Q: Provide an overview of the current exchange rate regime between the Pula and the Rand.
A: The Pula/Rand exchange has had a fair share of volatility from the start of 2024 with trading confined to the 1.3420 – 1.4100 area. The 1.4100 peak was recorded in January 2024 and post this we’ve seen the Pula gradually lose ground to the South African Rand to trade at the current lows below R1.35 against the Pula.
Q: What were the primary factors contributing to Pula’s performance against the Rand in early 2024?
B: Botswana has adopted a crawling peg exchange rate regime with the Pula weighed against a basket of currencies comprising the Rand (45 percent) and Special Drawing Rights (SDR 55 percent). The SDR further comprises the US dollar, the British Pound, the Euro the Japanese Yen and the Chinese Yen. As a result of this policy, currency movements impacting the Pula are usually not a result of local events but rather global market-moving events in the form of global politics and economic data.
About the 2024 performance of the Pula thus far, the exchange rate movements were largely influenced by heightened uncertainty persisting in the markets globally in the form of continuing geopolitical tensions between Russia-Ukraine and the war on Gaza, and the presidential elections in the US and South Africa.
Most recently, markets have become more optimistic about the SA elections, causing the trade-weighted Rand to appreciate. Since this Rand strength only has a 45 percent pass-through into the Pula’s performance, the Pula weakened against the Rand in recent weeks.
A: How does a weaker Pula impact import-oriented businesses?
B: The local economy is import-driven meaning that a lot of businesses have a constant need to pay for imported goods or services with foreign currency including Rand. When the Pula/Rand exchange rate trends lower, businesses realise that for every Pula, they will receive a lesser value of Rand and since the price of the goods or services being procured remains constant in Rand terms, this increases the Pula amount to pay for the goods and services and increases the overall cost of sales for these local entities.
A: Why are import-oriented businesses more vulnerable to exchange rate fluctuations?
B: Importer businesses will always be vulnerable to exchange rate fluctuations because of the elevated level of uncertainty in the foreign exchange markets. This is also the case with exporter businesses because no one can accurately predict future exchange rates because there are too many moving parts at play.
A: Can the increased import costs lead to inflationary pressures?
B: Increased import costs do add to local inflationary pressures through imported inflation which impacts the various inflation baskets depending on the nature of the goods or services. This is also due to the fact that South Africa’s inflation is currently trending higher than local inflation.
A: How can businesses balance between passing on increased costs to consumers and maintaining competitive pricing?
B: We at Absa Bank Botswana, stand ready to assist local businesses in minimising the adverse impact that emanates from exchange rate risks. There are various risk management (hedging) solutions that can be tailor-made to suit each client’s needs ensuring suitability to the many different client businesses that exist in the different business sectors.
A: What is your outlook on the future movement of the Pula against the Rand?
B: We forecast that the Pula/Rand exchange rate will climb back towards the 1.3800 area as the trade-weighted Rand gives back some of its gains. Specifically, the Rand could become susceptible to deterioration in global risk sentiment (especially amid geopolitical tensions and hawkish central banks) and local social unrest around the SA elections. Although the trade-weighted Pula would also weaken, it would be to a lesser extent than the Rand.
A: How can businesses prepare for and adapt to future fluctuations in the exchange rate?
B: Absa Bank Botswana can assist businesses with exchange rate forecasts from our research teams to help with more appropriate financial decision-making. Our Absa Group Research team was voted the best research house for the 7th year running at this year’s JSE Spire Awards and these accolades affirm the bank’s position as a leader in the financial markets research area. In addition, we can provide customers with bespoke risk management solutions which will allow businesses to pay full attention to the running of their business and we as Absa will assist in managing the complex exchange rate risk their businesses face.
A: Are there specific fiscal or monetary policies that could help alleviate the burden on import-oriented businesses?
B: The current exchange rate regime was introduced by the government through the Bank of Botswana to ensure the Pula remains stable for both our exports and imports. From the date of inception, our currency has remained competitive when compared to peer markets. The currency weaknesses seen in other emerging and frontier markets are far worse than what we’ve seen with the local unit and it is worth commending the regulator on this prudent management of the local currency.
