Foreign Exchange Exposure Costing Taiwan Billions

This is slightly off topic but still interesting.

Yesterday I read in the China Economic News (CENS) that the strengthing of the NTD against the USD has cost Taiwanese insurance billions of NTD. According to CENS:

"The NT dollar has revalued around 7% against the U.S. dollar, far exceeding the scale of other currencies, so far this year, inflicting some NT$40 billion of foreign exchange-related loss or cost so far this year on life insurance firms from their overseas assets, which top NT$2.2 trillion in value."

According to CENS, the main reason for the loss is that only 50% of the NTD2.2 trillion overseas funds had a complete 100% hedge. CENS reports:

"Of the NT$2.2 trillion overseas assets, life insurance firms have resorted to traditional 100% direct-hedge method for NT$1 trillion, while employing the proxy hedge method, or one basket of foreign currencies which tend to move in the same direction with the NT dollar, for the remainder, which is useless due to the exceptional strength of NT dollar this year."

Today I also read that Chunghwa Telecom is also feeling the pain. Taipei Times reports:

"Chunghwa Telecom projected losses from the contract would amount NT$1.5 billion (US$49.9 million) based on the assumption that the New Taiwan dollar would rise to an average of NT$30 in the next 10 years. The firm said the losses were still within the acceptable range."

According to the article, the company is not concerned at the moment saying that there would be a realignment over time and that these losses are unrealized. If it continues to rise against the USD then these companies will have greater losses. The Taipei Times says:

"If the NT dollar appreciated to NT$28 against the US dollar, the losses would widen to NT$3.5 billion from NT$1.5 billion estimated previously."

Of course the problem for many companies was that the NT dollar hit a 10-year high on Wednesday and traded at NT$30.01 to the dollar.

For Taiwan's hi-tech companies that trade in dollars this is a significant problem. Consider a tech company in Taiwan doing business in South Africa where the rand is depreciating against the dollar. Selling products into that market will be increasingly difficult. Also since most Taiwanese Tech companies quote in USD and since for many of these companies the US is their largest market, their equivalent NTD revenues are going to decline if they retain the same USD prices.

Thats it for now. Ciao.