CEBU, Philippines - Despite persistent calls by the Bangko Sentral ng Pilipinas (BSP) for exporters and other corporations to hedge their transactions against foreign currency risks, exporters in Cebu are still not keen on hedging facilities as these do not apply on how they deal with their buyers abroad.
In an interview, Philexport Cebu chair Allan Suarez said hedging works better with exporters who adopt the letters of credit (LC) as payment method because hedging their dollar would allow them to project and balance their income against production cost.
He said most exporters in Cebu, especially those who have been engaged in the business for years are using the direct payment scheme, which is also what most importers of Philippine products require. Direct payment is when buyers pay for the products bought 30 to 40 days after product delivery
“Those using the LC are affected with the volatility of the value of the peso against the dollar because when they quote their products, they already have a target income and production cost. When the dollar appreciates against the peso (or the peso depreciates against the dollar), they will lose. So they have to hedge,” Suarez told The Freeman.
Hedging is an investment tool used by investors to insure against the declining value of the peso against the dollar. A hedge is a position established in one market in an attempt to offset exposure to price fluctuations with the goal of minimizing one’s exposure to unwanted risk.
An LC is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
BSP, for its part is encouraging exporters and other corporations and individuals with foreign exchange-denominated assets to hedge their transactions against foreign currency risks to cope with the adverse effects if and when the peso appreciates.
BSP said in a report that it will not peg the value of the peso against the dollar and let the market dictate the values of both currencies.
BSP Circular No. 594 aims to promote the use of hedging instruments by setting risk management guidelines to ensure that banks have the capacity and ability to manage risks arising from engaging in hedging.
Jennifer Cruz, proprietor of exporting company 33 Point 3, said hedging is applicable only to bigger companies because this will mean additional costs to the small and medium ones.
“It still depends on the size of the exporter. Most SMEs have less profit. If they pay the banks’ interest or the cost of hedging, (this will mean additional investment,) he said.