By Andile Ntingi
In financial markets, prices of assets go up and down. In some cases, these market fluctuations bring with them unwelcome disruptions to business operations.
Recently the South African rand found itself in a situation where it depreciated against the US dollar over concerns about planned electricity blackouts affecting the economy, and a diplomatic fallout between South Africa and US regarding unproven claims that South Africa supplied arms to Russia.
The rand has since clawed back some lost ground against the greenback after South Africa dismissed the weapon sales claims and said it will establish a commission of inquiry to investigate the matter, promising to take appropriate steps if the country’s arms control laws were violated.
South Africa has an open economy and the stability of the rand, one of the world’s most traded currencies is crucial to its long-term prosperity and economic development. While at first glance a weaker currency may come across as a worrying development that may trigger inflation due to prices of imports becoming more expensive, it can also have a stimulus effect on the domestic economy.
In the context of South Africa, tourism and exports will receive a massive boost from a depreciated rand, making the country more attractive as a destination for tourists while exports will become cheaper compared to goods priced in stronger currencies.
Even before the rand softened against the dollar, South Africa was an affordable destination and the current round of the rand’s depreciation will put more cash in the pockets of tourists, who can use the extra money to enjoy shopping, entertainment, and visiting some of the most exotic and beautiful places the country has to offer.
South Africa, like any other country that engages in foreign trade aspires to have a stable, competitive currency, which helps exporters to be competitive in international markets.
One of South Africa’s competitive advantages, which makes it attractive to multinationals looking to set up operations in Africa is that it has world-class logistics infrastructure and a sophisticated financial system.
Many large financial institutions operating in the country offer foreign exchange derivatives to hedge exporters, importers, and investors against the rand’s volatility.
These derivatives are a useful hedge for managing currency risks, enabling businesses to protect themselves from wild market swings that could potentially disrupt their operations and cause financial losses.
In the meantime, South African exporters must take advantage of the current window of opportunity presented by the weak rand to increase export sales to global markets, while protecting themselves from unpredictable fluctuations in the value of the rand.
Currency devaluations and depreciations are a fact of life that drive up inflation and expose consumers and companies to high interest rates, low investor confidence, and economic slowdown.
South Africa has had a fair share of challenges, ranging from electricity supply constraints to logistics and transport bottlenecks. However, these infrastructure backlogs are being addressed through structural reforms aimed at improving South Africa’s economic competitiveness and reducing the cost of doing business by upgrading energy, rail, roads, ports, water, and telecommunications infrastructure. The structural reforms, including boosting energy generation are necessary to steer the economy on to a high-growth trajectory.
So far, the reforms are bearing fruit as evidenced by the inflow of new investment capital into the country. In the past five years, South Africa has received investments to the tune of R1.5 trillion, showcasing its status as an attractive investment destination. These investments are expected to drive industrial growth and generate employment.
The government is also allocating funding to strengthen law enforcement to combat money laundering and terrorism financing. As such, an allocation of more than R200 million has been made to the Financial Intelligence Centre (FIC), South Africa’s anti-money laundering unit to implement recommendations made by the Financial Action Task Force (FATF) when it greylisted the country in February, this year. The funding for FIC forms part of the country’s response to get itself off the greylisting.
The reforms being undertaken are a strong signal that South Africa is determined to maintain an enabling environment for multinationals looking to spread their tentacles across Africa.
South Africa is a member of the African Continental Free Trade Area (AfCFTA), the world’s largest free trade area, covering 47 countries that have a combined population of 1.3 billion people and gross domestic product (GDP) of $3.4 trillion (R62.4triln). By 2050, the continent is expected to be home to 2.5 billion people, with a combined GDP projected to grow to $7trln by the year 2035.
For companies that want to tap this vast continental market, South Africa is the best destination to base their operations. The country possesses several unique strengths that are rare in Africa. Apart from being home to the Johannesburg Stock Exchange (JSE), Africa’s largest stock market and among the top 20 largest stock exchanges in the world, the country is blessed with a skilled workforce, world-class logistics infrastructure, and is endowed with natural resources like platinum, gold, iron ore, diamonds, manganese, chrome, titanium, and other key commodities.
Many of the companies listed on the JSE have operations across Africa, giving investors access to fast-growing and resource rich markets on the continent. There are almost 5 000 products that are traded in Africa, and AfCFTA has liberalised trade on 88.3% of these products. South Africa is well placed to host companies that want to take advantage of AfCFTA to increase their market share of exports.
Andile Ntingi is a former business editor, economic commentator and founder of GetBiz Research Consultancy
BUSINESS REPORT