With the annual National Budget Speech around the corner, many business owners and leadership teams are becoming concerned that we’ll see the rand depreciating following Finance Minister Tito Mboweni’s presentation of the 2021/02/24 budget.
We’ll unpack why the rand could experience some volatility following the 2021/02/24 budget speech, as well as what businesses can do to ensure they are sufficiently protected in the market, but let’s first look at how currency fluctuations impact the way we operate in South Africa.
During the initial COVID-19 crisis, the rand immediately depreciated, hitting a low of R19.50 to the US dollar in April 2020. This meant that an importer who had not imported sufficient stock to withstand a longer period of market volatility would, for example, have been forced to pay their supplier an additional R3 or R4 on the dollar. The resultant readjustment of pricing left goods uncompetitive in the local market, squeezing margins further.
What’s the good news in this scenario? While we agree that there was a huge amount of short-term pressure on local business, by December there was a light at the end of the tunnel, as the rand closed at a low of R14.53.
For every high there is a low
Throughout history there’s a consistency in the way that currency operates. Over the past 25 years we’ve had a few spikes in the rand’s value – on a chart, they look like mountain peaks, and they align with big events, known as Black Swann events that the world or South Africa was experiencing, including the 2008 economic crash, Nenegate and COVID-19.
What’s important to remember is that peaks are followed by troughs. A high is always followed by a low – the secret is being able to determine how long it will take from the peak to the lowest point, and whether your business can navigate that period. In this case, it took nine months from peak to low, but most businesses only carry around three months’ worth of stock.
The ability to track markets, predict currency fluctuations and make real-time decisions based on market movements can have a big impact on bottom lines during these more volatile periods, and the same capabilities can be leveraged to maximise opportunities when the rand is strong. Ultimately, it’s important to know your numbers, understand how international markets and currencies impact your day-to-day operations and costings, and then be able to react quickly when the right conditions present themselves.
South Africa is in a tight fiscal position
So, how does the national budget impact businesses on the ground in terms of foreign exchange? It all comes down to international investors, rating agencies and their perception of South Africa.
In October 2020, Minister Mboweni addressed a number of factors impacting our economy in the Medium-Term Budget Policy Statement (MTBPS). These included a high public sector wage bill that accounts for around one third of government’s budget spend and the National Treasury’s fiscal deficit, which, under the medium-term estimate is projected to worsen to 15.7% in 2020/2021, before improving to 7.3% in 2023/24. These factors aren’t alleviated by the bailouts of State-Owned Entities (SOEs), which continue to negatively impact South Africa’s credit rating by international credit rating agencies.
To address these challenges, Minister Mboweni announced the Economic Reconstruction and Recovery Plan, which aims to invest in national infrastructure projects to boost employment and address the debt to GDP ratio and government’s fiscal deficit.
Unfortunately, many of these key issues have not been addressed leading up to the National Budget Speech 2021. COVID-19 has not caused the current issues in our economy, but it has accelerated them.
Two in three South African businesses are showing negative growth, which means they aren’t paying corporate income tax. In addition, approximately three million people have lost their jobs since the onset of the pandemic, which not only puts a strain on UIF payments, but decreases personal income tax collections. The lockdown measures restricting the sale of alcohol and cigarettes have also resulted in the non-collection of sin taxes. Altogether, SARS is set to lose almost R30 billion in uncollected taxes.
The gross debt-to-GDP outlook since the 2020 Budget is estimated to be 81.8% in 2020/2021 and is forecast to increase to 95.3% of GDP by 2025/26. Add to this the fact that gross revenue collections are anticipated to be R312.8 billion less than initially forecast for 2020/21 and R232.7 billion less than initially forecast for 2021/22, and it’s clear that our economy will be under pressure.
Where does this leave businesses as we await the 2021/24 National Budget?
Our first concern is that the limited success in implementing Minister Mboweni’s Economic Reconstruction and Recovery Plan will have an impact on South Africa’s credit rating. Inaction unfortunately does not inspire investor confidence. Similarly, if further SOE bailouts are announced, we believe it will be viewed internationally as going against what was promised in October. In this instance, we expect to see major credit rating agencies downgrade South Africa further and at the very least the rand depreciating in the short term.
Proactive bottom-line management is key for businesses
We will soon see what the 2021/24 budget holds and how international markets react to it.
Right now, we believe it’s important for leadership teams to remember that after every high is a low. There are many ways to mitigate the risk of currency fluctuations and even to leverage opportunities as they present themselves.
In our experience, the best way to navigate these challenges is with a team of dedicated specialists who understand international markets, track them on a day-to-day basis and can offer the best advice for businesses that purchase goods and raw materials in foreign currencies.
