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) Hanoi (VNS/VNA) - The Vietnamese Dong would remain stable against theUS dollar in the near future, supported by the country’s robust foreign directinvestment (FDI), a healthy current account surplus, and by the central bank’sactive intervention, experts forecast.
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 ofthe year, and average 23,440 VND per dollar over 2019, which represents a 1.8 percentdepreciation 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, addingFitch continued to project the Vietnamese economy to be a regional outperformerwith a growth of 6.5 percent in 2019 compared to an aggregate of 6.1 percentfor Asia.
“We believe that FDI inflows into the manufacturing sector will be furthersupported by improved diplomatic relationships combined with the Government’sopen-door trade policy, alongside favourable demographics such as Vietnam’seducated and low-cost labour force,” the report noted.
The Vietnamese processing and manufacturing sector remained the largest sectorfor FDI last year, with total registered capital of 16.6 billion USD, up 4.4 percentfrom 15.9 billion USD from the previous year.
Vietnam’s strong economic growth outlook will also continue to attract FDI inthe real estate sector as foreign developers look to capitalise on the rising affluence of the population and the desire for physical expansion among businesses. Realestate businesses attracted total FDI of 6.6 billion USD in 2018, more thandoubling the 3.1 billion USD in 2017.
Second, Fitch forecast Vietnam’s current account surplus to print around 2.1 percentof GDP in 2019, which represents an expectation for the surplus to narrow slightlyfrom 2.2 percent in 2018.
Vietnam is one of the two countries running a current account surplus among theMekong region countries, with the other being Thailand which ran a 7.5 percentsurplus in 2018. The other countries, namely Laos, Cambodia, and Myanmar arerunning current account deficits in excess of 2 percent.
“We continue to expect the current account surplus to be supported by theexport-oriented manufacturing sector, helped by a possible rebound in globaltrade 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 a13.8 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 StateBank of Vietnam (SBV) has ample foreign exchange reserves to continue itscourse of active intervention to ensure currency stability, which suggests thatthe Dong is likely to see minimal volatility over the coming months.
Over the long term, Fitch forecast the Dong to weaken gradually against thedollar to due to higher inflation, but a relatively strong growth outlook islikely to put a floor under the depreciation of the currency.
“We forecast inflation in Vietnam to average around 4.1 percent over the next 24months, as compared with 2.3 percent in the US.”
According to Fitch, the SBV, utilising credit growth targets as its mainmonetary policy tool, is targeting credit growth of 14 percent in 2019, thesame rate achieved in 2018. At 14 percent, credit growth still outpaces nominalGDP growth of about 10 percent and this is likely to fuel inflationary pressuresover the coming quarters.
“Given the Vietnamese economy’s reliance on export-led growth, upside pricepressures is likely to warrant some Dong depreciation against the US dollar topreserve Vietnam’s export competitiveness, and we believe that this is likelyto see the Dong average 23,850 VND per dollar in 2020,” Fitch forecast, addingthe Vietnamese Dong’s overvaluation, as suggested by its real effectiveexchange rate trading by 9.3 percent above its 10-year average, open room forfurther currency weakness over the longer term.
However, Fitch also noted: “Risks to the Dong forecast are weighted to thedownside. A dovish shift among major global central banks could see the SBVintervene to weaken the Dong by more than we expect so as to maintain Vietnam’sexport competitiveness. Slowing global growth, trade uncertainty, anddisruptions to global value chains could also adversely impact Vietnam’s exportsector, pressuring the SBV to weaken the Dong further.” – VNS/VNA
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