Dollar strength: risks to companies with FX-debt and -revenues

Another bad day in the markets. The main index was down 2.9%. The US markets are down too, and, no surprise, unemployment claims rose.

A big move has been in the currency markets. The USD is strengthening around the world, as people flee to safety. And the dollar is the only safe asset, at least according to most investors. Even gold has fallen from its higher levels.

But the in move in currency has significant repercussions (that we have talked about before). Looking at the six charts of major currencies and VND versus the dollar, the VND really stands out! No movement.

Source: Yahoo finance, charts by Vietecon.com

Of course, we all know that. The government allows little movement in the currency over time. It is able to do this by selling dollars and buying VND. But you have to have dollars to sell, which is why the country has such large reserves.

Source: Vietnamese customs, chart by Vietecon.com

In fact, Vietnam ended 2019 with a USD reserve of $80 billion, of which $20 billion was bought in the fourth quarter. So it should be able to maintain currency stability, at least versus the dollar, for some time. That is helped by very small trade surpluses in the first two and a half months of 2020.

It will be interesting to see how the trade balance changes over time. Short term, probably both imports and exports will fall, and the reserves will be sufficient to promote stability.

Longer-term, there is probably going to be a continued push to move manufacturing out of China, just to help diversify away from one country. That should be helpful to Vietnam. Against that, I imagine that some developed countries will try to provide incentives for companies to re-domesticate their supply chains. We are seeing problems with drugs, face masks and other essentials in the US that are mostly imported from China.

Source: World Bank, chart by Vietecon.com

But back to the dollar strength, there is limited risk that Vietnam will run down its reserves. The bigger issue is that companies and banks in Vietnam that have depended on dollar funding, will be at risk.

I can only find external debt figures through 2018, but I can’t believe that they didn’t go up in 2019. So these charts on the right are probably a bit scarier now than they show.

While the country was growing, the higher debt burden looked manageable. But now that the economy is at a standstill, interest and principle payments will be much more difficult to manage. I assume the banks (which have mostly VND-deposit funding) will be fine, and the government is very likely to step in. Companies will be in greater risk.

Another risk is that exports will fall given VND strength against most currencies. A year ago, a Euro bought 26,300 VND. Now it buys 25,000 for a 5% decline. So now everything from Vietnam is more expensive. Total exports to Euro countries were $4bn in the first two months of 2020, or more than 10% of total exports. China was almost $6bn, and the VND is 6% stronger than a year ago.

Looking back at my post on Monday, I need to look at both domestic and non VND-denominated debt. If the debt is denominated in foreign currencies, risks are higher. And then I should look at foreign currency revenues as well, because they are likely at risk, just because of the stronger VND.

Maybe that’s what I will try to look into over the next few days, at least for the companies with the highest debt balances.