‘Exporters demand bailout as currency bets go wrong’

THE leading 26 textile exporters of Pakistan have demanded the gov ernment to intervene by giving them the option to make the inter national export contracts null and void to mitigate losses, Pakistan Today learnt on Tuesday.

According to informed sources, ex porters expect these losses to be approxi mately Rs12-15 billion.

“The total forward expected booking is estimated to about $3bn,” sources said.

They added that if this value is closed out today, the average difference on these bookings is about three per cent, which equates to $90m or approximately Rs15bn.

“Exporters have requested the gov ernment to use the reserve fund, which has Rs100bn to cancel these contracts and reach settlement with commercial banks as soon as possible,” sources said.

As per details, the exporters said that over the last few months, they had sold forward dollars at approximately Rs160, which means they would have got Rs160 for every dollar paid by them.

“However, as our orders are deferred or cancelled due to the coronavirus (Covid-19) led shutdown of port opera tions and markets, we are receiving no dollars in sales to settle this forward. This would have been fine if the dollar had re mained at its value.”

“However, the sudden upsurge in dol lar value means that exporters have to pay the difference out of their pockets, hence causing them a loss,” sources said.

They added that the exporters told the government that this is something that they cannot afford in the given circum stances, and they will likely be paying penalties or even default.

“It is essential for the government to reduce these losses for the textile sector to stay afloat. We stand behind the gov ernment to minimise unemployment, but we need assistance to help do this,” sources quoted the exporters as having told the government.

Textile exporters who made this de mand to the government include Artistic Milliners, Feroze 1888 Limited, Gul Ahmad Textile Mills, Liberty Mills, Artis tic Denim, Al-Karam Textile Mills, Soorty Enterprise, Sapphire Textile Mills, Inter loop Limited, Navina Denim, Mustaqim Industries, Nishat Chunian, Reliance Weaving Mills, Fazal Rehman Fabrics, Mahmood Textile Mills, Masood Spinning Mills, Masood Fabrics, Roomi Fabrics, Sapphire Fibres, Sapphire Finishing Mills, Diamond Fabrics, and Nagina Group.

Sources from the banking and other market segments, however, said it's black mailing on the part of exporters, who want the government to fund their gambling.

“By no means, this demand by ex porters is justified,” sources added.

“If the price of the dollar had gone down they (exporters) would have earned millions of dollars,” one of the sources added.

One of textile exporters, who made this demand and didn’t wish to be named, said they had made this demand as most of the exporters sell dollars forward.

“With no proceeds coming now, it will cause a serious problem for them so this demand is justified,” he said.

Agreeing with his colleague, another exporter said that it is justified because “for instance, if we have manufactured clothes for Zara and they are not purchas ing it now due to Covid-19, the merchan dise will be useless for us as we have in curred cost of production and other expenses on it,” the exporter said.

He added that exporters do benefit from selling forward dollars but in the current prevailing situation it would be a huge loss for exporters who are facing a lot of hardships due to Covid-19.

“In the given circumstances, the gov ernment should support the export ori ented textile sector so it is a justified demand,” he opined.

Exporters book forwards to hedge their foreign exchange exposure by essen tially agreeing to sell their future dollars from export proceeds in the present. This means that they will get a premium on the prevalent USD/PKR rate on a particular day for a fixed tenor.

For example, a textile exporter is ex pecting payment for his shipment six months from today. He will approach his banker and ask to book those proceeds today. The reason to do this can either be that the market is very stable or the ex porter is expecting the rupee to appreci ate. By booking his proceeds at a higher rate (prevalent dollar rate plus premium) he is betting that 6 months from now the market rate will be lower than the rate he has booked thereby receiving more ru pees for his dollars.

NOW, ONE OF THREE THINGS CAN HAPPEN AFTER SIX MONTHS:

a. The USD/PKR market remains at 155 and the exporter converts his dollar proceeds at his forward booking rate of 160 and makes Rs5/dollar more than he would have if he had not booked an ex port forward.

b. The USD/PKR depreciates to 165 and the exporter has to realise his proceeds at his forward booking rate of 160 and makes Rs 5/dollar less than he would have if he had not booked an export forward.

c. Due to some unforeseen circum stances his dollar proceeds are either de layed or his order was cancelled meaning those ‘forward sold’ dollars will not be coming. In such an instance the bank will ‘close-out’ the export forward contract. This is done by offsetting the forward rate with the USD/PKR on the day the 6 month period finishes. If the rate is higher than 160 the bank will charge the exporter that difference, if it is lower the bank will pay that sum to the exporter.

So when the rupee was stable, hover ing at a calm 155, a lot of exporters booked forwards at 160, some perhaps at higher rates. The expectation was that it would remain stable or appreciate further and exporters would make a killing. That did not happen.

In the wake of the virus outbreak, the rupee depreciated sharply within days and is currently in the 165 167 range, much higher than the forward booking rates.

While condition ‘b’ mentioned above will apply to those whose orders aren’t cancelled, exporters who are facing heavy cancellations due to the global pandemic will have to bear a loss as banks close out their forwards outcome ‘c’.

“Whenever an exposure is hedged, for one party to make a profit, another has to make a loss. This is an inherent and implied risk. Exporters now asking for a bailout made a bet and lost. The taxpayer should not be charged for this,” a banker commented on the exporters fresh demand that the government write off the amount they owe to banks after close-outs.