What Vietnamese companies should expect

The euro dipped below parity with the US dollar in July 2022 – a 20-year low. The continued depreciation of the Euro has many far-reaching economic impacts, not only within the Eurozone but also in partner countries such as Vietnam. Vietnam Briefing analyzes the influence of the devaluation of the Euro on businesses in Vietnam.

In 2021, one Euro was generally equivalent to $1.20 before dropping steadily to $1.13 at the start of 2022. The currency then sent an economic shock wave in July 2022 by falling below $1 before rising back to $1.02 on July 20. The European currency has thus fallen by 19% since its high in January 2021 and by 37% since its all-time high in April 2008.

At almost the same value as the US dollar, the depreciation of the euro is now a burden on European economies, which face runaway inflation and a vulnerable post-pandemic business environment.

Two main factors explain the depreciation of the euro. Chief among them is the hike in interest rates by the US Federal Reserve (Fed) which has boosted the appreciation of the US dollar. To curb inflation, the Fed raised its benchmark interest rates to 0.75 points, citing the risk of recession. Meanwhile, the European Central Bank (ECB) is caught in a dilemma: as it identifies the need to raise interest rates to dampen soaring inflation, the EU economy is still vulnerable after the pandemic and would suffer from high interest rates.

Another reason is soaring inflation due to the shortage of energy supply caused by the Russian-Ukrainian crisis. The EU is heavily dependent on energy supplies from Russia and as a result energy supply shortages have driven up prices for Europeans who are already struggling to recover from the pandemic.

The depreciation of the euro not only has consequences for the EU, but also implications for other economies, such as Vietnam.

What does the depreciation of the euro mean for imports from Vietnam?

The devaluation of the EU currency has mixed results for both European exporters and Vietnamese importers. The depreciation of the euro increases the purchasing power of Vietnamese importers while making the products of EU exporters more competitive on the international market.

Indeed, importers in Vietnam can take advantage of the depreciation of the euro to buy more goods from European partners since they are now cheaper. In particular, Vietnamese companies in the pharmaceutical, fashion, IT, wheat and electricity sectors – the main industries that Vietnam imports from the EU should see this period as an opportunity to buy more EU goods with the same amount of investment. This can contribute to profits as well, and they can also increase their inventory of materials and goods that would otherwise cost more.

Note that the aforementioned case applies to contracts with payment in euros. Meanwhile, contracts with European partners in US dollars see little to no impact.

What does the depreciation of the euro mean for Vietnam’s exports?

The Vietnam-EU export sector may have the greatest influence, whether the currency of payment is USD or Euro.

First, as the euro depreciates, the purchasing power of Europeans deteriorates. Their demand for non-essential goods is weakened, which means lower demand for goods imported from Vietnam as well as other countries.

The impact is already being felt in industries such as wood/wooden furniture exports and seafood exports in Vietnam, as companies receive fewer orders from EU partners. The value of exports to the EU in these industries in the last two quarters of 2022 is also expected to drop significantly from the first two quarters when Vietnam recorded a trade surplus with the EU.

Second, as the majority of contracts are signed in US dollars, more and more EU importers are now hesitant to buy from their Vietnamese partners, as conversion rates are higher, which increases costs. It also means that products imported from Vietnam are subject to higher prices when converted into euros against the US dollar, which discourages European consumers from buying imported products.

Third, Vietnamese exporters risk incurring losses as the euro depreciates. Companies engaged in contracts with Euro payments could see their profits plummet as the same Euro payment amount is now exchanged for a lesser value in Vietnamese Dong, undermining exporters’ profits.

Does the depreciation of the euro impact foreign companies?

For companies headquartered in the EU but with operations in Vietnam, they have a chance to increase their profits because the value in Vietnamese Dong can be converted into more Euros.

However, companies headquartered in Vietnam but operating in Europe are at risk of losing value, as the profits they make in the EU will be exchanged for less value in the Vietnamese currency.

What to expect if the euro continues to depreciate?

The future of the European currency is uncertain as the ECB has yet to make any clear announcements on its upcoming decisions. However, experts believe that since Russia’s energy supply disruption is likely to continue or even worsen, the continued depreciation of the euro is inevitable. Some warn that the value of one euro could eventually drop to US$0.90.

The ECB is expected to raise its benchmark interest rate by 0.25, but this measure is considered to be of modest effectiveness since the Fed has even declared that it will raise the rate for the fourth time this year.

Vietnamese companies affected by the devaluation of the euro should prepare for further depreciation and incorporate the loss into their budgets. While the EU is an important market, exporters in Vietnam should seek to cover and diversify their markets outside the EU in the short to medium term to avoid profit losses as demand for goods imported into the country increases. EU becomes unstable.

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Vietnam Briefing is produced by Dezan Shira & Associates. The company assists foreign investors throughout Asia from offices around the world, including Hanoi, Ho Chi Minh City and Da Nang. Readers can write to [email protected] for more support on doing business in Vietnam.

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