Asian businesses fear for exports
Monday, 22 October 2007
Raphael Minder
HANK Morrison, whose Philippine company makes model aircraft, says he could be out of business within six months if the Philippine peso continues to rally against the US dollar.
"With the way the peso is going, it's become almost impossible," he says. "I'm not only operating at a loss but in effect the more I make, the more I lose."
As an emergency step, Mr Morrison has decided to halve his production of model aircraft, 95 per cent of which end up in America on the shelves of collectors or industry buyers such as Boeing. That is bad news both for Mr Morrison's 60 Filipino employees and for Philippine exports.
Not all of Asia's exporters are suffering. KC Chua, executive director of Singapore's Petra Foods, the leading chocolate company in south-east Asia, says the weaker US dollar has helped offset a doubling in the cost of milk imported from New Zealand and Australia, while stronger Asian currencies have boosted revenues in Indonesia and other Asian markets.
"If you have hedged forward for a year, you can even have a double gain," he says. "You can lock into lower [ingredient] prices and then benefit from a weaker dollar."
But hedging requires a degree of management sophistication and financial clout that is beyond smaller exporters such as Mr Morrison. A recent DHL/Austrade survey of 300 Australian companies showed only 5.0 per cent of small exporters were using currency hedging.
Asian central banks have been trying to help by stepping up market intervention in an attempt to restrain currency appreciation. But the results have been patchy.
Last week, for example, the Indian central bank announced that it would increase the amount of special bonds that it can issue to absorb rupees. Yet the bank spent $38.1bn (€27.1bn, £18.8bn) in the first seven months of the year, only for the currency to soar last week to its highest level in almost a decade.
Many experts think that Asian countries should abandon currency interventionism. Instead, they say, governments should view their strengthening currencies as normal consequences of the economic recovery since the 1997-98 Asian financial crisis, when currencies tumbled across the region.
"The Asian currencies are still relatively cheap and appreciation is the right policy response," says Rodney Jones, former managing director of Soros Fund Management, and an adviser on Asia to several hedge funds. "The central banks have come a long way and have moved towards an inflation-targeted regime [for setting interest rates, rather than targeting a specific exchange rate]."
But, he says, "Asia needs to accept a lot more currency volatility."
Some economists think Asia's manufacturers are, in any case, becoming less exposed to the US dollar because of growing volumes of intra-Asian trade, rising domestic consumption and a more diversified export base. China's latest trade data, for example, showed the European Union overtaking the US as the biggest recipient of Chinese goods.
There is uncertainty, though, about the extent to which this is happening and the likely impact on growth.
Last month, the Asian Development Bank raised its 2008 growth forecast for Asia excluding Japan to 8.2 per cent from the 7.7 per cent six months earlier. It argued that booming consumption in China and India and a reduced reliance on international lending should allow Asia to weather the credit market contraction, as well as a possible US slowdown.
Four days later, Lehman Brothers trimmed its 2008 growth forecast for Asia ex-Japan for the second consecutive month, to 7.5 per cent from 7.9 per cent.
Rob Subbaraman, the bank's chief Asia economist, argues that the simulation models used by the ADB, as well as the International Monetary Fund and the European Central Bank, "may underestimate'' the effect of a US slowdown.
Judging the impact of currency movements is further complicated by the boom in commodities, which are mostly traded in US dollars and have helped to drive growth in countries that are mineral-rich, large producers of farm products, or both.
The DHL/Austrade survey found only 20 per cent of companies said currency fluctuations could affect investment decisions, even though the soaring Australian dollar this week hit its highest level against the US dollar since 1984.
That prompted a rueful commentary from Peter Costello, the Australian treasurer, who said the strong currency was discouraging inbound tourism and making life tough for Australian exporters.
Under syndication arrangement with FE
HANK Morrison, whose Philippine company makes model aircraft, says he could be out of business within six months if the Philippine peso continues to rally against the US dollar.
"With the way the peso is going, it's become almost impossible," he says. "I'm not only operating at a loss but in effect the more I make, the more I lose."
As an emergency step, Mr Morrison has decided to halve his production of model aircraft, 95 per cent of which end up in America on the shelves of collectors or industry buyers such as Boeing. That is bad news both for Mr Morrison's 60 Filipino employees and for Philippine exports.
Not all of Asia's exporters are suffering. KC Chua, executive director of Singapore's Petra Foods, the leading chocolate company in south-east Asia, says the weaker US dollar has helped offset a doubling in the cost of milk imported from New Zealand and Australia, while stronger Asian currencies have boosted revenues in Indonesia and other Asian markets.
"If you have hedged forward for a year, you can even have a double gain," he says. "You can lock into lower [ingredient] prices and then benefit from a weaker dollar."
But hedging requires a degree of management sophistication and financial clout that is beyond smaller exporters such as Mr Morrison. A recent DHL/Austrade survey of 300 Australian companies showed only 5.0 per cent of small exporters were using currency hedging.
Asian central banks have been trying to help by stepping up market intervention in an attempt to restrain currency appreciation. But the results have been patchy.
Last week, for example, the Indian central bank announced that it would increase the amount of special bonds that it can issue to absorb rupees. Yet the bank spent $38.1bn (€27.1bn, £18.8bn) in the first seven months of the year, only for the currency to soar last week to its highest level in almost a decade.
Many experts think that Asian countries should abandon currency interventionism. Instead, they say, governments should view their strengthening currencies as normal consequences of the economic recovery since the 1997-98 Asian financial crisis, when currencies tumbled across the region.
"The Asian currencies are still relatively cheap and appreciation is the right policy response," says Rodney Jones, former managing director of Soros Fund Management, and an adviser on Asia to several hedge funds. "The central banks have come a long way and have moved towards an inflation-targeted regime [for setting interest rates, rather than targeting a specific exchange rate]."
But, he says, "Asia needs to accept a lot more currency volatility."
Some economists think Asia's manufacturers are, in any case, becoming less exposed to the US dollar because of growing volumes of intra-Asian trade, rising domestic consumption and a more diversified export base. China's latest trade data, for example, showed the European Union overtaking the US as the biggest recipient of Chinese goods.
There is uncertainty, though, about the extent to which this is happening and the likely impact on growth.
Last month, the Asian Development Bank raised its 2008 growth forecast for Asia excluding Japan to 8.2 per cent from the 7.7 per cent six months earlier. It argued that booming consumption in China and India and a reduced reliance on international lending should allow Asia to weather the credit market contraction, as well as a possible US slowdown.
Four days later, Lehman Brothers trimmed its 2008 growth forecast for Asia ex-Japan for the second consecutive month, to 7.5 per cent from 7.9 per cent.
Rob Subbaraman, the bank's chief Asia economist, argues that the simulation models used by the ADB, as well as the International Monetary Fund and the European Central Bank, "may underestimate'' the effect of a US slowdown.
Judging the impact of currency movements is further complicated by the boom in commodities, which are mostly traded in US dollars and have helped to drive growth in countries that are mineral-rich, large producers of farm products, or both.
The DHL/Austrade survey found only 20 per cent of companies said currency fluctuations could affect investment decisions, even though the soaring Australian dollar this week hit its highest level against the US dollar since 1984.
That prompted a rueful commentary from Peter Costello, the Australian treasurer, who said the strong currency was discouraging inbound tourism and making life tough for Australian exporters.
Under syndication arrangement with FE