Exporters face forex squeeze amid weak recovery

Published by reposted only Date posted on December 2, 2009

A STRONG peso risks undermining the recovery of the Philippine export sector, which has yet to bounce back from a global slump, according to pundits. Last week, the government announced that the country’s gross domestic product (GDP) hardly grew at 0.8 percent in the third quarter. Worse, second-quarter GDP growth was recast downward to 0.8 percent from the earlier 1.5 percent estimate.

Exports continued to contract, falling 13.6 percent in the three-month period ended September, while industry declined 4.4 percent. With imports and factory output contracting by double-digits still in September, the near-term outlook for both remains bleak.

Sergio Ortiz-Luis Jr., Philippine Exporters Confederation Inc. (PHILEXPORT) president, said positive growth in exports may only happen early next year, as the strong peso is slowing down recovery.

This is a less upbeat forecast than last month, when Ortiz-Luis said the sector would post positive growth in November and December, even as full-year figures would remain in the red by double digits.

To be sure, the peso’s strength augured well for the Philippine economy, as it joined neighbors in leading the recovery from the global slump.

After trading between P47 and P49 to the greenback from February to September, the peso last month strengthened to the 46-to-a-dollar range.

The local currency’s rise coincided with emerging Asia’s rebound from the worst global financial crisis since the Second World War, thus sending investors to shift their bets from safe havens like the dollar and gold to the region’s equities and other financial assets.

The Philippines was part of this rebound not by geographic accident, but because the resilience of the country’s remittances propped up domestic consumer spending, preventing it from contracting so far this year.

Coupled with the government’s past success in trimming the country’s foreign debt, the Philippines enjoyed a balance of payments surplus, thus ruling out any shock on the external payments front.

Positive growth put off to next year

But a strong peso hurts exporters since their products become more expensive than those of rivals in countries having weaker currencies.

Car parts exporter Kyoei Kogyo Philippines Corp. said the local currency’s strength results in failed bids for orders and worse, losses.

“When the peso is strong, we tend to lose on bids for auto tooling projects due to currency conversion.
We normally bid against [companies from] China, South Korea, Taiwan and Thailand for projects in other overseas countries,” said Edward Jose, marketing director of the VSO Group of Companies—which includes auto parts manufacturer KPC.

KPC exports jigs to Brazil, Indonesia, Iran, Japan, Pakistan and Vietnam, and it targets to ship the same products to Australia, China, India, Malaysia, Russia, South Korea, Turkey, the US and Venezuela.

Because of a stronger peso, the company has incurred huge losses, especially for projects wherein they collect on terms, Jose said.

Jacked up costs

For the country’s leading exporting industry, electronics, the strong peso has jacked up costs.

“[While] the market is improving tremendously for us right now . . . unfortunately, our costs have increased because of this weak dollar,” Arthur Young, Semiconductor and Electronics Industries in the Philippines Inc. chairman, said.

“We cannot pass on these costs to our consumers, so we have to just eat it and [let it] affect our profitability until we find additional ways to reduce costs by improving our productivity,” he said.

Jesse Tanchanco Jr., Food Entrepreneurs and Exporters of the Philippines Inc. chairman, agreed, saying, “A strong peso makes our exports less competitive, as it tends to drive our prices up.”

Take the case of sugar-based food exports.

Roberto Amores, Philippine Food Processors and Exporters Organization Inc. president, said the cost of producing sugar-based goods in the country are higher compared with its Southeast Asian neighbors, where sugar is about 30-percent cheaper.

Less cash flow this holiday

Indeed, exporters don’t expect to be awash with cash as they were in previous Christmases. “Those expecting incoming payments will have less cash flow this holiday season,” said Ricardo Sales Jr., Christmas Décor Producers and Exporters Association of the Philippines president.

Rashmi Tolentino-Singh, Chamber of Furniture Industries of the Philippines vice president for industry relations, said what is happening now is similar to what transpired in 2006 and 2007. “Whatever the exporters made from their mark-ups were wiped out by the exchange rate. That was a nightmare for all of us, especially the smaller exporters who could not qualify for the hedging that was offered by some banks,” she said.

Her company, Lightworks Resources Inc., caters to the high-end market, with prices based on the euro since 2006. Even so, they still have to consider the peso-dollar exchange rate in their negotiations because they have US buyers, she said.

She said they received information that the exchange rate could reach P43:$1 next year. “[Such a rate] will be a disaster for exporters,” she added.

Pegging the peso-dollar rate

To alleviate the plight of exporters, some quarters have been calling for some form of intervention in the foreign exchange market.

University of the Philippines economics professor Benjamin Diokno said the peso should be pegged at P55:$1 to give exporters a respite.

“This proposal will definitely give the drowning exporters a breather,” Tolentino-Singh said.

“I think pegging the [currency exchange] at P50:$1 gives us a very good edge,” Jose said.

For Tanchanco, pegging the foreign exchange “would be good on a temporary basis.”

But Ortiz-Luis said this is “unrealistic,” as it has been central bank policy to allow free play of the    exchange rate.

“Experience says that [the government] won’t do that. Much easier interventions were never made, how much more a forex peg,” Sales also said.

While the central bank could intervene quietly, Young sees a separate problem: “The issue is more of a weaker dollar than a strong peso.”

As it is, Manila’s biggest export market, the US, is poised for a slow drawn-out recovery.

“There are doubts that the recovery in the US could revive Philippine exports, considering the excess capacity in the world. US buyers are expected to tap more competitive markets such as China and Vietnam, before they come back to the Philippines,” Diokno said.

Given this, he said exporters should instead seriously consider restructuring by looking at the domestic market. –BEN ARNOLD O. DE VERA REPORTER, Manila Times

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