The Euro’s Depreciation: What Should Businesses in Vietnam Expect
The euro plunged in value below parity with the US dollar in July 2022 – a 20-year low. The ongoing depreciation of the euro has many far-reaching economic impacts, not only within the Eurozone but also in partner countries like Vietnam. Vietnam Briefing analyses the influence of the devaluation of the euro on businesses in Vietnam.
In 2021, a euro typically equaled US$1.20 before steadily spiraling down to US$1.13 at the beginning of 2022. The currency then sent a wave of economic shock in July 2022 as it fell below US$1 before increasing to US$1.02 on July 20. The European currency has thus fallen by 19 percent since its high in January 2021, and by 37 percent since an all-time high in April 2008.
At almost the same value as the US dollar, the euro’s depreciation is now a burden for European economies as they face soaring inflation and a vulnerable business environment post-pandemic.
There are two main drivers behind the depreciation of the euro. Chief among these is the interest rate hike by the US Federal Reserve (Fed) which has driven up the appreciation of the US dollar. To curb inflation, the Fed raised its benchmark interest rates by up to 0.75 points, citing a recession risk. Meanwhile, the European Central Bank (ECB) is caught up in a dilemma: while it identifies a need to raise the interest rate to cushion 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 supplies caused by the Russia-Ukraine crisis. The EU is heavily dependent on energy supplies from Russia and therefore, energy supply shortages have pushed up prices for Europeans already struggling to recover from the pandemic.
The depreciation of the euro not only has consequences for the EU but also has implications for other economies, such as Vietnam.
What does the euro depreciation mean for Vietnam’s imports?
The EU currency devaluation comes with mixed results for both European exporters and Vietnamese importers. The euro’s depreciation increases the purchasing power of Vietnamese importers while making the products of EU exporters more competitive in the international market.
Indeed, importers in Vietnam can take advantage of the euro depreciation to buy more goods from European partners since they are now cheaper. Especially, Vietnamese businesses in the pharmaceutical, fashion, computers, wheat, and electrical sectors – the main industries that Vietnam imports from the EU should see this period as an opportunity to purchase more goods from the EU with the same amount of investment. This can thus contribute to profits, and they can also scale up their inventory of materials and goods that otherwise cost more.
A point to note is that the aforementioned case is applied for contracts with payment in euros. Meanwhile, contracts with European partners in US dollars see little to no impact.
What does the euro depreciation mean for Vietnam’s exports?
The Vietnam-EU export sector may bear the most considerable influence whether the payment currency is in USD or euro.
First, as the euro currency depreciates, Europeans’ purchasing power deteriorates. Their demand for non-essential goods is weakened, which means lower demand for imported goods from Vietnam as well as other countries.
The impact can already be felt in industries such as wood/wooden furniture exports and seafood exports in Vietnam as businesses are receiving fewer orders from EU partners. The export value to the EU in these industries in the last two quarters of 2022 is also projected to drop significantly compared to the first two quarters when Vietnam hit a trade surplus with the EU.
Second, as the majority of contracts are signed in US dollar payments, more importers in the EU are now reluctant to buy from their Vietnam partners as conversion rates are higher adding to increased costs. This also means imported products from Vietnam are subject to higher prices when converted into euro from US dollar, thus discouraging European consumers from buying imported goods.
Third, exporters in Vietnam are likely to face losses as the euro depreciates. Businesses engaged in contracts with payments in euros may see their profits fall as the same amount of payment in euros is now exchanged for less value in Vietnam Dong, which undermines the profits of exporters.
Does euro depreciation impact foreign businesses?
For businesses headquartered in the EU but have operations in Vietnam, they stand a chance of increasing their profit as the value in Vietnam Dong can be converted into more euros.
For businesses headquartered in Vietnam but have operations in Europe, however, are at risk of losing value as the profits they make in the EU will be exchanged for lesser value in the Vietnamese currency.
What to expect if the euro continues to depreciate?
The future of the European currency holds uncertainties as the ECB has yet to make any clear announcements about its upcoming decisions. However, experts hold that as energy supply disruption by Russia is likely to continue if not get worse, the continuing depreciation of the euro is inevitable. Some warn that the value of one euro may eventually fall to as low as US$0.90.
The ECB is expected to raise its benchmark interest rate by 0.25, yet this move is considered to be of modest efficiency as the Fed has even declared to bring up the rate for the fourth time this year.
Businesses in Vietnam impacted by the devaluation of the euro should be prepared for further depreciation and factor the loss in their budgets. While the EU is a significant market, exporters in Vietnam should look to hedge and diversify their markets outside the EU in the short to medium term to avoid profit losses as demand for imported goods in the EU becomes unstable.
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