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Foreign Currencies and Exchange Rates

 

South Africans were allowed to send money offshore legally, in 1997. For the first time many of us were exposed to foreign currency investing and the volatility associated with it.

What is an exchange rate?

An exchange rate is simply the ratio at which one currency can be exchanged for another at a given time. If the Rand strengthens against the USD it will have appreciated and if it weakens it has depreciated. The rand [trading at R3.50 to the USD, the day we won the Rugby World Cup] is now trading at R 7.00. This is a significant depreciation.

The local currency is being compared with the currencies of several countries with which the country trades. The result is the "Effective rate". The Euro makes up the lions share of the basket of currencies we refer to above. It is the currency of choice of our main trading partners.

Different Rates

There are many different rates referred to in the market place. Below are the more popular rates that investors will deal with or hear across the wires.

  • The "spot rate" is the rate between two currencies for delivery at once. Settlement is generally two days, which are allowed due to the time zone differences in the different countries.
  • The "forward rate" is the foreign exchange rate that is longer than 2 days. If you need foreign exchange in 3 months time [you want a rate now] you will get a slightly worse rate due to interest rate differentials and the risk it entails.
  • The "mid rate" - is the average price indication between the buying and selling price. It is probably the most commonly used rate.

All prices quoted on the news bulletins are wholesale prices and are generally only good for USD 1 million. The banks treasury departments only deal in lots of USD or Euro 1 million. Any smaller denominations are more expensive as a Bank may have an “open position [be exposed] whil'st it makes up a lot. That is the reason why the foreign currency we purchase will be more expensive. The Banks cover themselves against price fluctuation.

Predicting Exchange Rates

  • Capital flows: The Rand has benefitted enormously from capital inflows into our economy over the past 3 years. The strong commodity prices have also supported the Rand.
  • Inflation: Higher inflation leads to higher prices in exporting countries. This leads to fewer customers for their goods, a higher amount of imports, trading losses and a weakening currency.
  • Interest rates: Higher interest rates traditionally attracted capital. In the new global economy it seems that the zone with the best growth prospects attracts the capital.
  • Investment abroad: Countries whose companies are purchasing or setting up businesses abroad are generally thought to have currencies that will strengthen as it takes quite some time for the companies to make their profits.
  • Monthly and quarterly trade figures: Currencies react to these figures to determine where the most demand in the future is.
  • Productivity: Plays a part in the strength of a currency. If nations productivity is high this is a positive for that countries currency.
  • Singular events: Wars or once off natural disasters can play a significant part in an exchange rate.

The Euro

Twelve European countries that are members of the European Union have adopted the new single currency, the Euro. Germany, France, Luxembourg, Belgium, Greece, Ireland, The Netherlands, Spain, Portugal, Finland, Italy and Austria. The European Union represents an economic powerhouse the size of the US.

Due to the success of the Euro it had been suggested that the Asians and Africans form currency blocs of their own to reduce volatility and thus ensuring stable trading conditions which are essential for sustainable long term growth.

Conclusion

Currencies play a crucial part in making your investment decisions. When investing offshore be sure to do your homework. The easiest method of addressing the volatile currency markets at the moment would be to invest in an offshore Global money market,equity or bond Fund. This gives you exposure to a range of different currencies thus reducing you risk.

Latest News

BUDGET IN A NUTSHELL: TOUGH TIMES AHEAD


Jaco Leuvennink Cape Town – Finance Minister Pravin Gordhan had a tough message for South Africans in Wednesday's Budget Speech in the National Assembly, with the introduction of a new tax bracket for the very rich, state debt creeping up and almost all economic indicators and fiscal numbers weaker than in last year's budget.

 

While South Africa is "once again at a crossroads" and "tough choices have to be made to achieve development outcomes", Gordhan nevertheless tried to stress the need for growth.

He used the word “transformation” more than 50 times in his speech, but against this background said: “Our growth challenge is intertwined with our transformation imperative.

We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage." He also indicated that fiscal consolidation will continue.

An additional R28bn will be collected in the coming financial year by means of those earning more than R1.5m per year paying 45% of that back to the taxman (the previous top rate was 41%), limited adjustment for bracket creep, a fuel levy rise of 30 cents per litre, a higher dividend withholding tax rate and the usual rise in sin taxes (excise on alcohol and tobacco).

There was relief for property buyers with the first R900 000 (previously R750 000) of the value of a transaction not liable for transfer duty. Social grants were increased by about 7% on average. While it looks like Gordhan made an effort to appease his critics, listening to him was tinged with sadness on the impression that it was his last budget after making a comeback as finance minister just more than a year ago.

The highlights of the budget are: Macro-economic outlook • Gross domestic product growth will gradually improve from 0.5% in 2016 to 1.3% in 2017 and 2.0% in 2018, supported by improved global conditions and rising consumer and business confidence. The percentages are considerably lower than last year’s estimates.

The review says though that greater availability and reliability of electricity should also support stronger growth in 2018/19. • Exports are expected to grow by 1.9% in 2017, 4.9% in 2018 and 5% in 2019, after estimated negative growth of -1.2% last year.

• After reaching 6.4% in 2016, consumer inflation is expected to decline to 5.7% in 2018.

• The current account deficit, after reaching 4% in 2016, will come down to 3.7% in 2018 and 3.8% in 2019. • Government will continue to enable investment through regulatory reforms and partnerships with independent power producers.

• Public sector infrastructure bottlenecks will be addressed through reform and capacity building. During 2017/18, government will establish a new financing facility for large infrastructure projects. Budget framework

• The budget deficit (consolidated) crept up to 3.4% for 2016/17 from the 3.2% stated in last February’s budget. This was due to less revenue collected than expected. The deficit is expected to narrow to 3.1% for 2017/18 and 2.6% in 2019/20.

• State debt is also steadily creeping up. Debt stock as a percentage of gross domestic product is expected to stabilise at 48.2% in 2020/21 (previously 46.2% in 2017/18, and before that 43.7% in 2017/18). • The main budget non-interest expenditure ceiling has been lowered by R26bn over the next two years (almost the same as the R25bn planned last year). • An additional R28bn (R18.1bn last year) of tax revenue will be raised in 2017/18. Measures to increase revenue by a proposed R15bn in 2017/18 will be outlined in the 2018 Budget. • R30bn has been reprioritised through the budget process to ensure core social expenditure is protected.

• Real growth in non-interest spending will average 1.9% over the next three years. Apart from debt-service costs, post-school education is the fastest-growing category, followed by health and social protection. Specific spending programmes over the next three years Over the next three years, government will spend:

• R490bn (R457bn last year) on social grants.

• R106bn (R93.1bn) on transfers to universities, while the National Student Financial Aid Scheme will spend R54.3bn (R41.2bn).

• R751.9bn (R707.4bn) on basic education, including R48.3bn for subsidies to schools, R42.9bn for infrastructure, and R12.7bn (R14.9bn) for learner and teacher support materials.

• R114bn (R108.3bn) for subsidised public housing.

• R94.4bn (R102bn) on water resources and bulk infrastructure.

• R189bn (R171.3bn) on transfers of the local government equitable share to provide basic services to poor households.

• R142.6bn to support affordable public transport. • R606bn on health, with R59.5bn on the HIV/Aids conditional grant. Tax proposals

• A new top marginal income tax bracket for individuals combined with partial relief for bracket creep will raise an additional R16.5bn.

• R6.8bn will be collected through a higher dividend withholding tax rate. Increases in fuel taxes and alcohol and tobacco excise duties will together increase revenue by R5.1bn.

• As soon as the necessary legislation is approved, government will implement a tax on sugary beverages. The rate will be 2.1c per gram for sugar content above 4g per 100 ml.

• A revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017.

• The first R900 000 of the value of property acquired from March 1 2017 will be taxed at zero percent. Before March 1 2017 the first R750 000 of the value of property was taxed at zero percent.

• The general fuel levy will increase by 30c/litre on April 5 2017. This will push the general fuel levy up to R3.15/litre of petrol and to R3.00/litre of diesel. The road accident levy will increase by 9c/litre of petrol and diesel on April 5 2017.

• Personal income tax will bring in R482bn, VAT R312bn, company tax R218bn, fuel levies R96.1bn and customs and excise duties R96bn in the coming year. Sin taxes rise Taxes on alcohol and tobacco are set to rise as follows: Beer 12c/340ml; Fortified wine 26c/750ml; Ciders and alcoholic fruit beverages 12c/340ml; Unfortified wine 23c/750ml; Sparkling wine 70c/750ml; Spirits 443c/750ml; Cigarettes 106c/packet of 20; Cigarette tobacco 119c/50g; Pipe tobacco 40c/25g; and Cigars 658c/23g. Social grant spending and increases Spending on social grants is set to rise from R164.9bn in 2016/17 to to R209.1bn by 2019/20, growing at an annual average of 8.2% over the medium term. The number of social grant beneficiaries is expected to reach 18.1 million by the end of 2019/20. The specific increases are:

• State old age grant from R1 505 to R 1 600 per month;

• State old age grant, over 75s from R1 525 to R1 620;

• War veterans grant from R1 525 to R 1 620;

• Disability grant from R1 505 to R 1 600;

• Foster care grant from R890 to R920 ;

• Care dependency grant from R1 505 to R1 600; and

• Child support grant from R355 to R380.

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