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Vietnamese currency predicted to weaken this year

May 08, 2020 | 17:01

Fitch Solutions experts believe the Vietnamese currency (Vietnam dong-VND) to gradually depreciate against the US dollar over the long term due to its overvaluation and Vietnam's higher inflation vis-à-vis the US.

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Fitch Solutions predicted Vietnam dong to weaken against USD (Photo: Online Law)

Fitch Solutions experts predicted the Vietnamese currency (Vietnamese dong-VND) to average VND23,475 per US dollar in 2020 and VND23,650 in 2021 from the current VND23,309.

“We maintain our view for the dong to gradually depreciate against the US dollar over the long term due to its overvaluation and Viet Nam’s higher inflation vis-à-vis the US,” they said.

The experts forecast FDI inflow will slow drastically in 2020 due to the COVID-19 pandemic and this will provide less support to the dong. Last year saw US$38 billion in total registered investment capital, up 7 per cent from $35.5 billion in 2018. FDI inflow in 2019 was supported by supply chain relocation from China by businesses seeking to diversify their manufacturing locations amid the height of the US-China trade war then, reported by Vietnam News.

“With Viet Nam having positioned itself as a low-cost regional manufacturing hub in the global supply chain, export demand and also FDI inflow will be heavily susceptible to swings in global economic demand. Given that the global economy is now in recession as a result of the COVID-19 pandemic, external demand will weaken significantly as compared to before,” they predicted.

vietnam dong predicted to weaken this year
In April, the exchange rate decreased again (Photo: Ho Chi Minh City Highlights)

According to securities companies, from the beginning of the year until now, the exchange rate of VND and USD has been decreasing

According to the April macroeconomic report issued by Bao Viet Securities Company, in April, the central exchange rate and the actual exchange rate at commercial banks all had the same downward trend compared to March. .

Compared to the end of 2019, the central exchange rate at the end of April increased by VND 102 (equivalent to 0.4%) while the exchange rate in the interbank market increased more strongly (VND 254, equivalent to 1.1%). .

SSI Securities Company assessed that in April, exchange rate decreased again. Compared to the previous month, it decreased about 0.7% in the interbank market and decreased 1.1% in the free market.

Bao Viet also said that maintaining the trade surplus of US $ 3 billion in the first four months of the year helped maintain the USD supply. Vietnam's foreign exchange reserves are estimated at 83 billion USD, equivalent to 32% of GDP, reported by Online Law.

According to Bizlive, the report of Vietnam Inter-bank Market Research Association (VIRA) on May 5-2020 agrees that exchange rate between VND and USD is forecasted to remain stable with slight adjustment compared to the previous month.

vietnam dong predicted to weaken this year
Fitch Solutions believe that any currency weakness is likely to be mild (Photo: Vietnam News)

Fitch expect the State Bank of Viet Nam (SBV) to favour a weaker dong to support its external sector. Viet Nam is dependent on exports as exports account for 95 per cent of GDP, and as such a weaker currency would ideally position Viet Nam for a stronger exports rebound with global demand likely to pick up after restrictive measures and lockdowns are gradually lifted.

From a production perspective, Fitch believed currency weakness will mainly support the country’s large manufacturing sector, which is being buffeted by strong headwinds from supply chain disruptions and a weak demand outlook.

“That said, we believe that any currency weakness is likely to be mild so as to avoid possible sanctions from the US given that Viet Nam has remained on the US Treasury’s currency manipulator watchlist in its January 2020 report.”

Fitch expected with a foreign exchange reserve position of $80 billion in February, representing 3.8 months of imports, the central bank has sufficient firepower to ensure a measured pace of currency depreciation.

Fitch also forecast inflation in Viet Nam to average 3.8 per cent in 2020 and 4.2 per cent in 2021, mainly on the back of food inflation as animal protein prices are rising due to supply shortages, according to Vietnam News.

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