According to Statistics South Africa, the construction industry currently contributes 2.4% of GDP, compared to 4% prior to the Covid-19 pandemic.
While the construction sector plays a vital role in the country’s economy, South African construction companies face formidable payment challenges, hindering their growth. Currency fluctuations, high fees, and lengthy processing times limit profitability and expansion, especially as the industry has a heavy reliance on materials and labour. If construction companies are not prepared to hedge against currency risk, it could seriously impact revenue and their profit margins. Streamlining cross-border payments is crucial, requiring improved solutions.
Ola Oyetayo, chief executive officer at Verto says “Embracing advanced digital payment technologies and platforms can unlock remarkable growth opportunities. Real-time exchange rates, automated processing, and transparent tracking empower businesses to optimise cash flow, allocate resources effectively, and expand operations.” Therefore, investing in tailored payment systems is a vital business consideration. By overcoming payment barriers, South African construction firms can fuel growth, increase competitiveness, and secure a prosperous future in the global marketplace.
Understanding currency risk management in the construction industry
In today’s global economy, construction companies in emerging markets face a wide range of challenges, including the need to manage currency risk. Currency risk refers to the potential impact that fluctuations in exchange rates can have on a company’s finances, particularly when it comes to cross-border transactions. The impact of currency risk can be significant, particularly for construction companies that often operate with thin profit margins and rely heavily on cash flow. Currency risk can lead to delays, increased costs, and reduced profitability, making it essential for companies to have a solid currency risk management strategy in place.
There are several different types of currency risks that construction companies may face. One of the most common is transaction risk, which occurs when a company must make a payment or receive a payment in a foreign currency. In this scenario, the exchange rate at the time of the transaction can significantly impact the amount of money that the company ultimately receives or pays.
Another type of currency risk is translation risk, which occurs when a company has assets or liabilities in a foreign currency. If the exchange rate between the company’s home currency and the foreign currency changes, it can impact the value of those assets or liabilities, potentially leading to significant gains or losses.
The impact of currency risk can be particularly acute in emerging markets, where exchange rates can be volatile and regulatory environments may be less stable. For example, imagine a construction company in South Africa has signed a contract to build a new factory for a foreign company. If the exchange rate between the two currencies fluctuates significantly during the construction process, it can impact the cost of labour, materials, and other expenses, potentially leading to delays and cost overruns on the project. Similarly, if the same South African construction company takes out a loan in a foreign currency, changes in exchange rates can impact the cost of servicing that loan, potentially leading to financial instability.
“To address these challenges, construction companies in emerging markets must have a solid currency risk management strategy in place. This may involve hedging against currency fluctuations through financial instruments such as futures or options. Alternatively, using payment platforms such as Verto to track currency exchange rates in real-time and manage risk exposure by booking in trades at favourable FX rates or by using multi-currency wallets,” Oyetayo explained.
Using Verto’s platform for currency risk management can bring significant benefits to help companies navigate the complexities of cross-border transactions that translate into reduced exposure to currency fluctuations and improved financial stability.
“In the current trading market where exchange rates can be volatile and unpredictable, these are particularly important considerations for local construction companies,” Oyetayo concluded.