Having evolved from a single country newspaper business to a global multimedia group, Naspers Group knows a thing or two about juggling currencies. Head of treasury Jaco van der Merwe shares some of that wisdom.
Global Finance: What is the best strategy to hedge against a weak currency?
Jaco van der Merwe: There is not a single best strategy that can be applied across different markets. We consider different strategies based on the availability and cost of hedging alternatives. In many markets, high local interest rates and liquidity constraints make the cost of hedging potentially very expensive. Where it is cost-effective to do so, the use of a rolling forward-currency-hedging program proves the most optimal for us in smoothing FX volatility. A rolling forward-currency-hedging program, however, only assists in smoothing short-term volatility and providing a window within which one can make structural changes to the business in response to currency devaluations. One should constantly be measuring the cost of hedging vs depreciation percentage by market before simply executing a broad hedging program. Currency options strategies are typically used only in exceptional circumstances where volatility and interest rate differentials are not excessive. Where hedging through derivative instruments is not economically viable or available, we look at alternative strategies, such as currency risk clauses in agreements, contracting currencies for expenses, etc.
GF: What tools can help mitigate a mismatch in currencies?
JM: If it is timing-related, currency swaps can be used. Many of our operations function as local businesses with a cost structure that helps to offset the trading currency of the business. Otherwise, we try to minimize the impact of mismatches through contracting terms with suppliers or customers where possible. From an investment and funding currency perspective, the geographical diversification of our portfolio assists in reducing part of the mismatch risk in currencies. We also consider from time to time diversification of our debt funding to provide a natural offset to our investment portfolio.
GF: As an outfit with operations in more than 130 countries, what do you see as the best FX risk management and hedging strategy?
JM: As highlighted above, I don’t think there is a “one size fits all” approach across such a diverse geographical footprint and with so many different market dynamics. Diversification across so many markets in itself provides some benefit from a currency risk perspective. We focus on currencies that the group is most exposed to from a transactional FX risk perspective. Our aim is to utilize FX risk management strategies that provide price certainty for those currencies to smooth out short-term volatility and to create a sufficient horizon of certainty within which we can adjust our business strategy for longer-term shifts in exchange rates.
GF: What are the best technological tools to assist an FX risk management and hedging strategy?
JM: Best-of-breed integrated treasury systems with live bank balance, transaction reporting and cash-flow forecasting capability by currency are a must. A single instance of the treasury system across the group and access to price discovery tools such as Bloomberg or Reuters should be a minimum requirement.
GF: What have been the main benefits of reporting in US dollars?
JM: As we are a global player with a diverse geographical presence, it made most sense to standardize our reporting currency in line with other global players. It simplifies benchmarking for international investors.