How to Manage FX Risk for Your Business in Vietnam

Vietnam's economy has seen impressive growth in recent years, with a GDP of over $340 billion in 2023. As a business owner, Vietnam presents exciting opportunities for expansion and growth. However, navigating the complexities of foreign exchange (FX) fluctuations can be a hurdle. In fact, a survey by the State Bank of Vietnam found that over 60% of businesses in Vietnam face significant FX risk exposure.

This guide aims to provide actionable insights on how your business can manage FX risk effectively and implement prudent financial practices as you enter the Vietnamese market.  

Understanding FX Risk in Vietnam

Let’s explore FX risk in action – the potential for unforeseen and uncontrollable currency movements that disrupt your financial calculations and revenue. In Vietnam, the Vietnamese Dong (VND) has experienced fluctuations against major currencies like the US Dollar (USD) and Euro (EUR) in recent years.

For example, if you import machinery from Germany and pay in EUR, a sudden weakening of the VND against the EUR would significantly increase your costs. Conversely, a strengthening VND could make your products less competitive in international markets.

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Conditions & Regulations in Vietnam Contributing to FX Risk

Vietnam's regulatory environment and the characteristics of the Vietnamese Dong contribute significantly to FX risk instability. Understanding these factors is crucial for businesses operating in the region:

Foreign Exchange Controls

The State Bank of Vietnam regulates foreign exchange transactions, which can lead to sudden changes in currency availability and exchange rates. For instance, there are restrictions on the amount of VND that can be converted into foreign currencies, which can create liquidity issues for businesses needing to make international payments. Companies may find themselves unable to access foreign currency when needed, impacting their ability to settle obligations or invest abroad.velopment and digitalisation of educational material and learning, the Vietnamese government has cleared a path for the growth and development of edtech solutions.

Limited Convertibility of the VND

The Vietnamese Dong is not a freely convertible currency, meaning it cannot be taken out of Vietnam. This limitation poses several risks for foreign-owned projects that generate revenue in VND:

Devaluation Risk: Businesses are exposed to the risk of devaluation of the VND until revenues can be converted into foreign currency. For example, if a company earns VND from local sales but cannot convert it into USD immediately, any depreciation of the VND during the waiting period can diminish the value of their earnings.

Availability of Foreign Currency: There is a risk that foreign currency may not be available at the time of conversion. This situation can occur during periods of economic instability or when the government imposes restrictions on currency exchanges, leading to unpredictable cash flow.

Regulatory Restrictions: Currency cannot be converted or remitted except for permitted purposes, such as repatriation of investment proceeds or dividends, and at specific times (e.g., once a year for dividends). These regulations can complicate financial planning and cash flow management for businesses.

Market Intervention

The government may intervene in the FX market to stabilize the VND, leading to unpredictable currency movements. For example, if the government perceives that the VND is depreciating too quickly, it might sell foreign reserves to support the currency. Such interventions can create volatility and uncertainty, making it difficult for businesses to forecast exchange rates accurately.

Economic Factors

Inflation rates, trade balances, and geopolitical events can also influence the stability of the VND, adding another layer of risk for businesses operating in Vietnam. For instance, rising inflation can erode purchasing power and lead to a depreciation of the VND, while trade imbalances can put additional pressure on the currency. Additionally, geopolitical tensions in the region can create uncertainty that affects investor confidence and currency stability.

These factors highlight the importance of recognising FX risk exposure and the need for a trusted payments specialist to navigate these complexities. Without proper management, businesses risk losing margins due to unfavourable currency fluctuations.

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Measures to Mitigate FX Risk

While we cannot control or predict FX market movements, we can take measures to manage and reduce exposure to FX risk, particularly when doing business in Vietnam with the Vietnamese Dong (VND). Here are several effective strategies to consider:

Stay Informed

Staying informed is one of the easiest ways to begin managing your FX risk. Keeping an eye on market trends and forecasts, especially for the VND against other currencies, is crucial. Resources such as financial news outlets, central bank websites, and FX analysis platforms like Bloomberg or Reuters can provide valuable insights.  

Additionally, subscribing to the Wallex weekly newsletter can keep you updated on bank-beating rates and the latest developments in key markets, including the US and Europe, which may influence the VND.

Track Historical Data

Tracking historical data is another important step in mitigating FX risk. Most financial websites and platforms offer charts that allow you to analyze past currency movements. Understanding how certain developments or decisions made by governments or central banks affect currency markets can help you identify patterns that may indicate potential future fluctuations. For example, if you observe that the VND has historically depreciated during certain economic events, you can prepare accordingly. However, it is essential to remember that past performance does not guarantee future results, so it is wise not to rely solely on historical data.

Hedging for FX Stability

Hedging for FX stability through various financial instruments can provide a powerful toolset to manage these risks. These instruments allow companies to lock in exchange rates for future transactions, providing predictability and stability in an ever-changing market.

Forward Contracts allow you to lock in a future exchange rate today for a specific transaction date, protecting your profits from adverse currency movements. For example, if you anticipate a payment of VND 2 billion for imported goods in three months, you could enter a forward contract today at an exchange rate of VND/USD 23,000, ensuring that you maintain this rate regardless of market fluctuations.

Currency Options also offer flexibility while providing some protection. A currency option gives you the right (but not the obligation) to buy or sell a currency at a specific price (strike price) by a certain date (expiry date). For instance, if you expect the VND to weaken against the USD in the next six months, you could purchase a USD call option with a strike price of VND 23,000. This would allow you to buy USD at this rate, even if the market rate rises beyond this point, thus protecting your costs for imports.

Additionally, taking a loan in a foreign currency you expect to appreciate can serve as a hedging strategy, particularly if you have future revenue streams in that currency. For example, if you anticipate receiving payments in USD for exports, taking a loan in USD could align your debt obligations with your expected revenue. However, this approach requires careful consideration of interest rate differentials and potential currency movements.

Consolidate Your Cross-Border Transactions

Consolidating your cross-border transactions can further streamline your FX management. Keeping track of the rates and fees charged by different providers can become confusing and inefficient, potentially leading to higher costs for cross-border payments and conversions. By finding a single provider who can handle your FX and payment needs, you can eliminate many operational inefficiencies and reduce administrative costs. Look for providers with a strong track record in managing international payments and multiple licenses across different markets, as they can offer better rates and more reliable service.

By implementing these measures, you can effectively mitigate FX risk and navigate the complexities of doing business in Vietnam, ensuring that your operations remain profitable and sustainable.  

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Wallex: Your Cross-Border Payments Specialist

As you consider the exciting opportunities in Vietnam and navigate the associated FX risks, look no further than Wallex – Asia’s leading FX and payments specialist. With our expertise, we have helped over 35,000 customers enjoy better speed, support, and savings on their cross-border transactions, all while offering competitive, near mid-market FX rates and zero hidden fees.

With Wallex, the more you trade FX, the more you save. Your dedicated Account Manager will work closely with you to customise FX rates that meet the unique needs of your business, ensuring you never spend more than necessary. Our customer support has consistently received 5-star ratings, reflecting our commitment to your success.

Experience seamless transactions as you make same-day payments to suppliers, manage payroll for employees, and collect payments from customers effortlessly. In addition to converting your MYR to popular currencies like SGD, USD, or JPY, you can also convert other top Asian and global currencies such as EUR, GBP, IDR, THB, PHP, and more.

Speak to us today and bring your business into new markets with confidence!

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