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Keep your business in balance with these foreign exchange (FX) strategies for COVID-19 and beyond.Â
Right now, the only thing thatâs certain is uncertainty. As any entrepreneur will tell you, the COVID-19 pandemic â with its lockdowns and downturns â has brought confusion and volatility to almost every aspect of doing business.
Exchange rates are no exception: between March and July 2020 the rand-dollar exchange rate yo-yoed between R16.50 and R19, with significant weekly (and even daily) fluctuations that left many businesses flummoxed. Compounding the problem is the fact that few smaller business owners understand the intricacies of the FX world, and fewer still appreciate the options available to them, even without a global pandemic to navigate.
Surviving this kind of volatility takes information, preparation and knowing where to go for help. Here is a roundup of FX strategies for entrepreneurs and SMEs.
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Spot for now, fix for later
When it comes to payments, there is always the choice of paying on demand (known as âspotâ) or, in the case of a future obligation, fixing the rate now. âEach choice comes with risks, and thereâs no âperfectâ model,â says Paul Fenwick, CFA: Digital Markets at Absa Group Limited. He warns that foreign exchange rates fluctuate all the time (not just during health crises), with the rand being a notoriously volatile currency.
âIt is therefore important for clients to understand these risks,â says Fenwick. âIf I know I have an order coming in six monthsâ time, I can wait until those goods arrive and then book my FXÂ rates on that day. If I do that, Iâm exposing myself to whatever the spot rate is going to do for the next six months â and all the political and economic noise that comes into the system. Alternatively, IÂ could decide that I like where the rate is today, and Iâm willing to bear the risk of locking into that rate. This way I know today what Iâll pay in six monthsâ time for those goods, and I can budget and prepare for that.â
Take action: Donât go it alone. Contact Absaâs FX sales team for guidance on the approach thatâs best for you.
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Diversify to de-risk
âMy recommendation to clients is always the same,â says Fenwick. An advocate of the balanced approach, he recommends that you donât put all your eggs in one basket. âIf you can only trade spots or forwards, maybe put 50% of your exposure in the forward markets and the other 50% on the spot. Then, if the market moves in your favour, you can partake in that, but if the market moves against you, then youâve got some flexibility, with some of your costs already locked in.â
Of course, this all depends on the type of small business youâre running. âIf I have a business that can pass all my costs on to my clients, and thereâs no pressure on me for the rate Iâm going to book, then I can just book my forward as it comes in and best prepare myself for the costs Iâm going to pass on through the value chain,â says Fenwick.
Take action: Find more on de-risking strategies here.
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Tap into local expertise
While many small businesses tend to think âlocalâ, there are obvious benefits to thinking bigger. âWhen you start to engage cross-border, you diversify and open yourself up to new markets,â says Trevonica Naidoo, COO, International Banking South Africa at Absa. âBut with that comes the element of risk, in terms of payment. You may be sending goods to somebody in, say, Angola, but are you going to get your money?â
âDoing business in Africa has many advantages, but itâs not easy,â says Fenwick. âYou need to understand the markets from a regulatory perspective before you jump in. If you donât, youâre going to get your fingers burnt.â Thatâs why it pays to draw on regional experts with the ability to execute across all regional markets. âAt Absa, our team takes the risks into consideration, and might say to you, âWell, we feel that perhaps you shouldnât do a regular Swift paymentâ or, âPerhaps you should consider a letter of credit.â Weâre able to assist in terms of the various pros and cons.â
Take action: Speak to Absaâs team of International Banking specialists for guidance on selling into Africa as an SME.
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Reverse your priorities
âYouâll find that the average entrepreneur has the following order of priorities,â says Naidoo. âFirst theyâll chase sales, then theyâll consider what their operational capabilities are. Following that theyâll look at logistical value-chain management, then at finance, then at trade facilitation, and lastly theyâll look at the rules and regulations.â
But, says Naidoo, this sequence is back to front. âThey should actually do it in a reverse order, first understanding the rules and regulations of their industry. Before even thinking about sales and operational details, first ask yourself: âWhat can I do?â and âWhat canât I do?â Then look at everything else.â
Take action: Absaâs team of International Banking specialists can advise you on relevant regulations and the right cross-border sales plan for you.
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Know the rules
The key for any cross-border business is to seek protection from FX fluctuations. âWe find a lot of clients who make, say, a 30% or 40% margin on their goods,â says Fenwick. âBut we have an incredibly volatile currency, so if your hedging policy is not monitored, you could also lose 20% or 30% on that margin because of movements in the exchange rate.â
This level of volatility â especially now â is the reason SMEs and entrepreneurs need to partner with FX experts who enable businesses to get business done. In addition to its FX and International Banking specialists, Absa has an award-winning research team that won the Best Research House award for the third consecutive year at the 2019 JSE Spire Awards.
Take action: Get always-on access to research that informs the best decisions. Visit this portal and the Absa Access research platform for short daily notes, longer thematic pieces and model-based daily exchange rate forecasts over five years.