has grown its business quite consistently and volumes have certainly grown, which is due to the marketing efforts and getting into the marketplace, and providing customers with good levels of service, and very competitive pricing. This is how we’ve been able to grow the business. Having said that, if one looks at those factors, those volumes are very dependent on the market conditions. For example, if the economy is growing then everyone can grow. The banks will grow their volumes and everyone will grow, but if the economy is static, as we have experienced over the past couple of years with very low GDP growth, then that is certainly going to affect the ability of the total market to grow.
We have been able to grow our volumes in spite of low economic growth which we ascribe to being a smaller player in the market but, at the same time, providing good service levels, product knowledge and experience to assist customers. I say that in the context for small to medium-sized businesses who really require a bit of handholding and assistance which, if one can provide, then they are very happy and grateful to get that assistance. Unfortunately, some of them do get lost in the banking system where, for example, they’re trying to get information out of call-centers and they’re not getting the personal service and the skills and knowledge levels that they really require to run their business.
We have also seen growth in offshore investment, where advisors have increasingly advised clients that it is essential to invest offshore for diversification. They are coming to us to assist their clients. SA citizens are able to invest up to R1 million offshore without a tax clearance and a further R10 million with a tax clearance. We process tax clearances for clients.
For anybody who wants to get in touch with your forex division, what is the best way for them to reach you guys?
We can be contacted on 021 657 2153 for Cape Town and Johannesburg enquiries and 031 536 8844 for Durban, also via email on [email protected] , we have offices in Johannesburg, Durban, and Cape Town. Our website is www.sableinternational.com/forex
This special podcast is brought to you by Sable International.