Proactive in dealing with exchange rate pressure

The exchange rate is facing a lot of pressure, but it is only temporary.

Calculate to increase export competition

Unlike previous years, since the early days of 2024, exchange rate developments in the world and domestic markets have fluctuated quite strongly.

As of the session on March 18, the DXY index (comparing the US dollar's price against 6 other currencies, including EUR, JPY, GBP, CAD, SEK, CHF) has increased from 101 points in early 2024 to around 103.5 points. At commercial banks, in the beginning of 2024, the exchange rate was listed around 24,200 VND/USD on the selling side, but has now increased to about 24,900 VND/USD, which is an increase of about 2.8 percent. But a notable development is that the exchange rate on the free market has increased sharply, from below 25,000 VND/USD to around 25,650 VND/USD.

According to many forecasts, the strength of the USD will continue to remain at a high level, causing the domestic exchange rate to face a lot of pressure. Experts from PHS Securities Company predict that the US Federal Reserve (FED) may not lower interest rates as soon as expected earlier this year, causing USD interest rates to stay high until mid-year. This will cause the interest rate difference between VND and USD to be deeply negative for a long time. Therefore, these experts believe that the exchange rate will still have a lot of pressure at least until the end of the first quarter of 2024.

Meanwhile, there is always a very close connection between exchange rate fluctuations and import-export activities. Vietnam is considered one of the most open economies, import-export activities are growing strongly, and turnover is growing at a high level, thus exchange rate fluctuations are a huge concern.

From a business perspective, businesses emphasize the importance of stabilizing exchange rates to help businesses maintain production activities and have foreign currency sources for import and export.

At a recent monetary policy conference, Mr. Dang Ngoc Hoa, Chairman of the Vietnam Airlines' Board of Directors (Vietnam Airlines), said that, as a large enterprise, even a 1 percent change in exchange rate will cause the business to lose 300 billion VND/year. If the exchange rate changes by 5 percent, it will increase to VND1,500 billion.

Similarly, Mr. Le Manh Hung, Chairman of the Board of Directors of PVN also stated that PVN's foreign currency loan balance is VND38,000 billion, equivalent to about $US1.55 billion, therefore, exchange rate fluctuations and risks greatly affect production and business activities.

Regarding the difficulties of businesses facing exchange rate fluctuations in import and export activities, Mr. Pham Tuan Anh, Director of PMA Technology Joint Stock Company, said that at the end of 2020, 1 Japanese Yen was equivalent to VND220, but now it is only around 165 VND/Yen. While the business transacted with Japanese partners mainly in Yen, when converting revenue to VND, the PMA director "sighed" about the sharp decline in prices and profits.

Comparing the exchange rate correlation between local currencies in the Top 5 textile exporters in the world, Mr. Le Tien Truong, Chairman of the Board of Directors of Vietnam Textile and Garment Group said that in the period 2022-2023, the four markets of China, India, Bangladesh, and Turkey use quite a strong tool of devaluing the domestic currency to stimulate exports.

In which, Turkey decreased the most by 50 percent, Bangladesh decreased by 21 percent, China decreased by 11 percent, while Vietnam decreased by about 3 percent. Therefore, Mr. Truong emphasized, this is one of the reasons why Vietnam's textiles and garments in general are about 15 percent more expensive than other countries, causing textile and garment exports to decrease by up to 10 percent and the largest decrease among the top 5 markets.

With the above situation, Associate Professor, PhD. Pham The Anh, Head of the Department of Economics, National Economics University, said that Vietnam can increase the competitiveness of domestic goods by making the VND exchange rate depreciate at an appropriate level. If the VND is kept at a rigid level, it could make Vietnamese goods more expensive than other countries in the region. Therefore, the expert believes that exchange rate policy should be flexible, not fixed but can fluctuate within a certain range to increase the competitiveness of the economy and businesses.

Operate appropriately and proactively

Although the foreign exchange market has strong fluctuations, in general the value of VND is still quite strong and remains more stable than other currencies in the region such as Thai Baht, Malaysian Ringgit, Korean Won…

In its reports, the State Bank (SBV) always affirms that it has managed exchange rates flexibly, following domestic and foreign situations, contributing to absorbing external shocks, stabilizing the foreign currency market and limit  ing large short-term fluctuations in exchange rates, stabilizing the value of currency; liquidity is smooth, legal foreign currency needs are fully met.

However, the recent problem of the banking industry is to solve the interest rate problem, to reduce lending interest rates to support businesses' recovery. But shifting monetary policy to "flexible and loose" is also a trade-off for the SBV, because it will create more pressure on the exchange rate when VND and USD interest rates are negative.

But in recent times, when the domestic foreign exchange market has had strong fluctuations, many experts have remained "calm" in saying that the State Bank has enough tools to intervene when necessary thanks to abundant foreign exchange reserves.

Vietnam's foreign exchange reserves in 2023 are forecast by the International Monetary Fund (IMF) to reach about $US100 billion, equivalent to about 17-18 weeks of imports (safe level is over 12 weeks of imports). Along with that is a large supply of foreign currency thanks to remittances, international tourism recovering strongly, trade surplus and disbursement of foreign investment (FDI) in Vietnam reaching a high level.

In addition, the State Bank also continuously has money injection and withdrawal activities on the open market operation (OMO) to regulate liquidity and help reduce pressure on exchange rates. Recently, the SBV has withdrawn nearly VND30,000 billion on OMO, which is considered to help adjust system liquidity in the short term. From there, it is expected to push up the VND interbank interest rate level, helping to reduce the interest rate difference between the USD and VND.

As for business activities, according to experts, businesses need to continuously monitor exchange rate fluctuations and update on inflation, interest rates... to be able to choose export and import markets and diversify, favorable payment currencies and gradually reduce the use of only USD.

To prevent exchange rate risks, businesses can choose banks with good trade financing capabilities and use derivative financial instruments such as forward foreign currency trading and derivative contract (SWAP), ensuring import and export activities are scientifically planned.