With new production capabilities in place, local electronics manufacturers anticipated that the global economic recovery and the launch of new products from global heavyweights such as Intel and Apple would spur demand for their products and get them back into the black. Indeed, demand has recovered, but the bottom line hasn’t rebounded as quickly as expected because a strong New Taiwan dollar dashed hopes of a speedy turnaround.
The NT dollar appreciated more than 3 percent in the fourth quarter to finish last year at NT$30.368 against the US dollar. Even the world’s top contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC), which posted record profits last year with a gross profit margin of nearly 50 percent, was concerned by the unfavorable exchange rate.
“Taiwan’s economy is good, but the foreign exchange rate is disturbing,” TSMC chairman and chief executive Morris Chang (張忠謀) said on Jan. 27.
Smaller companies and manufacturers recording narrow gross margins, such as laptop computer makers, have also voiced their concern because they are more vulnerable to foreign exchange rate changes and could drift into a dire situation in the blink of an eye. The impact of the NT dollar’s appreciation on exporters’ fourth quarter earnings is not yet evident because it was accompanied by a robust recovery in demand. However, it is predictable that the adverse effects could exacerbate a lull in growth later this year if consumers again tighten their purse strings amid continued unemployment in the US and rising inflation in emerging markets such as China and India, which are major destinations of local electronics exporters.
The uptrend in the NT dollar seems irresistible, despite the central bank’s alleged interventions. The local currency has risen 3.7 percent since early this year to NT$29.23 to the US dollar on Friday, as it has easily breached the psychological barrier of NT$29 and even flirted with NT$28. The trend is expected to continue throughout the remainder of this year, as economists have forecast the NT dollar will reach NT$28 against the greenback, or even NT$27.
Like most local corporations, TSMC has to rely on itself to minimize the impact of the strong currency. However, small and medium-sized companies, which employ 77 percent of the workers in the nation’s private sector, face a much tougher challenge to hedge against the rising NT dollar than large firms, as they have less resources at their disposal and smaller margins to absorb the impact of lower profitability.
This is compounded by the lack of action by the government. It seems as if the central bank is the sole government agency that has the power or legitimacy to assist local corporations in fending off pressure from foreign exchange rates, while keeping a close eye on the mounting risk of inflation. South Korea, a major export rival, has shown a strong determination to safeguard the country’s exporters. The Bank of Korea on Friday kept the key interest rate unchanged, which will help stabilize the won against other major currencies such as the US dollar.
The Ministry of Economic Affairs merely tinkered with the issue, as it encouraged local businesses to take more precautions to hedge against global currencies, primarily the US dollar, to reduce the risk of foreign exchange losses. In contrast, Japan recently said it was considering setting up a special fund to finance small and medium-sized corporations after a strong yen caused a spike in bankruptcies of small-scale firms.
As long as the nation’s economy is smaller in size and more vulnerable to fluctuations in the global money market than its regional export-led competitors, the government must take the appreciation of the NT dollar more seriously and come up with more concrete and comprehensive measures to ensure that local firms get through these tough times.
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