Over the past few months, the rand has strengthened considerably against major currencies.
Driven by optimism around the government of national unity (GNU), bigger interest-rate cuts by the Reserve Bank than the Federal Reserve, and a general positive swing in sentiment towards emerging markets, it’s seen particularly significant gains against the US dollar.
Within the space of a year, it’s strengthened from a high of R19.39 to the dollar to around R17.60 at the time of writing. In fact, the rand was the best performing emerging market currency in the three months leading up to October.
That strengthening comes with several benefits. Some are obvious to everyday consumers, like the fact that businesses and consumers are paying less for petrol and diesel.
Others are less visible but equally significant. Import businesses, for instance, can import goods more affordably, passing the benefits onto consumers or using them to scale and grow their business further. Similarly, local businesses with international operations will have lower payroll costs.
But currency fluctuations can be sudden and unpredictable, and that’s particularly true for emerging market currencies such as the rand. After its recent rally at around R17 to the dollar, the rand has weakened to its current level. Knowing this, how can businesses maximise the benefits of a relatively strong rand, not just now but for some time into the future too?
Why currencies fluctuate
According to Harry Scherzer, chief executive officer of international money transfer fintech Future Forex, understanding why currencies fluctuate is key to answering that question.
“It’s important for businesses to understand that, while South Africa has scored numerous own goals when it comes to the value of the rand, there are a lot more factors that go into the relative value of one currency over another,” he says. “Disruptions to global supply chains because of international conflicts play a role, as do interest-rate decisions in major economies and other economic data points.”
In early October, for example, the rand weakened against the dollar as it became clear that a Chinese stimulus package hadn’t had as big an effect as many had hoped. Thanks to the size of the Chinese economy and its consumption of raw materials from around the world, that kind of news tends to drag other emerging currencies with it.
“In other words,” Scherzer says, “businesses trying to spot trends or time exchange rates are going to have an incredibly difficult time. Some might get lucky and time things perfectly, but many others will end up paying far more than they should on international money transfers.”
Don’t rely on your bank for international money transfers
Not only do businesses need to navigate unpredictable currency fluctuations, but they’ll also face numerous other challenges if they’re relying on traditional banks for their international payments.
According to Scherzer, businesses can do something much more powerful when it comes to their international money transfer needs: ditching their banks in favour of an international money transfer provider that places a strong emphasis on transparency and expert-led customer service.
“Many South African banks still use slow, manual processes for international money transfers,” he says. “As a result, transactions can take much longer than they should, meaning that the business could miss out on a period of relative rand strength when sending money over gets them more dollars, pounds, or euros.
“By working with an international money transfer provider that embraces automation, the entire process will be completed swiftly and seamlessly, making it easier to keep up with currency fluctuations,” he adds. “But it also makes the process much more pleasant for investors, meaning that they’re more likely to keep investing money offshore.”
The Future Forex chief executive officer points out that the same is true for customer service.
“Most of us know how frustrating banks can be even when it comes to resolving relatively mundane issues,” says Scherzer. “Things are much worse when it comes to international money transfers. Businesses, particularly non-enterprise scale ones, will find themselves wasting a frustrating amount of time whether they try and resolve the issue on their own, use the bank’s website or app, or go straight to the contact centre.
“By contrast, when you work with an international money transfer provider that prioritises expert-led customer service, you’ll have knowledgeable teams tackling your problems and helping you on the communication channel with which you’re most comfortable,” he adds.
Perhaps the biggest issue with banks, Scherzer points out, is their lack of transparency, particularly when it comes to the fees they charge on international money transfers.
“Most people are only aware of the fees that a bank advertises,” he says. “But they may know nothing about a hidden fee called ‘the spread’ (which is the difference between the rate at which the bank buys a currency and the rate at which it sells it). Banks typically bake these significant charges into their processes, meaning that a transaction can end up costing much more than the customer realises and cancel out the benefit of a relatively strong rand.”
Not only will a good international money transfer provider prioritise full transparency in its pricing, but it will also provide comprehensive and easy-to-use currency hedging tools of which businesses might not be aware. One such option is known as Forward Exchange Cover (FEC), a financial tool used to manage the risk of fluctuations in exchange rates.
“Essentially,” says Scherzer. “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.”
Embracing certainty
“Business is inherently risky, especially in an economy as volatile as South Africa’s,” Scherzer concludes. “Businesses should welcome anything that reduces or even mitigates those risks. That includes taking full advantage of the rand’s current relative strength.
“The best way of doing that is to choose an international money transfer provider that will ensure your business gets the most value out of every international transaction.”
