Vietnam: Deficit to pressure exchange rates

• May 16, 2017

HA NOI – Exchange rates will face pressure to rise this year due to an anticipated trade deficit, according to the National Financial Supervisory Commission (NFSC).

Vietnam’s trade deficit was forecast at 3.5 per cent of the total import and export value.

In the first four months of this year, Vietnam ran a trade deficit of US$2.73 billion, or 4.5 per cent of the total trade value, pushing up demand for foreign currencies.

However, the abundant supply of foreign currencies from increases in foreign indirect and direct investments, together with supportive factors in the global market, will ease the pressure, NFSC said.

The US Federal Reserve (Fed) interest rate hikes in the short term will not exert significant pressure on exchange rates. However, in the long term, the pressure on exchange rates will intensify with the Fed’s plan of raising interest rates to 3 per cent by the end of 2019.

Notably, the devaluation trend of the yuan would have significant impact on the Vietnamese economy as Vietnam is running an increasing trade deficit with China, from US$23.7 billion in 2013 to $28 billion in 2016.

The daily reference rate set by the State Bank of Việt Nam was at VNĐ22,377 buying a dollar, around 1 per cent higher compared with the beginning of this year. The exchange rates of commercial banks fluctuated around VNĐ22,720 buying a dollar, 0.2 per cent lower than the beginning of the year.

The NFSC said that the central bank would adjust exchange rates gradually to prevent shocks in foreign exchange rate policies.

Bao Viet Securities said the move by the central bank would be an early signal for the economy to prepare for the pressure on exchange rates in the second half of this year when the US dollar strengthens following the US economic recovery and Fed rate rises. The Fed is expected to hike rates in its June meeting.

Experts say enterprises with debts in dollar should pay attention to the pressure on exchange rates this year, and the use of options or forward contracts is necessary to prevent risk from exchange rate fluctuations, despite the large gaps at around 3-4 per cent between interest rates for advances in Vietnamese Dong and dollar. – VNS

Source: http://vietnamnews.vn/economy/376448/deficit-to-pressure-exchange-rates.html#1h45yFLJVq1eEvt4.99