36 TMI | THE SOUTHAFRICANTREASURER NEXT GENERATIONTREASURY roughly 30% of the time, with the periods of profitability occurring at the beginning of a rate hiking cycle. Longer-dated contracts, such as a 5-year swap, have lower profit-to-loss ratios. Should corporates look to hedge now? Our three scenarios for interest rates in the future are set out here. The floating rate is graphed against the 2-year swap, which has been offset by 24 months to indicate potentially profitable pay-off periods. Scenario 1: In scenario one, our base case, inflation risks are skewed to the topside and Repo is peaking at 7%. A fully hedged position may not be advantageous given that the spread between the implied Repo Rate and the 2-year swap rate is expected to turn negative in the second half of 2024. Scenario 2: We took an extreme case where the Repo Rate rises more than twofold to peak at 12%. As seen in Figure 3, if South Africa faces an inflation crisis and the central bank is forced to raise rates into double-digit territory, interest rate risk would be acute, and a fixing interest rate risk would be profitable. Scenario 3: In this scenario, the SARB concludes its hiking cycle with one last 50bps hike or even two 25bps hikes as growth risks intensify. Figure 4 shows that over the two-year time horizon, the floating rate would average 12bps less than the average fixed rate resulting in a cost to the fixer. Conclusion ETMmodels and analysis suggest that entering into an IRS contract to hedge 100% interest rate exposure is not entirely beneficial. There are opportune moments early in the cycle where such a hedge could lead to profit, but these periods are often short-lived. The current interest rate cycle is already beyond this point if rates are to follow either our base case or the lower risk scenarios. Only if interest rates rise in line with our worst-case scenario would entering into a 2-year swap now effectively hedge against upcoming interest rate risk. All of that said, each corporate has a unique set of circumstances. We acknowledge that this report has not taken into account the need to create certainty as part of a broader shareholder mandate, nor have we stress-tested the balance sheet to consider other factors that may require a more aggressive hedging mandate. These issues, albeit part of the collective solution, are separate, requiring analysis to create the best mix between risk mitigation and product cost. n KIERAN SINEY Co-Head, Financial Markets, ETMAnalytics Kieran is the Co-Head of Financial Markets at ETM Analytics and is responsible for leading a team in identifying market dislocations and providing solutions for traders, treasury professionals and corporate executives. In addition to this role, Kieran heads up the Africa desk and has extensive experience in numerous markets, including Latin America, CEE and G10. He has a strong grasp of FX, commodities, interest rates and derivatives and developing hedging strategies for these risks. Kieran is driven by solving real-world issues using financial markets and creating profitable opportunities for clients. Kieran is a member of ETM Capital’s Investment Committee and is involved in the funds’ strategic asset allocation decision-making. LLOYDMILLER Co-Head, Financial Markets, ETMAnalytics Lloyd is the Co-Head of Financial Markets at ETMAnalytics, running the group’s real-time product offering while covering macroeconomic developments in G10, Latin America, and South Africa. Lloyd also heads up the team focused on providing solutions to corporates that are developed using ETM’s extensive coverage and understanding of financial market fundamentals. His market commentary has been featured in industry publications such as Bloomberg, Reuters, and CNBC Africa. Lloyd is a member of ETM Capital’s Investment Committee and is involved in the fund’s strategic asset allocation decision-making. Each corporate has aunique set of circumstances.
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