KEY POINTS:
The New Zealand dollar has fallen sharply this year and is now trading at about 56c against the greenback. It is tipped to fall even further, so you might expect the export sector would be celebrating.
For the past few years and up until February when the currency hit a 23-year peak above US80c, cries of exporter pain were a fixture in business pages.
So the flipside surely is that at current levels the sector should be in clover as the same volume of sales generate bigger revenues in local currency terms and demand is boosted by lower prices in offshore markets.
But exporters have been noticeably quiet about it. There are a number of reasons for this, not least of all the fact that the credit crisis and its fallout are hitting global growth and demand is softening.
Exacerbating the problem, many exporters are still locked in currency hedging contracts they took months ago on expectations the kiwi would still be trading at high levels right now. PricewaterhouseCoopers partner Paul Skillender says his firm is aware of a large number of small and medium-sized export businesses who are suffering as a result of this combination of factors.
The Auckland-based Australian has a rugby analogy to explain the situation to the local audience.
"You might go to watch an All Blacks test but you put a bit of money on the opposition to win. You'll feel bad if the All Blacks lose but you get some money to compensate for it. That's a little bit like the hedging that a lot of SME exporters have put on.
"The problem is in this case the test has actually been called off and you don't get your money, you're losing on both sides of the deal.
Skillender says he would be surprised if most large exporters didn't use currency hedging contracts to some extent.
"The question for most will be how far into the future have they locked themselves in?
"If it's only for the quarter ahead then this problem will pass relatively quickly, but most organisations hedge out at least a year, in many cases three or four years.
He says the sectors most affected will be those most exposed to falling demand and those that are price takers with little ability to adjust pricing to absorb some of the effect.
Skillender says affected businesses need to face up to the problem quickly.
"The starting point is to come up with realistic sales forecasts for the next few months. The worst thing you can do is sit and hope that the exchange rate moves and your contracts are back in the money."
A further headache is that as a company's hedging contracts move even further out of the money as the currency falls, many are being asked by the counterparties, usually their bank, to tip in cash to cover what has become a significant credit obligation.
"You're sitting on a very large loss on some of these contracts and you've got the potential to be faced with a margin call to reduce the credit risk.
"There are certainly clients we're working with that have had margin calls and are working through the process of negotiating the size of them."
Ken Stevens, chairman of Export New Zealand and founder of export-focused baggage handling company Glidepath, said he was hearing from exporters that have been hurting as a result of locking in hedging at levels that are now looking very unfavourable.
Glidepath is a case in point, he says. "When it was US80c, hedging at US70c to US73c looked pretty good whereas it looks stupid now. But how would you know? It's such a crapshoot.
"A lot of people took the view that it may not come down right through 2009. We didn't know that we were heading for this capital markets collapse and a lot of people, as we did, thought that it would be in the high 70s."
Glidepath hasn't been hit with margin calls to date but Stevens says some smaller firms without sufficient credit history are being pressed by banks. In at least some cases those banks would have helped form the exporter's view on where the currency was moving.
Back in August - before the most intense period of the credit crisis - the major banks were forecasting the kiwi to be trading at somewhere between US65c and US70c by the end of the year. Now they are forecasting it to close for the year in the low 50s and with the current level of volatility a move below US50c is not being ruled out.
The only thing you can guarantee about forecasts, according to Earl White of Bancorp Treasury Services, is that they are going to be wrong and for that reason they shouldn't be used when managing currency risk.
"The people that are in trouble now have probably hedged too much," White says. "Because of the slowing global economy they may not be getting the level of receipts they were expecting, so a six-month hedging profile might suddenly be a nine-month hedging profile."
White says businesses will simply have to work their way through their hedging book before they can fully take advantage of current rates.
