Falling rand burns IT

By Leon Engelbrecht, ITWeb senior writer

Johannesburg, 13 Feb 2008

South African IT vendors and distributors are facing a "double whammy", says Taquanta Treasury Solutions (TTS). Not only did the January power outages affect their ability to operate, it also dented the value of the rand, which is now escalating the cost of imports.

This, the company says, "is something that cannot be fixed by installing a generator or switching off lights".

"A business that ordered $100 000 worth of goods on 7 January would have had to pay out an additional R100 000 if the goods landed on 7 February, because of the plummeting rand," says TTS head Stephen Rogers. "And this excludes the increased payments for shipping and duties, which are calculated in foreign currency as well."

Rogers says local importers - many of which are small and medium enterprises (SME) operating on extremely tight margins - are in for a torrid period, which many may not survive unless they take proactive steps on an ongoing basis to limit the damage.

"Few importers could have predicted the 12% decline in the rand against the major currencies since early January," he says. "SMEs do not have that level of cash reserves in place; nor can they expect to pass on the increase to their customers, particularly if the goods were imported to fulfil already signed orders and tenders," he adds.

But, Rogers believes importers can do more than just hope that the rand is stronger on the day they have to settle their forex bill.

Ideally, they should have a holistic forex strategy in place that takes account of their business model and risk management policy. This will help them to reduce the impact of currency volatility on the business itself in the short, medium and long-term. Some of these steps would include:

* Having an actively managed stop-loss level in place that will limit the damage of a depreciating rand and pass on some of the upside should the currency appreciate.
* Actively monitoring the movement of the rand. "Assistance might be required as it is unrealistic to expect an SME to be able to do this on a sustainable basis, especially when the currency is moving by up to 10c to 30c a day," Rogers says.
* Being aware that covering all imports forward does not mitigate this risk.
* Make the banks compete for your business. "Having one service provider in this market does not make good business sense. In addition to this, your first price is often not your best price and in time of high currency volatility, the pricing from one bank to another could make a difference to the all-in price to the importer. In current market conditions, this could be as much as 5c to 10c against the US dollar," Rogers says.

"The first requirement, however, is information," Rogers says. "Businesses need to be able to make informed decisions based on the latest market news and information and to strip the emotion out of these decisions.

"In addition, businesses need to take advantage of the fact that the global forex market never closes. Most forex transactions entered into by local organisations take place only during South African business hours - but this may not always be the most profitable time to trade."