- GANS Trade Insight
Currency movements can materially change the profitability of an international transaction between the date an exporter issues a quotation and the date payment is received. A contract that appears profitable when it is signed may produce a much smaller margin if the settlement currency weakens against the rand before the customer pays.
The risk can be particularly significant for South African exporters because international sales, transport charges and imported inputs may be denominated in different currencies. South Africa follows a floating exchange-rate policy, meaning the value of the rand is primarily determined by market forces.
Currency risk cannot be eliminated entirely, and attempting to predict every movement is unlikely to provide a dependable commercial strategy. Exporters can, however, identify their exposure, establish acceptable limits and use suitable contractual, operational and financial controls to make cash flow and margins more predictable.
Effective currency management begins before a price is quoted. It should form part of product costing, contract negotiation, payment planning and the final decision to accept an international order.
Mapping currency exposure across the transaction
The first step is to identify when a foreign-currency exposure begins and when it ends. Exposure may start when a supplier commits to a foreign-currency price, when an exporter issues a fixed quotation or when the customer accepts an order.
It may continue through production, shipment, customs clearance, delivery and an agreed payment period. If the buyer pays 30, 60 or 90 days after delivery, the exporter may remain exposed for several months after the commercial price was originally calculated.
Exporters should map the currency, amount, expected payment date and commercial purpose of each foreign-currency inflow and outflow. This creates a clearer picture of the net amount at risk and prevents sales, procurement and finance teams from managing only their individual parts of the transaction.
Transaction exposure arises when a business must receive or pay a fixed amount in a foreign currency at a future date. Exchange-rate movements can change the rand value of that amount before settlement.
Economic exposure refers to the longer-term effect of currency movements on pricing, demand and competitiveness. A stronger rand may make South African products more expensive for international buyers, while a weaker rand can increase the local cost of imported materials and equipment.
Cash-flow exposure arises when the timing or value of expected receipts does not match the exporter’s operating commitments. Late payment, partial payment or a currency conversion at an unfavourable rate can create pressure even where the order remains profitable on paper.
Once these exposures have been identified, the exporter can calculate how much exchange-rate movement the margin can absorb. The calculation should use the complete landed commercial position, including manufacturing or sourcing costs, packaging, inland logistics, freight, insurance, bank charges, commissions and any imported inputs.
For example, if an exporter agrees to receive US$100,000 in 60 days, the rand value will depend on the exchange rate available when the funds are converted. At R18 to the dollar, the receipt would equal R1.8 million. At R17 to the dollar, it would equal R1.7 million, producing a R100,000 difference before banking costs and other adjustments.
The same movement may affect an importer differently. If the exporter must pay a foreign supplier in dollars, a weaker rand increases the rand cost of that obligation. Businesses with both foreign-currency receipts and payments should therefore examine their net exposure rather than considering each transaction in isolation.
A central exposure register can help the finance team record quotations, confirmed contracts, purchase orders, invoices, expected payment dates and any existing currency arrangements. Potential orders should be distinguished from confirmed commitments so that the business does not protect currency amounts that may never materialise.
The register should be updated when shipment dates, customer payment terms or supplier obligations change. A contract delayed by several weeks may no longer match the timing of the original currency arrangement.
Responsibility should also be clearly assigned. Sales teams should not promise a foreign-currency price without knowing how long it remains valid, while procurement teams should inform finance of foreign-currency commitments before they become payable.
Building currency protection into export contracts
Contract design is one of the most accessible ways to reduce currency uncertainty. Before considering a financial product, exporters should determine whether some of the exposure can be managed through pricing, payment terms or the alignment of receipts and expenses.
Quotations should identify the currency, validity period and assumptions used in the price. A quotation valid for seven days creates a different risk from one that remains open for three months. Long validity periods may require a larger currency allowance or a mechanism for reviewing the price.
Exporters should also specify when the exchange rate becomes fixed for commercial purposes. Possible reference points include order confirmation, receipt of a deposit, completion of production, shipment or final payment. The chosen approach should be clearly communicated so that neither party assumes that the other carries the currency risk.
Deposits can reduce the period and amount of exposure. An advance payment may allow the exporter to secure materials, cover early production costs or convert part of the foreign currency before the remaining balance becomes due.
Shorter payment terms may also reduce risk, although they must remain commercially acceptable to the buyer. The appropriate balance depends on the customer relationship, order value, production cycle and competitiveness of the market.
Where buyers require longer payment terms, the exporter should incorporate the cost of financing and currency protection into the quotation. A sale that includes 90-day payment terms should not necessarily carry the same price as an otherwise identical cash transaction.
A currency-adjustment clause may be suitable for longer contracts, repeat orders or projects with extended production periods. Such a clause can permit the price to be reviewed if the exchange rate moves beyond an agreed threshold.
The clause should identify the reference rate, base date, review date, threshold and method used to calculate an adjustment. Legal advice may be necessary to ensure that the wording is enforceable and consistent with the wider contract.
Natural hedging provides another operational approach. This occurs when a company receives and pays the same currency, allowing part of the inflow to be used for the outflow without first converting the full amount into rand.
For example, a business receiving euros from a customer may also need euros to pay a European supplier or freight provider. Matching those amounts and dates can reduce the net currency position requiring separate protection.
Natural hedging must still be managed carefully. Receipts and payments may occur on different dates, and the expected customer payment may be delayed. The business must also ensure that foreign-currency accounts and transactions are operated in accordance with applicable South African requirements.
The South African Reserve Bank explains that the Currency and Exchanges Manual for Authorised Dealers contains the permissions, conditions and reporting responsibilities applicable to foreign-exchange transactions. Exporters should consult an authorised dealer or appropriately qualified adviser regarding the rules relevant to their circumstances.
Regular communication with the buyer can reduce uncertainty. If production, shipment or payment is delayed, the revised dates should be shared promptly with the finance team so that any related currency arrangements can be reviewed.
Selecting suitable currency-management instruments
Financial instruments can help make the future rand value of a foreign-currency receipt or payment more predictable. They should be used to manage an identifiable commercial exposure rather than to speculate on future exchange-rate movements.
One commonly used instrument is a forward exchange contract. It allows a business to agree with a financial institution on an exchange rate for converting a specified currency amount on or around a future date.
A forward contract can provide greater certainty over the rand value of an export receipt. This can protect the expected margin if the foreign currency later weakens, although the exporter may not benefit if the market subsequently moves in its favour.
The International Chamber of Commerce identifies forward contracts and foreign-exchange options as established methods of managing foreign-exchange risk. It also notes that matching exports and imports in the same currency can provide a natural hedge.
Forward arrangements require accurate information about the amount and timing of the exposure. If the customer pays late, pays less than expected or cancels the order, the exporter may need to amend, extend or close the arrangement, potentially at a cost.
Foreign-exchange options may offer greater flexibility. An option can provide the right, without the same obligation as a forward contract, to exchange currency at an agreed rate or within agreed conditions. This protection generally involves a premium or other cost.
Options may be considered when an exporter wants protection against an unfavourable movement while retaining some ability to benefit from a favourable one. Their pricing and structure can be more complex, so the commercial benefit should be compared with the cost and the size of the underlying exposure.
Some exporters use a layered approach rather than protecting the entire anticipated amount at one time. For example, a business may protect part of an exposure when the order is confirmed and consider the remainder when production or shipment becomes more certain.
This can reduce the risk of committing to an instrument for revenue that is still uncertain. However, it also means that part of the transaction remains exposed to market movements. The appropriate approach depends on the certainty of the order, the business’s risk tolerance and the advice of its authorised dealer.
Currency-management decisions should follow a written policy approved by management. The policy can define which exposures may be protected, who may authorise transactions, which instruments are permitted and what records must be retained.
It should also set limits for unprotected exposure and require regular reporting. The purpose is to prevent inconsistent decisions, unauthorised speculation and situations where several departments make overlapping currency arrangements.
Performance should not be judged by comparing every protected rate with the most favourable market rate that later became available. A currency-management programme is designed to improve predictability and protect acceptable commercial outcomes, not to achieve the best possible rate in hindsight.
Useful indicators may include the value of confirmed foreign-currency exposure, the proportion protected, the average period of exposure, forecast accuracy and the effect of currency movements on gross margin.
Exporters should review these indicators by customer, market, currency and contract type. Repeated losses on one route or customer arrangement may indicate that quotation validity, payment terms or internal communication need to be revised.
GANS South Africa works with businesses to coordinate export pricing, supplier requirements, customer terms and international trade planning. This can include helping organisations identify the commercial components that influence export margins and preparing clearer information for discussions with banks and professional advisers.
A disciplined approach to currency risk allows exporters to quote with greater confidence, protect working capital and evaluate international orders on a more consistent basis. When exposure is identified early and managed according to an agreed policy, exchange-rate volatility becomes a controlled commercial consideration rather than an unexpected threat to profitability.
* This report provides general commercial information and does not constitute financial, investment, tax, exchange-control or legal advice. Foreign-exchange products can involve costs, obligations and financial risk. Exporters should consult a South African authorised dealer, qualified financial adviser and other appropriate professionals before entering into any currency-management arrangement.
