Fluctuations in exchange rate: Enterprises need to be proactive

The USD prices are causing highly variable on the global market. Source: Internet

Major impact

On November 21th 2016, the central exchange rate between VND and USD was released at 22.124 VND/USD, and continues to increase 12 VND compared to last week by the State Bank. Thus, for 9 consecutive sessions, the central exchange rate was adjusted to rise with a total of 99 VND and it is a highest rate until now. Therefore, at the commercial banks, the rate of USD has risen to 200-300 VND in both 2-way purchases and sales. This move is explained by the economist that is due to the impact factor from last season when imports increased significantly. Moreover, the fluctuation of the economy and world politics as a high probability that the FED will raise rates, the results of the US presidential election, also makes dollar price hikes, accompanied by a number of other currencies like the Yen (Japanese), Euro also increase, while the price of the Yuan fell sharply. However, "the way" of exchange rate is unpredictable.

For export enterprises, when the exchange rate tends to rise in the long term, it will be good news because trading activity with customers is calculated in US dollars, but the payment of tax, labor, sale raw materials in domestic market are calculated in VND. Therefore, when conversion, the export companies will get many benefits from the gap. On the other hand, for import enterprises, the rate increases will not only impact on the imported price but also the product price for consumers. Mr Lê Anh Văn, Sale Director of AUSTRONG Vietnam Co., Ltd, (imports and sells building materials) said: “Depending on the contract and time of entering the contract, the rate will affect enterprises.

If the contract is signed before rate increase, the agreed price will be unchanged. If signed contracts are new or contract has a provision which costs fluctuate to the rate at the time of delivery rate, enterprises have to accept the increased price. That is the objective reason so enterprises should not fear because it could affect their credibility. However, if the rates rise too high, the sales volume will decrease, affecting the imports of enterprises.

Besides that, Mr. Nguyễn Văn Sưa, Vice President of Vietnam Steel Association said, enterprises are being imported large amounts of steel and raw materials from abroad, so if the exchange rate increases, the domestic sale price will increase. While imported steel from China is cheaper and sells in the domestic market, it causes difficulty in competition for domestic enterprises.

Furthermore, logistics enterprises are have the same situation like other imports enterprises when the exchange rate increases day by day. According to Ngô Minh Hải, Deputy Director of Thang Loi Logistics Service Co. Ltd, all kinds of expenses related to freight, boats are calculated in USD. Thus, logistics enterprises and exports enterprised will have to bear one more expense due to different levels of exchange rate. However, transportation costs only take 20-30% of transaction cost and logistics service for customers so the enterprise will balance and the impact of exchange rate will not be large.

Plan for taking precautions

It can be seen that, at the end of the year, the exchange rate will take "a chance" for fluctuations that cause significant impacts to exports enterprise and other enterprises having transactions by USD. Therefore, enterprises must find ways to tackle the problem as soon as possible. Mr. Ngô Minh Hải shared that: “In the fiscal plan, enterprises have to preserve contingency cost in order to tackle the price variations which relate to enterprises’ operations such as: exchange rate, gasoline, labors. This will help enterprises to be more proactive and always have contingency cost to balance the losses caused by exchange rate fluctuations.

Along with that, many companies have used protective instruments to tackle exchange rate fluctuations from credit organization. However, according to the representative of some commercial banks, small and medium enterprises are mainly concerned with the spot rate. These enterprises indicated that they have small-scale operation and trading activities are not enough to apply and balance the expensea for the above services. Therefore, enterprises still mainly operate under market movement, they will have an appropriate action plan to tackle depending on the fluctuation of the exchange rate. Mr. Lê Anh Văn said, exchange rate fluctuations at the year-end have become a market rules thus enterprises should take precautions such as commodity reserves, signed contracts early, finding cheap sourcing, etc.

However, according to experts, these ways also involve lots of risks for enterprises’ operations. The reason is that the exchange rate is managed by the State Bank but it follows the world market so it could have unpredictable variation and cause pressure on enterprises’ competition. Therefore, the initiative and professional financial instruments will be seen as a “cure” for enterprises in current context.