Company News |
BT CEO's e-Club : Topic
'The Art of hedging'
The
Business Times,
8 November 2004
The Art of
hedging
How would a sharp
decline in the US dollar
impact your business,
your industry and the
economy?
THE pressure on the US
dollar is almost
palpable. The US current
account deficit keeps
rising. Though off their
peaks, oil prices remain
at prohibitive levels
and the security
situation in the
Middle-East is as grave
as ever. How will a
weakening dollar affect
the Singapore economy
and its companies? Over
to BT's CEO e-club.
THE Bush re-election
spells more trouble for
the US dollar as he
seems unconcerned about
the twin deficits and
mounting debt in
America. In his first
term, the US dollar
declined about 21 per
cent against a basket of
currencies and there is
no reason to suppose it
won't decline by at
least that amount again
in President Bush's
second term.
If people pull out of
the dollar, where will
they go? There are only
two places that can cope
with such a volume of
money. They are Europe
and the euro, and Japan
and the yen. Whether
they deserve it or not,
both of these currencies
seem set to strengthen
further.
I am very optimistic
about the Singapore
economy and, in fact,
Asia in general.
Geopolitical incidents
aside, I don't share the
views of the gloom and
doom merchants. I don't
think oil will remain
above US$50 per barrel.
it will come down to
manageable levels. The
US economy will not
crash and I think there
are many opportunities
out there to do good
business for Singapore
and Singapore companies.
In my view, this is a
good time for us to
expand throughout the
region and the world.
Amanda Foods operates in
the global seafood
business and trades in a
variety of currencies.
Therefore, the real
question is: 'What will
the US dollar do against
currency x or y?' - as
they will all differ. As
a Singapore company, we
obviously report in
Singapore dollars. There
will be ups and downs
but I don't expect the
Singapore dollar to
strengthen dramatically
against the US dollar.
Overall, I believe we
will have some negative
effect on our bottom
line on translation. But
the global seafood
industry will continue
to grow dramatically as
consumers around the
world increasingly enjoy
the pleasures of eating
high-quality seafood.
Currency fluctuations
are a normal part of
international business.
There is, frankly,
little that management
can do about it.
Instead, we at Amanda
Foods will remain
focused on quality
products, good execution
and people and brand
development. These
things create a
universal currency of
high value.
Some business executives
are very quick to point
out the negative effects
on their businesses when
currencies move against
them. They are, of
course, usually silent
when it goes the other
way. I wonder why?
Graham M. Bell
Executive Chairman
Amanda Foods
VOLATILITY in exchange
rates is not conducive
to business because
planning under such
conditions is difficult.
As a global trader,
almost all the
commodities we trade in
are denominated in US
dollars and our earnings
are all in US dollars.
Freight and insurance
costs and interest on
bank borrowings are all
denominated in US
dollars. Our cost of
operations translated
into corresponding US
dollar will go up since
salaries, rents,
utilities, telecom and
travelling costs are all
denominated in Singapore
dollars and this should
have some effect on us.
The same impact will be
felt by other players in
our industry, as most of
us have global
businesses with the
transaction currency
being the US dollar.
This impact on the
bottom line may be
offset by a commensurate
increase in trading
volume.
There are, however,
adverse factors:
1) The Chinese currency
is pegged to the US
dollar and the impact of
a US dollar decline on
China's imports will be
neutral. There are
strong concerns about
overheating in the
Chinese economy, with
interest rates poised to
go up further, which may
affect business volume
as China has been the
engine of commodity
demand.
2) For non-US suppliers,
there may be an
effective decline in
realisation, and
consequently they may
tend to increase their
US-dollar denominated
prices to cover their
costs of production.
3) Although buyers
theoretically stand to
gain, a rise in
US-dollar denominated
prices by suppliers will
most likely offset these
gains. Buyers' appetite
for commodities will not
go up significantly if
there are no material
decline in the prices of
the commodities in their
own domestic currencies.
As far as the economy
goes, on the negative
side:
1) A weak US dollar
could hamper Singapore's
exports, as major
trading partners of
Singapore have their
currencies pegged to the
US dollar (China,
Malaysia and Hong Kong).
Combined with the US,
they comprise a
significant portion of
Singapore's exports.
3) If the US dollar
declines, there may be
some impact on
investment decisions
that US companies may
make overseas, and this
may include Singapore.
On the positive side:
1) Singapore companies
with significant
borrowings in US dollars
will gain.
2) Singapore companies
that plan to have a
footprint in the US
should benefit.
Overall, in our view, a
sharp decline in the US
dollar could be a drag
on the economy. But the
magnitude of this drag
will be determined by
the speed at which the
US dollar declines.
Vijay Iyengar
CEO
Agrocorp International
LIKE virtually all
businesses, we prefer a
stable exchange rate
environment. That said,
my personal view is that
the US dollar will
weaken over the next 2-3
years, and all
businesses - including
Bain & Company - need to
think through the
implications of this.
At Bain Singapore we
have taken steps to
minimise the impact of
foreign exchange shifts
on our business. First,
we invoice our services
in a range of
currencies, including
euros, US dollars and
Singapore dollars, based
on customer preference.
We try to roughly match
our payments to the same
currencies. For example,
we pay some of our
compensation in Sing
dollars and the rest in
US dollars. By keeping
revenue and expenditure
roughly in balance -
what I would term
passive hedging - we
neither benefit nor lose
from currency shifts.
Consistent with this
philosophy of passive
hedging, most of our
clients operate with
relatively dispersed
operations, allowing
them a flexible response
to changes in currencies
and other input costs.
For example, they may
have assembly operations
in Batam and southern
China. If the yuan were
to strengthen, as many
expect, they would
gradually shift some
production (say, that
destined for Australia)
to Batam. One of the
reasons contract
manufacturers like
Solectron and
Flextronics have done so
well is their ability to
flexibly respond to
changing market
circumstances, including
currency moves, in a
fast and flexible
manner.
If your firm is
significantly hurt by a
drop in the US dollar,
the answer may be a
change to your operating
strategy - manufacturing
and supply chain -
rather then expensive
hedging or
across-the-board
cost-cutting.
Charles M Ormiston
Director
Bain & Company
OIL prices are almost
always denominated in US
dollars. Oil companies
therefore have a natural
long position in US
dollars and are
vulnerable to a
weakening in that
currency.
In China Aviation Oil's
case, revenue and
commissions for our
procurement business are
denominated in US
dollars, while many
operating expenses are
in Singapore dollars. A
fall in the US currency
relative to the
Singapore unit therefore
raises costs. As well,
China is our main
customer, and with its
pegged currency, a
weaker dollar raises the
cost of imports such as
oil, and puts pressure
on enterprises and
consumers to use less.
It must be noted,
however, that oil
companies have been
dealing with a weaker
dollar for some time.
The US dollar has been
weakening against the
euro and the yen since
early 2002. Indeed, one
of the major reasons oil
prices have risen in
dollar terms has been
the weak currency.
Because the US dollar is
the currency of choice
for oil transactions,
this has had the effect
of reducing effective
costs to countries with
currencies not pegged to
the US dollar. This, in
turn, has helped oil
demand remain quite
robust, to the extent
that the benefits of
volume growth have
exceeded the costs of a
weaker dollar. We see
this most readily in the
positive financial
results being reported
by most oil companies in
Singapore and around the
world.
So while there is a
clear and direct concern
facing oil companies
from a weaker dollar,
there is also a less
obvious, but just as
important, gain in the
business's overall
demand.
Chen Jiulin
Managing Director
China Aviation Oil
MOST advanced software
products come from the
US. A lower US dollar
makes them more
affordable in countries
whose currency is not
pegged to the US dollar.
This is good for
companies like NCS which
build business solutions
on advanced hardware and
software. I hope the US
dollar will fall in an
orderly manner and
stabilise soon.
Volatility and
uncertainty are bad for
business.
Lee Kwok Cheong
CEO
NCS
THE currency for
exchange in shipping,
being an international
business, is the US
dollar. Revenue is
earned and most expenses
are incurred in US
dollars. Hence,
technically, a swing in
the value of the US
dollar will not
materially affect our
business. But the books
of account - as the
reporting currency is
Sing $ - have to reflect
any fluctuation and
account for the loss if
there is a sharp decline
in US dollar. Recent
amendments in the
Singapore regulations
allow companies to
maintain their books in
US dollars or any other
currency. So,
henceforth, if we keep
our books of accounts in
US dollars, this book
loss will be eliminated.
With regard to vessel
acquisitions, the
transactions are again
mostly done in US
dollars. Therefore, in
all, we do not see any
appreciable impact on
our business and our
industry as a whole.
Mahesh S Iyer
Managing Director
Orient Express Lines (S)
Pte Ltd
WE have a fair amount of
transactions in US
dollars for our
electronics and medical
businesses, and
therefore the weakening
of the US dollar will
affect us in terms of
exchange losses.
However, as we operate a
hedging strategy within
our group to lower the
risks of exchange rate
fluctuations, the
adverse impact is
mitigated to some
extent. We also have
operations in Malaysia
and China, where a fixed
US dollar exchange rate
regime is in place, and
these operations are
shielded from the
weakening of the US
dollar. On the whole
there is some adverse
impact on us, but it is
manageable.
A sharp decline in the
US dollar could have
wider implications for
the economy,
particularly if the US
dollar weakens more
against the Singapore
dollar than the
currencies of other
Asian countries
exporting to the US. Our
exports to the US may be
affected, as our goods
would be relatively
dearer. The more
immediate impact on the
economy would, however,
be a fall in income as
Singapore is a net
exporter to the US and
the weakening US dollar
would translate into a
net exchange loss for
exports denominated in
the US dollar.
In general, with the US
being our major trading
partner, any weakening
of the US dollar could
have a significant
impact on our businesses
and the economy as a
whole. Businesses should
therefore practise a
prudent hedging strategy
to keep the risks of
exchange rate
fluctuations in check so
as to minimise any
negative implications
that may arise.
Lawrence Leow
Executive Chairman
Crescendas Group
THE impact on our
industry of electronic
components distribution
is complex, in both
micro and macro aspects.
Depending on where a
distribution company is
headquartered, the
affecting factors are
the denominating
currency used and what
major currencies are
used to transact sales
and pay expenses and
suppliers.
At company level, and
headquartered in
Singapore, we collect
revenue from most
customers in US currency
to pay our suppliers in
US dollars. A declining
US exchange rate will
put more pressure on the
gross profit margins due
to an artificial
increase in product
costs
If a credit term is
extended for payment - a
common practice in our
industry - a savvy
customer, for example,
in India, may choose to
drag the payment out
with confidence that the
same US dollar payment
can be purchased with
fewer rupees later.
Another undesirable
effect is that US-dollar
revenue collected from
sales must now battle
against salaries and
other expenses paid in
appreciating local
currencies.
Luckily or not, being
production-demand driven
and with orders booked
on average two to three
months ahead, the
distribution business is
not likely to jitter
violently with sudden US
dollar movements. In the
eight countries where we
are located, most sales
are transacted in US
dollars. But some
overseas subsidiaries
trade in their own local
currency and may, in
fact, gain from a sharp
decline in the US dollar
due to a lower transfer
cost of products. So you
gain some here and lose
some there. However, a
prolonged period of a
sliding US dollar will
definitely give rise to
an unpredictable chain
reaction in our
industry.
Markets like Singapore,
Malaysia and the
Philippines, where
production is carried
out for US-based, local
currency-paying clients,
may be seen as less
competitive than
factories in China,
where the local currency
is pegged to the US
dollar. Production may
ramp up there instead of
here, affecting our
business undesirably. No
doubt for those already
charging their clients
in US currency, local
expenses and costs will
also appreciate against
their income and put
pressure on their
margins.
Much cheaper US dollars
will also have a
dampening effect on many
low-end electronics
produced in Asia
destined for the US
consumer market, despite
the lower cost of
components used in these
gadgets if we assume
that most of the
components used are
exported by US
companies. To what
extent and which
direction this scale
will tilt is anybody's
guess.
Jerry Hui,
CEO,
BBS Electronics Pte Ltd
ONE thing about currency
fluctuations is that no
one can really predict
to what extent the
impact to the economy is
going to be. There are
just too many factors in
play at the same time.
While generally there
will be a negative
impact when the Sing
dollar appreciates
against the greenback,
being an infrastructure
operator, the impact of
a US dollar declining is
quite minimal to our
business.
Joey Chang
CEO
AXS Infocomm
AS the US dollar
depreciates, our
business and bottomline
profit (S$) continue to
slide, as our sales are
fixed and contracted in
US dollars.
The semiconductor
business sector has been
projected to be slow in
2005. The weakening of
the US dollar will
affect it further and
make it harder for
companies like us to
maintain profitability
and remain competitive.
Most semiconductor and
electronics
manufacturers are in
located in Asia. It
means there is a lot of
cost pressure.
A weaker US dollar would
also have an immediate
impact on companies that
export their
products/services to the
US. This would hurt
domestic exports to US
markets.
Singapore is highly
dependent on the global
economy and the global
growth cycle. A slowdown
by a key market player
like the US would affect
the domestic business
environment and foreign
investors' confidence.
It would also increase
domestic economic
volatility.
James GJ Jeong,
CEO & President
ComSOC Technology Pte
Ltd
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