Exchange rate to be stable in 2019
The Vietnamese Dong would remain stable against the US dollar in the near future, supported by the country's robust foreign direct investment (FDI), a healthy current account surplus, and by the central bank's active intervention, experts forecast.
The dong will average 23,440 VND per dollar over 2019, which represents a 1.8 percent depreciation from the average of 2018. (Photo: VNA)
According to analysts from the Fitch Group’s Fitch Solutions Macro Research, the Dong will weaken slightly against the dollar to 23,700 VND by the end of the year, and average 23,440 VND per dollar over 2019, which represents a 1.8 percent depreciation from the average of 2018.
Analysts attributed the modest weakness expectation to three reasons.
First, they said, Vietnam’s FDI will likely remain robust over 2019, adding Fitch continued to project the Vietnamese economy to be a regional outperformer with a growth of 6.5 percent in 2019 compared to an aggregate of 6.1 percent for Asia.
“We believe that FDI inflows into the manufacturing sector will be further supported by improved diplomatic relationships combined with the Government’s open-door trade policy, alongside favourable demographics such as Vietnam’s educated and low-cost labour force,” the report noted.
The Vietnamese processing and manufacturing sector remained the largest sector for FDI last year, with total registered capital of 16.6 billion USD, up 4.4 percent from 15.9 billion USD from the previous year.
Vietnam’s strong economic growth outlook will also continue to attract FDI in the real estate sector as foreign developers look to capitalise on the rising affluence of the population and the desire for physical expansion among businesses. Real estate businesses attracted total FDI of 6.6 billion USD in 2018, more than doubling the 3.1 billion USD in 2017.
Second, Fitch forecast Vietnam’s current account surplus to print around 2.1 percent of GDP in 2019, which represents an expectation for the surplus to narrow slightly from 2.2 percent in 2018.
Vietnam is one of the two countries running a current account surplus among the Mekong region countries, with the other being Thailand which ran a 7.5 percent surplus in 2018. The other countries, namely Laos, Cambodia, and Myanmar are running current account deficits in excess of 2 percent.
“We continue to expect the current account surplus to be supported by the export-oriented manufacturing sector, helped by a possible rebound in global trade in the second half of 2019,” the report said.
Vietnam’s goods trade surplus came in at $6.8 billion in 2018, on the back of a 13.8 percent expansion in exports and a 12.1 percent increase in imports.
Third, at 56.3 billion USD, representing 2.8 months of import cover, the State Bank of Vietnam (SBV) has ample foreign exchange reserves to continue its course of active intervention to ensure currency stability, which suggests that the Dong is likely to see minimal volatility over the coming months.
Over the long term, Fitch forecast the Dong to weaken gradually against the dollar to due to higher inflation, but a relatively strong growth outlook is likely to put a floor under the depreciation of the currency.
“We forecast inflation in Vietnam to average around 4.1 percent over the next 24 months, as compared with 2.3 percent in the US.”
According to Fitch, the SBV, utilising credit growth targets as its main monetary policy tool, is targeting credit growth of 14 percent in 2019, the same rate achieved in 2018. At 14 percent, credit growth still outpaces nominal GDP growth of about 10 percent and this is likely to fuel inflationary pressures over the coming quarters.
“Given the Vietnamese economy’s reliance on export-led growth, upside price pressures is likely to warrant some Dong depreciation against the US dollar to preserve Vietnam’s export competitiveness, and we believe that this is likely to see the Dong average 23,850 VND per dollar in 2020,” Fitch forecast, adding the Vietnamese Dong’s overvaluation, as suggested by its real effective exchange rate trading by 9.3 percent above its 10-year average, open room for further currency weakness over the longer term.
However, Fitch also noted: “Risks to the Dong forecast are weighted to the downside. A dovish shift among major global central banks could see the SBV intervene to weaken the Dong by more than we expect so as to maintain Vietnam’s export competitiveness. Slowing global growth, trade uncertainty, and disruptions to global value chains could also adversely impact Vietnam’s export sector, pressuring the SBV to weaken the Dong further.”
