The EU is Vietnam’s second-largest trading partner and an export market that witnessed the euro fall below $1 for the first time in nearly 20 years on July 29.

Euro-dollar parity threatens the nation’s exports, source: freepik.com

Pham Van Viet, chairman of Viet Thang Jeans, the top 5 leading fashion companies in Indochina, said that the immediate impact on textile and garment export enterprises is a decrease in value.

All customers in Europe pay in euros and Vietnamese businesses that receive money back home must exchange it for USD. Now that the euro has fallen to the level of the US dollar, the export value of each shipment will decrease accordingly.

“Profits of businesses are low because input costs such as gasoline, input material prices, and labour costs have all increased, now the plunge in euro prices will drag profits down even more,” he told VIR.

Viet added that the depreciation of the euro shows that the European market is currently unstable, and purchasing power has fallen. “The proof is that we haven’t had many new orders recently. We have lost nearly 20 per cent of our export orders to Europe in the past few months. This shows that the market’s demand is weak,” said Viet.

Elsewhere Phan Van Co, marketing director of exporter Vrice Co., Ltd., agreed that devaluation of the euro would be detrimental. “The depreciation will affect the settlement of export contracts because some signed contracts of foreign partners are paid in euros and are not beneficial to us,” he said.

The current weakness of the euro reflects investor fears of an impending recession in the eurozone. Since the start of the war in Ukraine, the bloc has been particularly affected by the recent rise in global energy prices, which is fuelling inflation in the eurozone.

On July 12, German investor sentiment readings were heavily negative, causing the European currency to depreciate sharply against the US dollar.

Although Europe is Vietnam’s main export market, current foreign trade contracts are mainly converted into USD, so according to Vo Dinh Tri, lecturer at the University of Economics in Ho Chi Minh City, fluctuations in the currency pair have a strong impact on Vietnam.

He explained that most companies opt to utilise the US dollar as an international payment currency after signing contracts, thus such swings will not have an effect on them.

“In the first six months of the year, Vietnam’s import-export balance was almost equal, not a trade surplus, so Vietnam’s general economy is not affected much if the euro depreciates,” said Tri.

The US dollar is benefiting from the US economy’s better prospects compared with the eurozone. The US is less exposed to the negative economic consequences of the war in Ukraine, not least because it imports little energy from Russia.

In addition, the US Federal Reserve started to tighten monetary policy earlier than its European counterpart, and at a more aggressive pace.

According to Tran Trung Kien, director of electronic component manufacturer Trung Kien Co., Ltd., said EU partners have recently permitted Vietnamese businesses to choose between the euro and USD as the method of payment immediately following signing of a contract, contrary to previous practice.

Vietnam mostly exports textiles, garments, seafood, wood, handbags, and telephones to the EU. Meanwhile, Vietnam imports mostly accessories, automobile spare parts, completely built-up cars, and household appliances.

According to a report from MSB Bank Research Department, currently only about 15-20 per cent of Vietnam’s import-export enterprises sign payment contracts in euros, the rest is mainly in USD, so the damage is reduced significantly less.

The Import-Export Department under the Ministry of Industry and Trade said that in the short term, the depreciation of the euro may have a certain impact on some businesses that have contracts for payment in euros. For exporters, the same amount of euros earns less in local currency, which will affect profits.

In addition, businesses importing goods from the EU will be cheaper, so the import will be more profitable.