About one-and-half months ago, concerns about a severe disruption to supply chains stemming from the massive earthquake and tsunami in Japan triggered a sell-off in some technology stocks. Now that Japanese electronics suppliers are gradually resuming operations and power shortages in that nation are easing, fears of supply constraints for local firms look to be subsiding. As a result, renewed concerns are emerging about the erosion of corporate profits because of the strength of the New Taiwan dollar against its US counterpart.
A strong NT dollar will most likely remain a challenge for exporters, primarily technology companies, for the rest of the year as its uptrend seems inevitable now that the US Federal Reserve has decided to keep its key interest rates at record lows — near zero — for an unspecified period. This move by the Fed is meant to support the US economic recovery, but it will also most likely result in a weaker US dollar.
A strong NT dollar would not only continue to reduce revenues for exporters, but it would also erode their profits as appreciation would offset increases in gross margin by several percentage points — an amount which normally takes a long time for companies to build by adding increased value to existing products or cost cutting.
In the past, the foreign exchange rate only eroded Nanya Technology Corp’s revenues by 1 percent, but things have changed. As the NT dollar appreciated at an unprecedented pace, the company saw its revenues cut by 6 percent in the final quarter of last year after converting its revenues from US dollars into NT dollars.
Taiwan Semiconductor Manufacturing Co (TSMC), the nation’s largest company by market value, expects supply chain disruptions to reduce demand for its chips for just one quarter. In contrast, the impact of the NT dollar’s appreciation is expected to be much greater.
If the NT dollar remained unchanged at last year’s NT$31.49 against the greenback, TSMC would make NT$26 billion more in net profits, or NT$1 a share, this year, TSMC chairman Morris Chang (張忠謀) told investors last week. However, in the first quarter alone, the NT dollar has appreciated 8 percent year-on-year against the US dollar, making the currency one of the fastest-rising ones in Asia versus its US counterpart.
Some technology companies, including TV chipmakers, are playing it safe by now providing financial forecasts in terms of US dollars instead of NT dollars, a move that will help circumvent the risk of missing financial targets. It is understandable why companies would give their forecasts in US dollars. There is very little any Taiwanese manufacturers can do to hedge against uncertain exchange rates because the movement of any global currency is intertwined with the trends of the global economy and capital flows.
Local companies are left pinning their hopes on the central bank. Central bank Governor Perng Fai-nan (彭淮南) knows this better than anyone. Perng has repeatedly said that the bank wants to keep the NT dollar stable. While Perng has a strong reputation for getting the job done, it is uncertain how much the bank can do amid the ever-growing flow of capital into Taiwan and other Asia nations.
Besides, the central bank has to keep inflation risk in check. The nation’s inflation rate is expected to reach 2.18 percent annually this year from the government’s previous estimate of 2 percent, which is likely pushing the central bank to boost its benchmark interest rates, thereby driving up the local currency.