Islands Business - Dollar Jitters

Currency fluctuations putting a toll on local businesses

Dionisia Tabureguci

After doing business in Fiji for some 21 years, Mark Halabe is close to contemplating suicide. It's a joke, of course. But for the Kalabo Tax Free-based rag trader and prominent local businessman, that's about all he can say to illustrate how tough things are these days.

Currency fluctuations, the subject of our telephone interview, were hitting him really badly and appeared to be increasingly pushing his business and those like his towards truly uncertain times.

"Most of us export in Australian and New Zealand dollar so we have had a decline in value of our sales brought about by the devaluation of the Australian dollar.

"It's quite substantial," said Halabe, managing director of Mark One Apparel, one of Fiji's oldest garment manufacturing companies.

"We were sitting on around AU$0.68 (to F$1) not that long ago, it's now AU$0.84, AU$0.85 (against F$1), so that's a massive loss. For me, it's about every one cent difference is a F$40,000 loss per annum. So it's a huge loss to try to absorb...impossible to absorb actually. We are heading towards some very difficult times ahead of us."

It's a flow-on effect from the erratic economic condition the world has been spinning in recently.

As the acidic impact of America's troubled financial system slowly eats its way into the world's major markets, the Australian (AUD) and New Zealand (NZD) dollars are generally weakening along with other major world currencies as the mighty US dollar (USD) gains strength.

Being bases of trade in a free market environment, the values of these currencies are exposed to the rigours of unforgiving investor sentiments when times are bad, ride on the crests of investor confidence when times are good and in uncertain times such as this, they are casualties as investors fear for the worst and run for cover to what is perceived to be a safer USD for cover.

What's up with the dollar trend?

"The trend since last year and the first half of this year was a stronger Fiji dollar against a weaker US dollar as the US economy went through a rough period of major banks failing, unemployment rising, home loans sales decreasing and, so on," explained Shirleen Sahai, manager treasury for ANZ Fiji.

"Due to the sub-prime mortgage crisis hitting the US the hardest and the first economy to start this financial crisis, the USD fell against most currencies on the market until later this year when it started to pickup.

"The trend now is a stronger USD against the FJD and this trend is likely to continue with the US economy doing everything it possibly can to help revive its economy and prevent a recession," said Sahai.

"Against the Aussie and Kiwi dollar, the first half of this year, we saw a stronger AUD and NZD due to weakening USD and stronger commodity prices.

"Investors traded mostly in commodities and this, in turn, boosted the Aussie dollar, which then gave strength to its Kiwi sister. Also, lack of supply in conjunction with a high demand due to continuous hurricane destructions in the Gulf caused oil prices to sky-rocket as well. Against the FJD, exporters benefitted the most. Sentiment in the markets has now changed with investors trading in USD as markets fear a global recession. Due to this, we now see a weaker AUD and NZD," Sahai added.

The performance of Fiji dollar in all this is mixed. While it is generally weakening against the USD, it is strengthening against the AUD and NZD. To simplify what that means for Fiji's trade, consider this scenario: A man has AUD$100. Going by the exchange rate of one local bank, the man would find that in January this year, his AUD would have fetched him F$130.

However, if he had waited until last month to trade his AUD100 for FJD, he would have to contend with only FJ$114. Imagine dealing with thousands of AUD in export earnings. Those worst hit in a scenario like this are businesses like Halabe's Mark One Apparel who earn their revenues in Australian currency.

On the other hand, those that pay their imports in Australian dollars, such as hotels that buy food and vegetables from Australia and New Zealand would find their purchases cheaper with a weaker AUD and NZD.

Compare this with another scenario: based on the same exchange rate from our local bank, a woman with US$100 would find that in January this year, her wad of greenback was worth FJ$147 whereas by last month, the same amount would have fetched her FJ$174.

For the exporter earning in USD, like a local fishing company or mineral water company exporting to the US, this is early Christmas. But for one paying for imports in USD, such as a Fiji-based oil company or a large-scale company buying machines and having to pay for it in USD, it translates to a very steep increase in costs.

Businesspeople like Halabe consider themselves victims of the first scenario and what irks them most is that the basis of the movement of the Fiji dollar against the major currencies is determined not by the free market but by a basket of currencies.

Its value is therefore generally seen as not truly reflective of what it would have been worth if it were subjected to a free market environment. The economist will argue that a small economy like Fiji has no choice but to peg its currency against a basket of other major currencies. But for specialists like Halabe, one degree of relaxation in the control of exchange rate has the power to transform in an instant the hardship they face as a result of currency fluctuations.

Double whammy!

"Our export earnings have been devalued by the amount of AUD depreciation,' said Halabe. "We import mostly in USD, which works against us because the USD is strengthening against the FJD. And when we buy in Australia and export back, a very small portion of our costs are direct AUD. Most of it are imported costs in USD out of South East Asia. Goods from Australia are mostly driven by imports from South East Asia so because USD is rising against the AUD, you'll find (the prices of) most goods coming from Australia are also rising, to compensate for the depreciation. Where you bought something three months ago for AUD$10 from Australia, it may be worth F$9 today because of currency fluctuation in our favour. You will find that two or three months on, that same item will be worth F$11 or F$12. So by the time raw materials fly out of Australia and get exported again, they would have had to raise their prices by 20 to 30 percent," said Halabe.

It's a double whammy for the Australian-bound rag business and Australian dollar paid export earnings in general. And as if that's not enough, they have been hit with another one.

"The Fiji Wage Council has hit us with a 20 percent increase in wages from January 1st (next month). So for us to go back to our customers and say 'please pay us more,' it is really going to be very difficult to maintain business in Fiji," Halabe said.

Never before in his 21 years of doing business in Fiji has he seen anything like this, he confided, where three things were going against business at the same time.

"It's really scary," he said. "In my 21 years of doing business in Fiji, I've seen a lot of bad times and dealt with them and we've managed, we're still standing but I've never seen this scenario where everything is working against us all at once. It's not easy."

For some businesses trading in US dollars, the story is a little different.

"It's good for exporting (the stronger USD) but having said that, all our costs are in USD anyway so it's not such a great difference to us," said Russell Dunham, Group Business Director of Fiji Fish Ltd, one of the country's oldest local fishing companies.

Fiji Fish exports over 50 percent of its fish to America while a majority of its frozen fish exports are paid in USD, particularly albacore tuna. The company's costs mostly comprising oil and baits, which it purchase in USD. At the time of this interview last month, the local fishing industry was still trying to deal with a new three percent tax imposed on fish exports in the 2009 National Budget.

Oil price eases?

There is another grave scenario emerging out of this exchange rate issue and that is the cost of importing oil. True, the current price trend of oil globally is down but don't bet on our local bowsers mirroring that trend. The word from the oil companies is that they too are victims of the strengthening USD.

"We are procuring fuel from overseas refineries and payments have to be remitted to them in USD," said Vijay Kumar, general manager of Total Fiji.

"The strengthening USD has a direct impact on the price we have to pay for imported fuel. This consequently impacts the price to the end user."

BP South-West Pacific Managing Director, Mathew Elliott pointed out that the rising USD has been more than offset by the fall in oil prices in recent months.

Oil imports and its payment can easily be Fiji's thorny issue if it were seen in light of currency fluctuation alone. On the one hand, Fiji consumers may not quite feel the benefits of a lower global oil price, considering that the Prices and Incomes Board (PIB), the authority that controls the retail price of fuel, bases its monthly determination on three things.

"There are three components of the template that we use to determine the price of fuel," said PIB official Biulailai Biutiviti.

"They are the cost of product, the exchange rate and freight costs. When the price of oil was high, the exchange rate was down (USD against the FJD). But now we are seeing the price of the product drop but the exchange rate has gone up. So just because the price of oil has come down, it doesn't mean we will see local prices drop. There are other factors that are considered."

Oil companies are also debilitated in that they cannot protect themselves against such currency fluctuations even if they wanted to.

Due to factors related to economic stability, the Reserve Bank of Fiji (RBF) does not allow them to hedge their costs. Where RBF allows a facility called forward cover for some items, in which local importers can remit funds offshore to help protect themselves against a worsening exchange rate situation, oil companies cannot do that.

Time to consult the crystal ball

So where to now? Just a month ago, local analysts were saying the global credit crunch would pass over Fiji and that the country was safe. The general consensus then was that the financial systems, especially the banks, were safe and sound. A month on, the world is beginning to fall apart and the impacts on a small islands nation like Fiji are slowly taking form, making it easier to identify what they are.

For the Fiji dollar, its path is very much predictable at least in the short-term.

"The AUD and NZD are likely to remain soft for the next six months to 12 months so we are likely to see a continuation of this trend of FJD weakness against USD but strengthening against the USD," said Simon McLay, treasurer for Westpac Fiji.

"With the downward revisions on global growth and commodity prices in the short to medium-term, we expect weaker commodity currencies which are the AUD and NZD, and a firmer USD," said ANZ's Sahai.

Businesses are already moving to protect themselves from being further victimised by that. "We have seen an increase in interest in hedging items which come from Australia or New Zealand as the current exchange rate levels reflect good value relative to past history," McLay added.

ANZ's Sahai alluded to similar behaviour from its USD clients. "USD importers have shown interest in hedging as the USD has appreciated around 15 percent from the end of July when the global financial crisis started to unfold," said Sahai.

Just how authorities in Fiji are going to react to this is still unclear at this stage, as they had not responded to FIJI BUSINESS queries when this edition went to press. But there is very little doubt that it is unchartered waters for just about anyone living in the world today.

"Financial markets have been extremely volatile on the back of huge swings largely due to the stock markets and reversing of riskier assets/currencies (AUD & NZD against USD & JPY)," said Sahai.

"We are seeing currency trends somewhat like the times of the Great Depression and most market players have commented that we may not see these movements again in our lifetime."