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    Home»In-depth»Rand woes to hit tech sector

    Rand woes to hit tech sector

    In-depth By Craig Wilson8 October 2012
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    The rand nose-dived against major foreign currencies on Monday hitting a new three-and-a-half year low of R8,97/US$, before recovering slightly. The slide means gadgets and computers are about to get a lot more expensive, though not necessarily immediately.

    Chris Gilmour, investment analyst at Absa Asset Management, says the fall in rand’s value will create a “major headache” for everyone from telecommunications companies that import equipment to retailers stocking up for the Christmas season.

    “Prices over the next few months could be significantly higher and a rise in inflation could throw the Reserve Bank’s models out of kilter,” Gilmour says, adding that those expecting another cut in interest rates may be disappointed.

    David Kan, CEO of computer assembler and technology distributor Mustek, says that if the dramatic slide in the currency continues, his company will be forced to increase its prices. “Any company that conducts imports will have this problem,” he says.

    Kan says Mustek takes 50% forward cover each quarter but doesn’t tie itself in any further because the currency is volatile and can appreciate as violently as it depreciates. “Our policy with forward cover is we don’t buy to 100%,” he says. “I think few companies do that because, in the past 10 ten years, the rand has not been a one-way bet.”

    RJ van Spaandonk, executive director at Apple and Nintendo distributor Core Group, says the sharp fall in the value of the rand was unexpected but the company always takes forward cover against currency fluctuations.

    “Since 2008, the rand has been one of the world’s most volatile currencies along with the Brazilian and Polish currencies,” Van Spaandonk says. “For the past 10 years, we’ve taken forward cover on a quarterly basis. If we could forecast these things, we wouldn’t be in the IT trade; we’d be in the currency trade. What’s important for us is to create price stability in the quarter.”

    Van Spaandonk says one of the benefits of this approach is that Core’s prices are unlikely to change between now and the end of the year. “Our forward cover extends until the end of December and is based on what we anticipate we will sell. If business goes even better than expected, we might exhaust our forward cover, but we don’t know what the exchange rate will be in December.”

    The rand’s woes will affect smaller importers and retailers — and their customers — more directly than companies that are able to afford forward cover.

    Justin Drennan, founder of online retailer Wantitall.co.za, says the effects of the falling rand will be passed on to his site’s customers immediately. “Our pricing is in real time; we don’t hold stock like other guys,” he says.

    “Larger local companies can keep prices down until they have to import again, although some people will increase their prices straight away anyway and take the difference as margin.”

    Drennan says local delivery costs will remain unchanged for the foreseeable future and that for companies like Wantitall.co.za, the real effects will be felt on its stock coming from the US. He says the rand’s fall was not unexpected in light of the ongoing truck drivers’ strike and the poor international publicity SA has been receiving in light of the Marikana shootings and Anglo Platinum’s decision to fire more than 12 000 striking workers last week. “Investors aren’t exactly confident,” Drennan says.

    Biggest fall in a decade
    Absa’s Gilmour says he hasn’t seen this sudden a shift lower in the rand in a decade. “[The rand] has been remarkably resilient for the past 10 years and it’s had the benefit of the trend of upturn in commodity prices, much like the Australian dollar.”

    But Gilmour says with demand from China for SA commodities softening, lower Chinese growth and weakening commodity prices, the rand “is now the worst performer of any currency in the world”.

    “It’s starting to display a lot of its old tendencies, even though circumstances now are very different,” he says. “A decade ago you saw the start of the commodity boom and the global economy was in good shape. Now the economy is muddling through and that’s compounded in SA by the political issues — the striking truck drivers, the strikes, and the deaths at Marikana.”

    Gilmour says SA also has yet to come to terms with ratings agency Moody’s recent statement that the SA government no longer has the capacity to deal with the political and economic issues facing it.

    However, he says the local currency has fallen too fast and expects it to “snap back” at some point soon. “For now, we’re at the mercy of currency speculators.”  — (c) 2012 NewsCentral Media

    Absa Chris Gilmour Core Group David Kan Justin Drennan Mustek RJ van Spaandonk Wantitall
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