Exporters Face Challenges of Exchange Rate Volatility

10:43:11 AM | 8/26/2022

The sharp appreciation of the U.S. dollar to a two-decade high on the world market is leading to exchange rate fluctuations of many currencies. Vietnamese exporters are supposed to take careful steps to minimize exchange rate impacts.

Most volatile exchange rate in two decades

Many major currencies have fallen against the greenback in recent months. The Japanese yen lost the most, about 20%, against the dollar. The euro slipped 12%. Many other currencies such as the Thai baht, British pound and Korean won also dropped by more than 10%.

In the middle of July, the central exchange rate stood at VND23,225 per USD, an increase of 113 VND versus mid-June. In the domestic market, on the morning of August 15, the base exchange rate of USD/VND was quoted at VND22,550 (buy) - VND23,400 (sell) at the Exchange of the State Bank of Vietnam (SBV). In the free market, the greenback was always anchored at a higher rate, approximately VND24,000 per dollar.

Although Asia's "emerging" currencies depreciated deeply against the USD, the Vietnamese dong (VND) lost only 2.6% against this hard currency. According to Maybank Securities Company (MSVN), the VND depreciation resulted from the Fed’s rate hikes and Vietnam was hit by the increase in crude oil prices as a net importer. Another important reason attributed to the faster growth of the dollar on the free market was stronger speculation.

However, in the basket of eight currencies used to calculate the central exchange rate, including the Japanese yen, Korean won, U.S. dollar, Thai baht, Euro, Chinese yuan, Singapore dollar, and New Taiwan dollar (China), the Vietnamese dong also appreciated against all other peers.

A representative of UOB Vietnam said that many currencies in the world will face further downward pressure in the coming time when the Fed is likely to have more rate hikes in the second half of 2022.

Two-way effects on exports

Mr. Pham Xuan Hoe, Former Deputy Director of the SBV Banking Strategy Institute, said that the VND depreciation of 2.6% was also Vietnam’s success in operating and controlling the exchange rate. However, importers and exporters will not benefit from competitive prices of goods.

Specifically, the slump of the Korean won, Japanese yen and Euro made Vietnam's exports more expensive in these markets and placed pressure on Vietnamese exports to markets other than the United States.

Dr. Le Xuan Nghia said, the gradual increase of USD/VND exchange rate and interest rate placed exports at a disadvantage when competitive pressures mounted. In addition, anchoring the VND to the U.S. dollar may make the U.S. think that Vietnam is devaluing and manipulating the currency.

Many exporters heavily rely on imports for manufacturing. Ms. Nguyen Kim Hong, Director of Hung Yen province-based Tan Kim Joint Stock Company, said, packaging, plastic boxes and glass bottles the company imports from South Korea gained 10-20% in prices, resulting in a rise in product cost. However, fulfilling previously signed contracts with importers, the company cannot raise selling prices right now.

A representative of the Ho Chi Minh City Association of Mechanical and Electrical Enterprises said that more than 90% of machinery in this field is imported. Machinery importers that pay in euros are making a profit but when they receive euros for exports, they are losing money. If they import machinery in USD, risks are higher. Currently, the euro and the Japanese Yen are depreciating against the U.S. dollar. Mechanical and electrical exporters to Europe and Japan suffer many losses.

Mr. Nguyen Van Sang, CEO of Viet Products Joint Stock Company, said, high inflation is forcing people in Europe to tighten their spending and giving rise to weaker demand. Partners are asking Vietnamese exporters to reduce selling prices. Together with the euro devaluation, the latter is facing a considerable decrease in revenue.

On the other hand, the textile and garment industry is benefiting from the rising USD/VND exchange rate. A representative of the Vietnam Textile and Apparel Association (Vitas) said that many textile and garment exporters have 100% of their revenue in USD. So, when the exchange rate looks up, they will get significant benefits. Moreover, input cost also supports Vietnamese firms as the Chinese yuan weakens.

Active hedging

As the world economy is still complicated and unpredictable, Ms. Le Hang from the Vietnam Association of Seafood Exporters and Producers (VASEP) noted that exporters must pay attention to exchange rates between VND and other currencies to choose between importing and exporting markets and opt for a favorable payment currency for businesses.

According to Dr. Le Xuan Nghia, businesses need to care about exchange rates by using hedging products to provision and stabilize liquidity and ensure smooth business operations.

“When building business plans, companies need to hedge rate volatility to avoid strong impacts on selling prices of output products,” he said.

According to experts, businesses must take notice of choosing export and import markets, choosing favorable and appropriate payment currencies, and diversifying international payment currencies rather than using only one currency. In addition, importers and exporters can use swap contracts, buy and sell forward contracts, to ensure that importing and exporting activities are planned in a scientific and long-term way.

Businesses are recommended to use insurance tools to hedge against exchange rate risks of commercial banks when paying for orders.

Huong Ly (Vietnam Business Forum)