It wasn’t just governments and central banks that took away lessons from the Asian financial crisis of the late 1990s. Ayala Corp. and SM Investments Corp. of the Philippines learned to fully hedge the currency risk on their foreign debt when the dollar strengthens.
“Our view from the start of the year has been a stronger dollar, and we have managed our positions as such,” Ayala’s Chief Finance Officer Jose Teodoro Limcaoco, said in a July 14 interview in Manila. SM’s policy is to have “no currency risk in our books,” Corazon Guidote, the company’s head of investor relations, said July 13.
Weakening Southeast Asian currencies are sparking memories of the 1997-1998 crisis, when a sharp rise in the dollar inflated the cost of dollar-denominated debt and led to corporate defaults. Hedging measures by Philippine companies such as Ayala and SM are seen helping shield them as the dollar gains and the Federal Reserve prepares to raise interest rates.
“For companies exposed to dollars on their books, it’s a really, really good time to be hedging,” said Alan Cayetano, head of foreign-exchange trading at Bank of the Philippine Islands in Manila. “The general outlook is a broadly strong dollar. We see that companies are very proactive in covering short-term obligations, both from a cash flow and a risk management perspective.”
The dollar has climbed against all major Southeast Asian currencies this year. The peso fell 0.1 percent as of 11:16 a.m. in Manila, heading for its lowest close since February. It has weakened 1.3 percent this year, compared with an 8 percent loss for the ringgit and a 7.5 percent drop in the rupiah.
It’s a different situation from 1997, when the peso declined 33 percent at the height of the crisis, and the economy contracted by 0.6 percent the following year. Once called the “sick man of Asia,” the Philippines is projected to be among the fastest growing Asian economies this year and next.
Philippine companies sold $1.3 billion of dollar bonds in 2014, with SM Investments issuing $350 million of debt while Ayala sold $300 million. This year, companies have sold $843 million, with SM and Ayala abstaining. That compares with more than $10 billion of global securities issued by Malaysian and Indonesian companies this year, data compiled by Bloomberg show.
Ayala, which owns the country’s second-biggest property developer, matches about 80 percent of its foreign debt with foreign cash flow and the remainder with dollar-denominated investment, Limcaoco said. At SM Investments, Asia’s largest mall owner by market value, all foreign-based liabilities are effectively fully converted to pesos, Guidote said.
San Miguel Corp., the largest Philippine company by revenue, can hedge as much as half its dollar debt and is watching the market very closely, head of Treasury Sergio Edeza said this week.
“People are applying lessons learned from the Asian financial crisis,” said April Lee-Tan, head of research at COL Financial Group Inc. in Manila. “These strategies will help insulate profits from potential foreign-exchange losses.”
They’re better off than other companies in the region: Standard & Poor’s lowered its rating on Indonesia’s MNC Investama last week citing the rupiah’s weakness, while Fitch Ratings earlier said PT Japfa Comfeed is the most exposed to a depreciation in the rupiah, and that its rating may be cut.
“History has taught us to remain prudent and cautiously optimistic through different cycles,” said Paolo Borromeo, Ayala’s head of corporate strategy. “We continue to have a strong focus on managing risk, including our overall foreign exchange exposure.”