Currency hedging now part of business
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Companies now regard foreign exchange hedging as a crucial tool and necessary cost in managing financial risks as they were unable to protect themselves from the collapse of the baht 15 years ago, according to bankers.
“Thanks to the baht depreciation, we now know the real value of the Thai baht against foreign currencies, while Thai operators learnt about the market mechanism and became interested in the major currencies,” Wasin Saiyawan, head of financial markets at Siam Commercial Bank, said last week.
Floating of the baht in 1997 clobbered businesses, as most lacked an understanding of the forex market and were not aware of hedging, he said.
Volatility still reigns in the currency market here because commerce is now much more connected with the global economy. Thai firms cannot avoid instability. Instead, they must prepare themselves if they don’t want to suffer losses.
But the bitter lesson of 15 years ago convinced Thai businesses to act to limit financial risk and they are now willing to set aside a budget for the purchase of hedging products.
“Exporters already include hedging in their budgeted expenses if they think that they can still break even. Some exporters will buy hedging products to prevent currency fluctuations and ask for a term loan to defend against interest rate volatility to reduce risks,” he said.
The measures by Thai exporters ensure that they can deal with forex volatility, he added.
Tak Bunnag, an executive vice president at Bank of Ayudhya, said the de-facto devaluation 15 years ago taught businesses that they had to fend for themselves besides relying on state measures.
Huge fund flows
The country never knew before that the fixed exchange rate regime could not withstand huge fund flows and currency volatility. When the regulators failed to tackle the fund flows, they had to let a floating rate system be set up.
People realised that they had to monitor the movement of funds and currencies. Now, the country can live with volatility, as seen during the US recession in 2008 and the current European debt crisis.
Enterprises, especially medium and large ones, have a better eye for currency movements, so the baht today moves in a narrow range.
The change in the baht against the US dollar in the year to date is 5.3 per cent, less than 6.6 per cent last year, because businesses have a better grasp of fund flows and the managed float policy.
Stability in the Thai unit is assured by foreign fund flows compared with currencies in neighbouring countries. Most fund outflows are short-term investments because some investors want to take profits from currency trading.
Companies, however, have factored forex risk in their budget without buying hedging products because the baht’s appreciation is an acceptable risk.
Other currencies
Some enterprises say they lose profit-making opportunities because of hedging. Banks have to offer more alternative instruments such as adjustable rate contracts to increase flexibility for customers.
Local financial institutions are providing the same comprehensive hedging products as their international counterparts.
Firms should use other currencies such as the Singaporean dollar or Malaysian ringgit to settle international transactions, besides the greenback, to avoid major currency volatility, he added.
Songpol Chevapanyaroj, an executive vice president of Kasikornbank, said currency volatility could get worse when investors lack confidence.
The lack of confidence is the key lesson from the devaluation 15 years ago, not the fundamentals.
Businesses should recognise that the currency is not stable because the forex market is a market of speculation.
The events 15 years ago proved that businesses cannot diversify all risks because there are some operators that prefer to make bets on forex trends.
Even if the currency situation is not reaching excess volatility yet, operators should consider another denomination, especially those in cross-border countries.
The role of business transaction inter-mediaries is the next challenge for the currency.
That tool in managing financial risks is important for exporters-importers, but existing hedging products offered by banks are enough to assist businesses to cope with volatility.
The best solution is how banks can communicate with customers about risk management and encourage them to focus on productivity and cost efficiency rather than convince them to seek other markets.
Market diversification is not the answer because financial problems can emerge in all regions, not only in the US and Europe, he added.
