How Brexit could affect your business and how a short-term FD could help.
In the outcome of a referendum that sent shockwaves rippling across the world last week, Britain voted to leave the European Union.
Minister for Africa in the UK, James Duddridge, who was an advocate for the Brexit campaign, has assured the continent that its relations with Britain will only improve without the encumbrance of the EU. “We’ll be able to focus more on our bilateral relationships with Africa and with our traditional partners,” Duddridge said. But analysts agree that African economies are likely to take a knock, with South Africa at the forefront of the sufferers.
“South Africa’s already battered economy may be the worst affected by Britain’s exit,” noted Quartz Africa. “As it became clear that the UK vote had swung toward leaving, the rand plunged during early morning trading, becoming the worst performing currency after the British pound. As of mid-morning the rand had fallen more than 7%, its steepest single-day decline since the 2008 financial crisis.”
Part of this is due to the dual-listing of many of South Africa’s major companies on both the JSE and the London Stock Exchange.
But it’s not only the large companies in the country that will feel it. Here’s how your company could be affected by Brexit, and how bringing on a short term FD could help you weather the storm.
- Outflow of foreign capital. The UK is the single biggest foreign investor in South Africa. The advent of Brexit could mean UK investors start to pull out from the country, meaning less cash in the economy. At best, the terms of its trade agreements will need to be renegotiated.
“While SA may get better terms down the line, in the short-term we could see a slowdown in foreign direct investment flows to SA,” Ian Wason, chief executive of DebtBusters told Fin24. “All these factors will have a knock-on effect for a number of spheres of our economy, including tourism and agriculture.”
If your business is in one of the affected sectors, bring on a short-term FD to help your company prepare for this. Your short-term FD can help you identify where to save money, cut costs and maximise on your investments to be ready for a slow-down in sales.
- A weak, volatile rand. As mentioned above, the rand reacted strongly to the news of Brexit. One aspect of its vulnerability is its weakness – it has hovered over R15 to the USD for months now – but another aspect is its volatility. This makes business difficult for companies that rely on imports of any kind. While a weak rand should ostensibly assist those who focus on exports, clients shy away from prices that are too volatile.
If your business in the import / export space, a short-term FD can help you determine how best to price your goods and services to weather this volatile period. He or she can help execute some effective scenario planning that will help you know where to pitch your products depending on how strong or weak the rand is. By identifying a roadmap with your short-term FD, you’ll be able to follow a route that provides pricing stability for your clients; something that will earn you their loyalty and ongoing support.
- Debts get worse. “If experts are correct that Brexit might eventually shave about 0.1% off SA’s growth rate, we can expect even harder times all round for South Africans, especially with regards to increased unemployment and inflation,” said Wason. “If the rand doesn’t show a recovery, the SA Reserve Bank (Sarb) may be under pressure at its next MPC meeting to further increase the prime lending rate.”
This means that your business will be paying more on interest for your loans, during a time that cash is already depleted and sales are lean.
It sounds rather dire, but your short-term FD can help you navigate this precarious situation. He can calculate, for example, what the impact of an increase of 25 basis points on the repo rate will do to your expenses, and help you mitigate for that.
We’re already seeing the short-term effects of Brexit on the South African economy. Bring on a short-term FD to help your company stay on top of things during this time. Contact The Finance Team to find out more.