The foreign exchange market faces a year where growth is predicted, but it does not come without its challenges.
This was according to Bianca Botes, a director at foreign exchange experts Citadel Global, who said this week that risks were mounting for forex clients.
Botes had made four predictions for forex risk trends in 2024, from elections and geopolitical risks to investment declines and more ups and downs for the rand.
Recently released research indicates that the global forex market size, for North America, Europe, UK, Switzerland, Middle East, Africa, Asia-Pacific, South America, China and Japan combined, is projected to grow by $516.48 billion, accelerating at a compound annual growth rate from 2023 to 2028.
Geopolitical and environmental risks are mounting in 2024
“The local forex market will certainly be affected by the geopolitical events we’ll be seeing in 2024. South Africa’s shifting position within international affairs is a concern. South Africa’s geopolitical ties have become more relevant considering its trade and political relationships with Russia, China, the United Arab Emirates, the US, Israel and its allies, and its standing in international bodies such as BRICS and the UN. Our financial markets are affected when we engage with sanctioned countries,” Botes said.
“The past four years have taught us that one needs to remain fully aware of how dynamic and unpredictable the global environment is, and how swiftly and dramatically things can change. At the World Economic Forum this week a lot of attention is being drawn to how the world needs to be ready and prepared for Disease X, the next unknown super-spreader pathogen we are likely to face in our lifetime. Scientists are also warning of accelerated climate change risks. All of these global threats could impact our financial and forex markets.”
It’s election year in south Africa and 70 other countries
“This year the world will see in the region of 70 elections play out, including in the US and South Africa. Election periods typically bring political uncertainty which can impact the forex markets,” Botes said.
She said, “In the local context, and as this is an election year, we are likely to see an election-friendly Budget speech delivered on 21 February 2024 rather than the prioritisation of fiscal certainty needed to build investor confidence and implementation plan required to drive economic growth.
The challenges in South Africa are not only numerous, but also complex. Ranging from collapsing state owned enterprises such as Transnet and Eskom, a pressing debt burden, political and policy uncertainty, to South Africa’s geopolitical positioning, which can all contribute to volatile market conditions.
Foreign direct investments are likely to waver
Botes said, “Attracting foreign investment in the current political and economic environment has become harder, with many multinationals withdrawing from South Africa, while foreign investors are no longer the main holders of our bonds. The upcoming election will be closely monitored by foreign investors and will set the tone for the next four years of investment spend, economic growth and policy certainty.”
“Over the past year we have seen a sustained weak rand, and while it was not solely driven by local factors, additional risk premiums were built into the rand due to various risk factors facing the country.”
The rand continues to face headwinds
Botes, who is an expert on currency market movements, said the rand was displaying sustained weakness as it faced both global and local headwinds, making South Africa one of the worst performing emerging market currencies in 2023.
“We shouldn’t be surprised to see the rand devaluating further this year. A decrease in US interest rates, and the subsequent decline in the USD (US dollar) will assist the rand in gaining back some ground, however, we also need to focus on unwinding the risk premia in the rand, caused by the factors mentioned above,” she said.
The best way forward for businesses and individuals who relied on forex was “to prepare for uncertainty and volatility, and to hedge when markets provide opportunities”.
In the interconnected and volatile world of 2024, Botes cautioned that many ripple effects might be hard to navigate without professional treasury, cash management and risk hedging solutions and advice.