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Hedging risks a concern in cross-border trade — PCCI

A team from the International Monetary Fund met with officials of the Philippine Chamber of Commerce and Industry, the country’s largest business organization, on how businesses would prefer to conduct more of their cross-border transactions for trade, investments, lending or borrowing through the formal exchange market rather than through the informal market. PCCI officials led by their president George Barcelon told Annamaria Kokenyme, lead financial sector expert of the IMF team, that the formal market competes with the convenience and costs of doing business offered by the informal market.

MANILA, Philippines — Local exporters are more concerned about the risks in hedging rather than the documentation requirements and foreign exchange regulations in cross-border trade, the country’s biggest business group said.

Officials of the Philippine Chamber of Commerce and Industry (PCCI)  recently met with representatives of the International Monetary Fund (IMF) to discuss how businesses would prefer to conduct more of their cross-border transactions for trade, investments, lending or borrowing through formal channels  rather than through the informal or black market.

The IMF is working with the Bangko Sentral ng Pilipinas (BSP) in developing the  forex market.  

During the meeting, PCCI honorary chairman Eduardo Lacson told the IMF team that Philippine businesses do not have difficulty in borrowing from other countries, but the risks they encounter with hedging is a concern.

He said some Filipino exporters use forward option in hedging compared to premium which is expensive. He added banks in the Philippines accept hedging for a few months or up to one year.

PCCI officials also emphasized that the thriving informal forex market is mainly driven by the ease of doing business it offers due to fewer documentation requirements.

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“More than the illegal trade that happens, saving time in doing foreign exchange makes the informal market a more viable option for businessmen,” PCCI chairman emeritus Alfredo Yao said.

Yao also pointed out that the Philippine banking system is losing the oil businesses that prefer to establish and operate outside the country due to documentary stamps which are becoming more expensive.

“Many years ago, businesses sign loan agreements outside the country in order to avoid doc stamps wherein BIR intervened to have those agreements done within the Philippines,” Yao said.

As IMF lead financial sector expert Annamaria Kokenyme inquired if the $1 million per day non-documentary exchange level is still low for an average company, both Yao and Lacson agreed that is enough, considering 99.6 percent of Philippine companies are micro, small and medium enterprises (MSMEs), with only 0.4 percent doing large transactions.

The PCCI officials also pointed out that too much convenience will contradict the Anti-Money Laundering Act (AMLA), which only allows P500,000 or around $10,000 to be freely transacted.

Last September, the BSP increased the allowed amount for corporations to buy up to $1 million.

Moreover, Lacson noted the fluctuations in foreign exchange in country, as companies source their foreign currencies not just from the bank but also from the informal market.

Yao cited figures from the Banking Association of Philippine (BAP), which show banks get only 40 percent of letter of credit (LC) opening.

He added most lending in the country are now sourced locally, mainly because of the ample liquidity, low exchange risk and low interest rates.

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