Real Estate Investor Magazine South Africa September 2014 | Page 56

CURRENCY

BY ANDREW RISSIK

The
Volatile
Rand

Challenges of moving Rands cross-border

T

here are two ever-present factors when
exchanging or transferring Rands that make
“doing business” on a commercial and private
basis from South Africa tricky, frustrating and costly:
the exchange itself (due to volatility) and the transfer
of funds, which will inevitably go cross-border and
be subjected to transaction costs, and reporting and
surveillance requirements imposed by the South
African Reserve Bank (SARB).
When exchanging Rands, the first thing you have
to think about is the rate. The volatility of the market
can affect how much you receive on the other side or
how much you have to pay to settle a foreign invoice
and this can cause major problems for exporters and
importers. Predicting income or costs can become
very difficult when the market is unstable and while
companies (unlike private individuals) can hedge to a
degree against these currency price uncertainties, they
can only do it if they have regular predictable purchases
or sales, and only for a limited period of time.
Ever-present volatility
The Rand has steadily declined in value against all
major currencies over the past 30 years and this has
been driven in part by high inflation and other factors
like labour and productivity imbalances. While this is
not ideal, it is at least predictable. What makes currency
exchange tricky is short- to medium-term swings in the
market. These wild swings (volatility) occur as a result
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September 2014 SA Real Estate Investor

of the actions of currency speculators, money funds
(seeking short-term gains on the Rand) and relative
political and economic shocks that happen from time
to time, as well as negative sentiment often portrayed
in the media.
In 2002 everyone thought the Rand would continue
its slide from 14 ZAR/USD to 20 ZAR/USD when
in fact it came all the way back to 6.80 ZAR/USD in
2011. Many large companies made costly mistakes in
taking forward contracts over that period. Since August
2011, however, we seem to be back into the slow but
sure devaluation cycle.
Rand rise?
It is these swings in the market that make moving
money cross-border a worrisome affair. As things stand,
there is a good chance that the Rand may continue
to climb as the interest rate increases amid the lowest
volatility in many years. The Rand has strengthened
the most among the 16 major currencies tracked by
Bloomberg, fuelled partly by investors borrowing in
Dollars to purchase South African assets. The Reserve
Bank recently raised the repo rate by 25 basis points
and warned of more increases.
The SARB is battling to curb inflation while limiting
the risk of higher borrowing costs on the slowing
economy; higher interest rates are increasing Rand
returns relative to peers amid sustained appetite for
emerging market assets as volatility falls.
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