In 2015, Letshego’s operations in Mozambique and Namibia had grown to a scale where they made up over 40 percent of group revenue, profit and advances. But a huge translation loss arising on the conversion of the results of non-Botswana operations had a significant impact on the group’s results for 2016.
The most notable impact at the time was depreciation of the Mozambican Metical (MZN) versus the Botswana Pula (the group’s functional and reporting currency). Recording about 60 percent depreciation, the Metical resulted in a reduction of the group profit before tax of P33 million. This weighed on the group’s profit before tax which reduced to P948 million, a 9 percent reduction from 2015.
The depreciation of MZN reduced the loan book by P437 million, the equivalent of 6 percent compared to the previous year. Had the exchange rates been akin to the previous reporting period, they would have been P33 million higher in profit before tax.
Because Letshego operates in multiple currencies, CFO Gwen Muteiwa acknowledges that the foreign exchange fluctuations may positively or negatively affect consolidated financial results as currencies shift in value against Letshego’s primary reporting currency, the Botswana Pula (BWP). As a multinational organisation with a presence in 11 sub-Saharan Africa markets, Letshego operates and attracts funding in regional and international currencies, including USD, ZAR, MZN, TZS, GHS, UGX, KES and NGN. The company also attracts regional and global currency funding, hence the CFO says Letshego employs hedging strategies to mitigate this risk.
Currency hedging is one of various treasury tools available that assist multinational businesses to mitigate potential downside fluctuations in currency conversions. The purpose of currency hedging is to preserve medium to long-term income and returns to support sustainable shareholder value.
But while this is the case, currency translations can actually benefit an organisation. For example, for Turnstar’s 2019 full year results, the US Dollar appreciated against the Botswana Pula, resulting appreciation resulted in an exchange gain in the Turnstar and Group results for the year ended 31 January 2019. Profit rose from P73 million to P122 million.
The translation gain reported for the year ended 31 January 2019 occurred when translating the US Dollar denominated investments and other financial assets of the Group’s Tanzanian and Dubai subsidiaries. The subsidiaries report in US Dollar and UAE Dirham currencies while the Group’s functional currency is the Botswana Pula. For Turnstar, the foreign exchange translation gains and losses are unrealised and are dependant on the US $ / BWP exchange rate as at year end.
In 2016, the Group results were also significantly higher than those reported for 2015, chiefly as a result of exchange gains on the translation of the Group’s US$ dominated assets and liabilities. The Group’s subsidiary, Mlimani Holdings Limited, generates US$ revenue. Approximately 49 percent of the total rental income at the time was in US$. In light of these advantages and disadvantages, the question now remains whether it is advisable to hedge.
Currency hedging involves locking in a price for future currency trades today, mitigating against potential FX fluctuations that could impact the Group’s future FX conversion requirements. FX hedging is structured in such a way as to assist a company to mitigate potential dips in a particular currency’s value.
Although Turnstar did not respond to questions from this publication, the Group notes in its financials that it has ensured that the US Dollar dominated liabilities are serviced by US Dollar income (as a hedge), hence the Group is not exposed to actual exchange fluctuations.
At Letshego, Muteiwa says managing foreign currency risk is a part of Letshego’s Enterprise Risk Management Framework. “Letshego hedges its foreign currency balance sheet exposures to mitigate against potential gains or losses in the short and medium-term,” she says. In her view, because regional and international currency fluctuations can be unpredictable and sensitive to economic or global market shocks, it remains prudent for multinational organisations to mitigate against foreign exchange risk.
Typically, banks and fin services use derivatives (swaps, forwards, cross currency swaps and others) to hedge their foreign exchange exposures to mitigate forex risk. Other options in managing foreign exchange risk include ‘currency matching’.
Elsewhere, the Botswana Insurance Holding Limited (BIHL) Group’s exposure to foreign currency is twofold: Firstly, Kudakwashe Mukushi, the CFO, says this is via investment in associates that have operating companies in other jurisdictions outside of Botswana. For example, Letshego operates in 11 countries and FSG operates in four. Secondly, Mukushi says, some of the shareholder and policyholders’ funds get invested in offshore investment markets, which results in exposure to exchange rate risk. The companies that form the offshore investment universe are themselves invested in several jurisdictions across the world. “Depending on the exchange rate movements and the underlying investment positions, the fluctuations can result in either a positive or a negative impact on earnings,” he says.
Asked if there are hedging mechanism, the CFO of FSG says it is the Group’s policy that the exposure to foreign currency risk is not hedged, given the multiple jurisdictions that FSG is exposed to both operationally and through the investment markets that the Group invests in. Infact, for BIHL, the number of jurisdictions tends to provide a natural form of diversification, given that the diverse currencies do not always move in correlation.
“The decision whether or not to hedge exchange rate risk should be carefully thought out because there are many factors to consider,” Mukushi says. “It is therefore a decision that should be made considering the relevant case at hand, hence it would not be appropriate to provide a general response to the question.”