FX risk management in a time of crisis

by David Irish | April 2, 2020

In this unprecedented and extraordinary time of significant uncertainty and volatile foreign exchange markets, we felt it important to provide some guidance and insights into how foreign exchange risk management should be approached in a time of crisis.

Firstly, take out your foreign exchange policy and read it; thoroughly. And review the key factors and parameters that were analysed in order to determine the policy. If you do not have a foreign exchange policy, contact us urgently.

Secondly, are you managing foreign exchange risk as part of your holistic cash flow cycle or are you managing it on a standalone basis. Your foreign exchange policy should be part and parcel of a robust treasury management policy that is created to optimise and protect the cash flows in your business. If you do not have a treasury management policy, contact us urgently.

Just how significantly has the South African Rand (“ZAR”) been impacted by, mainly, the COVID-19 crisis and the Moody’s ratings downgrade?

* Measured on 31 March 2020

Next, we need to look at the impact of these market movements on your business and
the impact this has on the decisions you are making.

One important piece of advice during times of a significant shortage in liquidity, countries being locked down, many businesses closing and worldwide job losses on the increase; “Now is not the time to create more or new risks within your business”.

Let’s look at this in more detail:

* Yesterday, at the time of writing the USDZAR was trading at R17.85. Now (one day later), as we publish it is trading at R18.60.

We realise that there will be some of you that will still want to take on more risk, regardless of whether this may reduce your returns or put your business under even more pressure.

BUT if you do want to follow this approach be sure that you have all the facts before making this decision:

Our advice would be to reduce your specific uncertainty as far as possible during times of crisis. Risk mitigation should not only be applied during periods of crisis, but rather on a consistent basis in order to enhance the sustainability of your business and its results.

No-one can predict what the future holds (not even in non-crisis periods). We have not found a single analyst that is prepared to predict how long this crisis, or the impact thereof will last; how far the weakening of the rand may still have to go, or when we may see strengthening of emerging market currencies (including the ZAR) when market liquidity is restored.

We believe you should rather be determining what business decisions you should be making in the light of the state of financial markets.

Factors to consider:

We provide you with two examples of factors that may impact your business in a period of crisis, but that should form part of your overall risk management plan; and thus also be considered when evaluating and formulating your foreign exchange and treasury management policies:

1. Many countries are closing their ports, either to certain product types or in their entirety:

2. How “essential” is your product to your customers and their markets? Are you at risk of facing order cancellations and if so, how could it affect you?

These two examples indicate how important it is to consider the impact on your holistic (full) cash flow cycle when making FX decisions. There are many more factors to consider and they may differ from one business to another.

Analysing your operating cycle can help you understand the exact nature of your business’s operations and the unique characteristics related to the marketing, sale, production and delivery of your product or service. This analysis can also help determine how and where your foreign exchange risk appears and how long it remains.

With the level of volatility in the foreign exchange markets at present exposing yourself to more risk may be fraught with more dangers than you think.

Over the past month the volatility of the rand against our major trading partners has increased significantly, both on a daily and hourly basis; see USD ZAR graphs below:

Looking at the daily and hourly directional volatility charts (this plots the % of the period variance of the opening rate to the period low versus the opening rate to the period high) it is clear that any increase in cash flow at risk can on average; just as easily result in an increased loss as an increased profit. Although the daily directional volatility during 2020 has leaned towards the high; on an hourly basis it has hardly moved.

From this analysis we conclude that the most rational approach to these turbulent times is to stay the course and continue to apply the policy we demonstrated to you will provide an optimal result over the long term. Remember, our data analysis included Nene-gate, the build-up to Nasrec 2017, Zuma’s ousting and the waning of Ramaphoria, etc.

If anything, the one parameter you may want to revisit is the risk margin applied to determine your reference rate for costing purposes.

And in your calculations do not forget to factor in the effect of forward points.

If after all this, you still wish to adjust your foreign exchange policy please do not do it without including us in the process. We are here for you.

We would also like to share the following considerations that have been adapted from an article by Naresh Aggarwal for the Association of Corporate Treasurers (UK).

When dealing with the unknown it’s often best to, as Benjamin Disraeli said, plan for the worst and hope for the best.

It’s unclear how extensively the Covid-19 virus will spread or how long it will continue to disrupt – our advice assumes that disruption could continue for up to 6 months. So, what should businesses be doing with respect to their treasury/cash flow function?


Business Impact: You need to determine, evaluate and test the impact on the business.

  • What is the current and potential impact on customer demand?
  • What is the current and potential impact on supply chains and working capital?
  • What’s happening to inventory. Is it building up and will this affect sales and cashflows?
  • Do you know your country exposures for both customers and suppliers?
  • Are there business actions that are being contemplated e.g. closure of
    manufacturing or logistics sites?
  • How frequent are your updates on business performance?
  • What are the business base case, best case and worst case scenarios, and how often are these being updated? Sensitivity analysis is critical.

Liquidity: Best practise for all businesses is to have enough liquidity access for three months of outflows without any customer receipts during this period.

  • Do you have enough on-demand facilities and liquid assets to support the normal demands of the business?
  • What are the liquidity requirements under various business scenarios? Do you need to put extra emergency facilities in place or hold more cash?
  • Is your cash forecasting sufficiently accurate? Do you need better visibility of your Accounts Payable and Accounts Receivable ledgers? Do you need to communicate with the procurement and sales teams to ensure that you’re getting better information during this period?
  • It is usually best to approach your financing providers when you are in a strong position and planning for an adverse scenario, rather than approaching them at a later stage. If your scenarios show a risk to your cash position or debt covenants, when should you approach your bank or funding providers for a discussion?

Operations: If you cannot travel to the office, your treasury, payments, banking and receivables teams will need to be able to access banking information from home. Businesses will be at greater risk of cyber-attacks and payment fraud.

  • Do these teams keep their banking tokens and access codes with them at all times?
  • Are these teams able to communicate effectively with each other to settle
  • Are you able to employ enhanced checks on potentially fraudulent payment
  • Have you increased training and general awareness of the risks of cyber-crime and payment fraud?
  • Is there sufficient bandwidth at home for staff to access the company network in a secure way that does not use public Wi-Fi sources? If not do they have an alternative solution?
  • Do they have printed or locally saved copies of any key contacts at the banks, key system providers, Money Market Funds, and colleagues?
  • Do you have any contingency plans with your main banks to ensure that key
    activities can continue? Do you have a buffer overdraft that you can utilise?
    Also: if significant numbers of your team are ill for a period of time, what are the implications and what back-up plans or contingency plans that can be considered?

Strategic and longer term

Funding: The virus will affect businesses in a variety of ways including the balance sheet and income statement.

  • How will the business be affected in the short and medium term? Do you have enough accurate data?
    • Will profits in some / all jurisdictions be affected?
    • Will working capital demands increase?
  • What are the indirect as well as the direct costs?
  • What will insurers be expected to cover?
  • Do you need to delay certain capital expenditure (“capex”) and operational expenditure (“opex”) intensive projects and if so, what are the financial implications of this?
  • Are there key events / annual activities that will affect your business plans?
  • What impact could this have on any of your covenants that could be tested during the period affected?

Operations: Most business continuity plans assume a short level of disruption, but how long could key activities continue to be performed?

  • Have you assessed how key activities could be performed in the medium / longer term?
    • Do you need to look at different collaboration tools like Microsoft Teams?
    • Do you need to redesign your preventative and detective controls to manage new operational processes?
    • Do you need to increase your buffers for cash management and FX hedging?
    • Do you need to plan differently for absences of key staff either due to Covid19 or pre-agreed vacation time?
    • Could you use different office locations to do different tasks?

These are some of the key considerations that we would advise you to address when performing your risk assessment. As we have said, it is better to be prepared.

If you need any assistance with any of these considerations, please do not hesitate to contact us. Our team of experts are ready and able to assist you in managing your FX, cash flow and other financial risks during this crisis.

Copyright notice and disclaimer

Copyright © 2020 updated. WauTreasury (Pty) Ltd. All rights reserved.
The information contained in this document is the property of WauTreasury (Pty) Ltd.

The information is only for the information of the recipient or reader and may not be used,published, reproduced or redistributed without the prior written consent of WauTreasury (Pty) Ltd.

The opinions expressed are in good faith and while every care has been taken in preparing these documents, WauTreasury (Pty) Ltd makes no representations and gives no warranties of whatever nature in respect of this document, including but not limited to the accuracy or completeness of any information, facts and/or opinions contained herein.

WauTreasury (Pty) Ltd, its holding company, its subsidiaries, the directors, employees and agents cannot be held liable for the use of and reliance on the opinions, estimates, forecasts and findings in these documents.


Submit a Comment

Your email address will not be published. Required fields are marked *