On forward risks

The 1-rupee a day PKR appreciation continues. As rupee appreciates, systematic risk builds up. Exporters’ selling quantum in forward is building up amid a growing pile of import documents. Once the direction reverses, managing the expected outflows would be hard in the ready market.

The story is simple. Ever since the crackdown on smuggling and illegal exchange business began, the expectation of PKR to appreciate started to build. Expectations in the twin cities was to bring USD rate close to Rs250-260. Exporters started believing that number and began to sell in bulk. The forward premium collapsed to almost zero.

There is a concern about the quantum of “forwards” that exporters have booked across the system. The maturities of forward book in the start of September are likely to start – if exporters book the delivery, there is no problem. However, banking folks fear that there could be speculation in forward booking as well. The situation will get clearer in November.

SBP expects banks to do their own due diligence with exporters by not letting them book forwardmore than what they usually export at. However, the exporter can go to a few banks to book forward. For example, a big exporter, with $200 million in exports a year, should not book forward of more than $100 million in six months. Any big bank would be comfortable on booking $50 million. What if the exporter has booked $50 million each in four banks. There is no check on such practice, as banks don’t share this data. It is the responsibility of SBP to keep a close eye on aggregate forward by any exporter.

If the exporter does not have delivery at the time of maturity, he might buy in ready to square the position. That will aggravate the problem. The pressure on banks Nostro is already building, and importers may rush to clear payments when PKR direction reverses. One way to deal with this risk is by allowing forward to importers. But SBP is reluctant to allow (there is informal bar by SBP to book imports in forward). The risk is building up.

SBP should pull up its socks and not allow exporters to book in forward beyond a certain percentage of historic exports proceeds. SBP should have a registry of forwards to limit large forward bookings. The probability of PKR to depreciate in November is building. And importers would come in flocks to clear and probable speculative exporters will be buying in ready too. That is not good.

Already, loads ofimport documents are waiting for acceptance and payment. Banks are sending emails and reminders for imports to clear and pay. However, importers are delaying getting benefit from PKR appreciation. It’s a cat and mouse game.

One way to deal is to let PKR depreciate for a day or two. However, SBP may think that in this case, the importers may come in bulk and it would be hard to reverse the direction. Well, that will happen one day. Why not do it now? Here SBP may want open market folks to sell, as with every passing day, more are coming on exchange companies counter to sell. SBP perhaps wants more.

One way to deal with this for SBP is to make a condition for exporters who are giving delivery on maturity of forward. If an exporter is booking its forward, let it be. However, if the exporter is clearing forward without delivery, he should be allowed to buy dollars at the rate at which he booked the forward. If ready is higher than his forward booking rate, he should buy in ready. That would end the speculative forward booking while the genuine forward booking continues. SBP should do this sooner than later.