Peso depreciation results in winners, losers

The recent turbulence in financial markets shows the value of having a hedge against sharp movements in the peso’s value, which may significantly weigh on a company’s operations and cash flow.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said movements in the peso’s value against the dollar, the most traded currency in the world, affect businesses in different ways, depending on the nature of their operations.

“If you’re a user of foreign exchange, obviously a strong peso will be favorable,” Tetangco said this week.

These “users” include companies that earn in pesos but have dollar-denominated loans, and importers.

“But if you’re a source of foreign exchange, in other words you have to convert to peso, then a weaker peso will be favorable,” he said.

Those who benefit from a weaker peso are families of overseas Filipino workers, exporters, and companies in dollar-earning industries such as outsourcing and tourism.

A weaker currency puts more money, in peso terms, in the hands of individuals and businesses that earn in dollars.

Tetangco’s comments come amid the recent weakness in the local currency, caused mainly by investors’ anxiety over China’s slowing economy, and the prospect of rising interest rates in the United States.

Earlier this week, the peso dipped to its lowest level since June 2010.

The peso has lost about 4.5 percent of its value since the start of the year, outperforming peers like Malaysia and Indonesia that saw their currencies decline by 17.57 percent and 11.83 percent, respectively.

“If you’re hedged, you’re okay. You’re not really affected that much, except of course there are costs to hedging. But you basically take out a significant part of foreign exchange risk,” Tetangco said.

Hedging involves transactions or arrangements that protect a company’s operations from market fluctuations.

One way for companies to hedge is to have a deal in place, either with a bank or other types of financial institutions, that gives access to foreign currencies at a pre-set price.