Dollarisation a risk for local firms

Firms are urged not to rely on the greenback

A recent Central Institute for Economic Management (CIEM) survey found that up to 64.4 per cent of Vietnamese exporters use US dollars as the primary currency in contracts with European Union (EU) partners. Meanwhile, 27.42 per cent of exporters use the Euro at their partners’ request.
However, Sandra Callagan, European Commission to Vietnam’s first counsellor and head of the Political, Economic and Trade Section, said the EU’s official policy to the international role of the Euro is one of neither promoting nor hindering its international use. It was, therefore, up to market participants to determine which currency was used to settle transactions, she said.
Nguyen Dai Lai, deputy head of the State Bank’s Banking Development Strategy Department, said the percentage of businesses using the US dollar could encourage the ‘dollarisation’ of Vietnam, an occurrence in which US dollars become the sole currency in foreign trade transactions.
“The US dollar has become the prime foreign currency used by Vietnamese enterprises. The State Bank is considering increasing the use of other strong currencies such as the Euro to reduce reliance on the dollar,” said Lai.
At present, Vietnam’s rate of dollar deposits in total liquidity (FCD/M2) stands at between 20-30 per cent. If that rate exceeds 30 per cent, it is considered to represent a “serious level” of dollarisation under International Monetary Fund guidelines.
According to the State Bank, in bilateral trade with non-EU markets, the US dollar has practically become the sole currency used by Vietnamese companies.
Vo Tri Thanh, head of CIEM’s International Integration Department, pointed to the Euro’s weak role in EU-Vietnam trade which was a result of poor awareness among local enterprises concerning the Euro’s rising international influence.
Recently, the US dollar has weakened against the Euro and a number of countries to look at shifting from US dollar to Euro reserves.
Stephan Lauper, the Swiss embassy’s head of economic and trade affairs, said the majority of Vietnamese sellers demanding payment in US dollars may be processing companies which must pay their input providers in dollars.
“When using dollars, Vietnamese firms will face exchange rate risks on the European market, the second most important export market for these companies,” said Lauper.
At present, the strength of the Euro against the US dollar has exporters buying input materials with dollars and selling the products in Euro.
“With more flexible use of foreign currencies, local exporters can also benefit from exchange rate fluctuations,” said Thanh.
Callagan said the currency share for the Euro at almost 28 per cent does not stand out as extremely low. In the Netherlands, 76 per cent of imports from China and oil-producing countries are settled in US dollars while the rates in Finland and Greece stand at 63 and 80 per cent.