Exchange rate risk escalates

11-Sep-2019 Intellasia | Dien dan Doanh nghiep | 6:02 AM Print This Post

Foreign exchange losses are quite common for businesses with revenueexpenditure or debts in foreign currencies, especially importexport businesses.

An official of the Vietnam Oil and Gas Group (PVN) once shared that for PVN’s member enterprises currently having annual total foreign currency transactions of about $5-7 billion, the influence of exchange rate fluctuations is huge.

According to recent information from PVN, PetroVietnam Exploration Production Corporation (PVEP) accounts for over 80 percent of foreign currency payment. Vietnam Oil Corporation (PVOil) also has to pay $850 million per year to import petroleum from abroad. According to estimates from PVN, the exchange rate fluctuation will increase by about two percent, leading to a loss of businesses in the industry of over 1.8 trillion dong.

Indeed, the consolidated financial statements for the first six months of PVOil recorded a loss of exchange rate difference of nearly 16.4 billion dong and an exchange rate profit of 7.8 billion dong. So in the first six months of this year, PVOil saw a net loss of foreign exchange difference of 8.6 billion dong.

As for PetroVietnam Power Corporation (PVPower), the consolidated financial statements for the first six months of 2019 also recorded foreign exchange losses due to the revaluation of foreign currency items of 38.5 billion dongs. Besides, there were more than 13.1 billion dong of exchange rate differences in payment. However, during this period, PVPower also recorded an exchange rate gain of nearly 63.5 billion dong and a gain of more than 0.5 billion

For import-export businesses, exchange rate difference losses are even more visible. For example, Minh Phu Seafood Joint Stock Company, up to June 30, 2019, the total exchange rate difference loss was nearly 37.3 billion dong, of which the realised exchange rate loss was 32.7 billion dong and unrealised exchange rate losses are nearly 4.6 billion dong.

In fact, the exchange rate risk for businesses is not the same. An increase in the exchange rate or devaluation of dong may be beneficial for exporters with foreign currency earnings, but it is a big risk for importers that have foreign currency payments.

However, the fluctuation of the exchange rate is very difficult to avoid, especially when the domestic exchange rate is under double pressure from the strengthening of the US dollar and the drop of Chinese yuan. In particular, yuan plunged, penetrating the threshold of seven yuan per US dollar, dragging a lot of other currencies in the region. In such a context, the dong appreciated against other currencies, especially yuan, thereby detrimental to the export activities of Vietnamese enterprises and pushed the trade deficit from China.

Because Vietnam is in the sight of the US for currency manipulation, this year the exchange rate is likely to fluctuate within a margin of about two to three percent. “The State Bank of Vietnam (SBV) will have solutions to control the exchange rate, not let the dong devalue too deeply (over three percent) to avoid the risk of being put into the list of monetary manipulation by the US,” BVSC Securities Company said.

But as analysed above, the increase of the exchange rate by two to three percent has led many businesses to record exchange rate losses of trillions of dongs. Therefore, using derivative tools to minimise exchange rate risk is the advice of today’s experts.

Due to the fluctuation of exchange rate, import enterprises have to pay foreign currencies in the future, it is possible to use foreign currency forward contracts with the exchange rate set right from now.

TS Nguyen Tri HieuFinancial expert said that currently derivative products to prevent exchange rate risks for Vietnam’s import-export enterprises were relatively adequate. “Banks are offering businesses a number of derivative products, such as forward and swap. The use of these derivatives depends on the needs of each business, but it is important to identify the correct exchange rate trends”, PhD. Hieu stressed.


Category: Finance, Vietnam

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