South African companies are not as exposed to currency volatility as their counterparts in other emerging markets due to the country’s well-developed rand debt capital market, limiting their need to use foreign currency debt, Moody’s Investors Service said in a report titled Non-financial corporates — South Africa, Direct credit exposure to currency volatility limited despite macroeconomic implications.
“Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies,” said Dion Bate, a Moody’s Vice President and Senior Analyst.
“In South Africa, the rand debt capital market provides good access to rand-based borrowing, reducing companies’ need to rely on foreign currency debt funding. The use of foreign currency denominated debt has been driven by offshore expansion, which in most cases is serviced with cash flow generated in the same currency, creating a natural hedge to currency fluctuations,” Bate added.
In contrast, companies in Turkey are struggling due to exposure to foreign currency debts. In July, Turk Telekom, a big telecoms group, announced a second-quarter loss of almost one billion lira due to a surge in the cost of financing foreign-currency debt.
Turkish companies have for years taken advantage of low interest rates and longer maturities to borrow in euros and dollars rather than Turkish lira, but many corporates now say it was a wrong move.
According to Turkey’s central bank, 85 percent of the country’s total of $293 billion in corporate foreign currency loans are held by 2,300 companies. The Financial Times reported Turkish officials to have said they expected large companies to have hedging strategies that would protect against currency volatility but some do not. South African companies have succeeded in this aspect, adopting a variety of hedging practices that will help them mitigate sudden exchange rate swings. This protects their credit quality from rand movements. In the event that the rand is weak for a longer period, hedging provides time for companies to adjust and align their operating models to the weaker rand levels.
The ratings agency noted that hedging policies which match cash flow and debt obligations in the same currency tend to reduce the effects of currency volatility on leverage ratios. However, for companies with large offshore operational and debt exposures in different currencies, such as MTN Group Limited, which is under review for downgrade by Moody’s as well as Fitch, revenue, cash flow and ultimately credit metrics are more volatile.
South African companies with a high proportion of foreign currency debt are more exposed to volatile debt servicing obligations, particularly if they are not adequately hedged.
Moody’s expect rand movements against the dollar or euro to remain volatile for the next 12 to 18 months.
While many South African companies are not hard hit by the currency crisis, Bates noted that a low growth environment and policy uncertainty remain key constraints for them.
“In addition, rand volatility has broader macroeconomic implications which indirectly complicates the domestic operating environment and investment decisions for South African companies,” Bate noted.