Forex risk management in e-Marketplaces

With the May elections over, the radar screen has reverted to the business terrain for the remaining semester this year. Economists and analysts are one in their call that funds flow has improved in the Philippines, part of which has favored equities and other securities markets. In fact, several listed and non-listed enterprises are revisiting capital expenditure plans for the remaining semester, especially those that are likely to benefit from the government’s key priority investment sectors. With monetary authorities on status quo on policy, several, if not all, negotiators have kept a close watch on the peso-dollar movement, while treasury experts re-position prospective financing options given the present single-digit interest rate environment.

Foreign currency adjustment (FCA) trends are commonly visible for utility companies, especially since regulators allow these enterprises to effect tariff adjustments whenever the peso weakens or firms up vis-a-vis the greenbuck. Such a case, however, is not typical for ordinary enterprises, unless they belong to industries that create a significant impact on the economy. For a regular enterprise to survive — irrespective of the venture it’s in — volatility in foreign exchange markets needs to be monitored, especially when necessary direct inputs to production are purchased overseas. In fact, competition rests on proper inventory monitoring, as any wrong call on dollar purchases could set difficulties in implementing “realistic” selling prices to key markets. Such a case becomes more complicated if wrong calls are made for slow-moving items, especially when cyclical demand sets in.

Participation in e-Marketplaces has tackled these concerns, especially since it’s faster to collaborate in contracts that require flexibilities on terms, especially if these are tied to foreign exchange movements. Responses are swifter since buyers and suppliers could cohesively plan on the length of an agreed contract, based on existing industry trends during the targeted timing of negotiations. In other words, risk management procedures are not only transparent, but they’re simplified for all related parties concerned.

Let’s check an example. Suppose you were buying imported item A, and pricing was at P1,000 apiece in November last year. Being a regular customer, your supplier called in to inform you that pricing has been unchanged as of June this year. The supplier may have quipped that you need to purchase the item soon, as prices are likely to trend higher during the peak season this year. Meanwhile, an inquisitive friend informed you that he/she purchased the same item for P800, and his supplier was not even on a swift mode to do a sale. There are two things here: (1) You could simply ignore the fact, believing you purchased a “superior item” or (2) Try digesting facts and see if you did lose 20 percent of your hard-earned funds. With these options, I’m sure you’d rather focus on item 2. Differences in foreign exchange rates should enable buyers to purchase the item lower (granting this item is imported), or there may have been other costs involved (e.g., overhead) that could justify your supplier’s “unchanged” pricing.

E-Marketplaces do more than merely benchmarking or price referencing. As long as linkages are made within a system that runs across industry platforms, negotiations can be facilitated simultaneously for items intended for purchase, and similar input items that form part of finished items to be sold. Catalogue referencing can be revised accordingly, and orders are facilitated fast. Moreover, price variances can be adjusted based on prevailing market conditions, and one need not stock on relatively expensive inventory that might not even be pushed aggressively when competitive pricing pressures set in.

Catapulting present business models that run on technology platforms provides long-term gains. At the end of the day, it’s how fast a decision-maker sees revenues flow in, and how equipped his backroom people are in implementing measures to help streamline direct-related charges.

* * *

Grace Crisostomo-Cerdenia is the general manager of SourcePilipinas.com and 2TradeAsia.com. For comments or queries, e-mail her at [email protected].