From murmurings of a technical recession on the home front to Trump’s trade war across the pond, not to mention the knock-on effects of emerging market movements, the cocktail of factors affecting the rand’s less than stellar performance comes down to a hard-to-swallow truth: there’s no growth.
“I won’t predict the rand, but I will predict this: there will be volatility for a long time to come,” says Barr. Here’s why:
You can’t grow an economy on high interest rates
The old economic theory of pushing up interest rates for foreign investors to buy rands and thereby creating a demand actually prejudices the economy.
“Even though locals can save or put money into cash instruments for a higher return, the way an economy grows is not by people saving money, it’s actually by people investing money and therefore gearing against it, ie borrowing,” says Barr. “Most companies can only grow on gearing, particularly smaller companies, and those are the guys that fuel the economy. SMEs can double in size and capacity, but they need to borrow. And they can’t afford to borrow with high interest rates.”
Asked whether he sees the interest rate going up or down, Barr says, “there was at one stage a comfort that interest rates would go down, but right now, again because of the weak rand, rates may not come down. They shouldn’t go up because that’s counter-productive.”
The rand will not stabilise until exchange control is abolished
For the majority of South Africans, there is no such thing as exchange control. Most people don’t have multiples of millions to take out of the country. However, multi-million or billion rand companies are subject to exchange control. “Knowing that these businesses cannot invest overseas creates a false sense of security, which believe it or not, actually drives volatility,” says Barr. “Most emerging markets that abolished exchange control saw massive chaos in the short term, and then stability and strength and no volatility.”
Talk of a potential recession is making everyone nervous
Rand volatility, coupled with investor apathy can lead to a technical recession; defined as two or more consecutive quarters where economic growth is negative. The knock-on effects of this would be rampant inflations and rapid interest rate hikes. “This talk gets people nervous about the country and invites speculators to play our currency; to kick it around,” he says.
It’s business unusual
Barr advises that because times are tougher and margins are tighter, “you have got to do things differently; you’ve got to work harder for less.” He explains that importers of the past, for example, could simply phone their bank, get a price and make a deal. “Now, you have to monitor the rand over a day or two, make a decision, and call it. At CFS, we would help you make that call and fix the price by sharing intelligence and insights.”
Another example is trade finance. “Whether you are with the big banks or us, the interest can average out at north of 18% – closer even to 24 or 25%. Because CFS is not subject to the stringent rules and regulations of traditional banks, we are in an ideal position to massage interest rates to give you the best returns on your investment.”
He adds that nominating an interest rate on a deal is not an exact science. “We look at your overall assets to determine price for risk; this based on the security that is offered, the individual behind it, and the term of the debt.”
“It begins with a conversation,” concludes Barr.
If you are looking for business finance at competitive interest rates coupled with secure intel regarding exchange rates, CFS will ensure that rand volatility is your friend, not your foe. Contact us today.