South African computer wholesalers use several mechanisms to protect themselves from the volatile rand.

The rand’s value to foreign currencies — particularly the US dollar — has fluctuated dramatically since the start of 2023.

At the start of the year, a US dollar cost roughly R17. The rand weakened significantly from around mid-February and slumped to R19.78 to the dollar by late May.

It then recovered to roughly R17.27 near the end of July before retreating to about R19.19 in the middle of August.

Since then, the rand has strengthened again, and by the close of markets on Thursday, 24 August 2023, it was trading at R18.83 to the dollar.

The graph below shows how the dollar-to-rand exchange rate has fluctuated in the year to date.

South African computer wholesalers import most of their electronics and other goods from foreign countries — which means they are very exposed to currency changes.

The substantial variation in the rand’s value could significantly impact how much they spend on the same goods from one day to the next, making cost planning very difficult.

One major computing wholesaler in South Africa is Mustek.

Mustek Group financial director Shabana Aboo Baker Ebrahim told MyBroadband that only certain vendors sold goods to wholesalers in rand.

“There are some vendors that have local operations, like Samsung, where invoicing happens in South African rand,” she said.

Mustek primarily gets its goods from China and Taiwan, bought in US dollars and euros.

Ebrahim said the main mechanisms that the industry commonly used to hedge itself against fluctuating exchange rates were forward contracts and currency options.

The latter is also called capped forwards.

As Investopedia explains, a forward contract is a legal agreement between two parties to buy or sell an asset at a specified price on a future date.

Capped forwards, meanwhile, involve a company buying a “synthetic off-market currency forward” and another option, allowing it to benefit from favourable exchange rate changes.

“When the underlying asset closes at or beyond a specified price, the option automatically exercises,” Investopedia said.

Ebrahim added that groups with central treasury functions would also utilise more complex products such as currency swaps and currency collars.

Mustek used a combination of forward contracts and capped forwards to lock in favourable exchange rates and reduce uncertainty.

“Management of our foreign currency exposure is based on the principle of avoiding speculation,” she said. “Managing currency fluctuations is essential to ensure the Group’s competitiveness in the market.”

“The group’s policy is to cover a minimum of 70% of our foreign currency exposure.”

Bulk buying not always a good option

Another mechanism wholesalers can employ to reduce the impact of currency volatility on their business is buying products in bulk.

Wholesalers have large warehousing and storage facilities where they can keep significant quantities of goods, ready to be dispatched to retailers or other customers when required.

Ebrahim said bulk-buying does help by providing a measure of stability and cost predictability in procurement and supply chain management.

However, the business would need clearly defined guard rails that govern its stock holding and robust forecasting processes to ensure the risk does not outweigh the benefit.

“With the current cost of financing as well as the severe volatility of the exchange rate, this could be a risky strategy,” Ebrahim said.

Buying too much of a product for which demand might end up being low due to consumer price pressure could result in Mustek’s warehouses being filled with stock that it would need to clear at a discount later on.

It could also happen that the rand strengthens significantly, meaning buying a second tranche of the stock down the line might have made for a better deal.

Ebrahim said there was no way for computer wholesalers to completely avoid the impact of exchange rates.

“Over the 2023 financial year, we continued to see significant volatility of the Rand, with the US Dollar costing R16.41 at 30 June 2022 and R18.74 — 15% weaker — a year later,” said Ebrahim.

“At the extreme of R19.80, that represented a 21% swing from June 2022, which did make forex management quite tricky.”

“The volatility in the currency makes pricing a challenge, and margins are usually kept under pressure, particularly in the weak economic environment,” she said.

The factors influencing this include political uncertainty — both locally and internationally — Russia’s war on Ukraine affecting world markets, and the fragility of South Africa’s electricity supply.

On the flip side, a depreciation in the rand does result in higher margins, which offsets some of the exchange rate losses. “This, however, might not be reflected in the same period,” said Ebrahim.

MyBroadband also contacted Axiz, Esquire, Pinnacle, and Tarsus for comment on this story, but did not receive feedback by the time of publication.

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