The foreign exchange rate of the Vietnamese dong against the US dollar is forecast to be under greater pressure in 2020 (Photo: VNA) Hanoi (VNS/VNA)- Afterbeing relatively stable last year, the foreign exchange rate of the Vietnamese dong againstthe US dollar is forecast to be under greater pressure in 2020 due to bothinternal and external headwinds.
Financeexpert Nguyen Tri Hieu said thatpressure on the exchange rate would be bigger this year as a greenback supplydecline in the domestic market is forecast, driven by weaker foreign directinvestment (FDI) inflows and exports.
“Dueto a decline in global demand, Vietnam’s exports in 2020 may not bepositive as last year and the Government even forecasts a trade deficit ofabout 3 percent of export turnover this year,” Hieusaid, adding that the country’s imports are also likely torise over the coming months, outpacing exports and putting pressure on the dong.
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“Besides,it is projected that FDI and remittance inflow to Vietnam would also weaken in 2020 due to the global economic slowdown, providing lesssupport to the dong,” Hieuadded.
Vietnam received38 billion USD in total registered investment capital last year, up7 percent from 35.5 billion USD in 2018. The processing and manufacturing sectorcontinued to attract the bulk of FDI at 24.6 billion USD,which accounted for 64.6 percent of investment capital in 2019.
However,it is forecast that infrastructure and human capital bottlenecks will see FDIto the manufacturing and processing sector ease this year.
Higherinflation would also put more pressure on the exchange rate, Hieusaid.
Infact, a shortage of meat in the country has seen inflation spike. Inflation wasat 5.2 percent year-on-year in December 2019, up from 3.5 percent year-on-yearin November 2019, led by a 9.2 percent year-on-year inflation in food prices,up from 5.6 percent year-on-year over the same period. This is likely to see Vietnam ramp up imports of meat to deal with the shortfall, causing higher inflation inthe coming months.
Asfor external headwinds, according to Hieu,though the US and China this month signed a first phase trade agreement, thereare still a lot of disagreements between the two sides.
Moreover,as US President Donald Trump wants to use the trade war to gain an advantageover his opponent in his re-election campaign, the war cannot end in 2020, Hieusaid, adding this would continue to have a strong impact on US dollar andChinese yuan in 2020, putting pressure on the dong.
“Theimpacts will cause the dong todepreciate by between 2 and 3 percent in 2020,” Hieuforecast.
The dong remainedrelatively stable against the dollar last year, with the State Bank of Vietnam (SBV)’s referenceexchange rate up some 1.45 percent against the end of the previous year.
Despitebeing under more pressure, experts also forecast the Vietnamese central bankwould try to limit the depreciation of the dong asthe country is still stuck on the US’s currency manipulator watchlist.
Accordingto analysts from Fitch Solutions, a strong foreign reserves position shouldallow the central bank to safeguard the currency against excessive downsidevolatility to avoid potential punitive measures from the US due to currencymanipulation.
“Thatsaid, we believe that the State Bank of Vietnam (SBV) will seek to limitthe pace of dong weakening as Vietnam remains on the USTreasury’s currency manipulator watchlist at its January 2020 report,” Fitchanalysts said,adding though they viewed the US taking punitive measures against Vietnam asa quite unlikely scenario.
Theanalysts explained Vietnam was included on the list asits goods trade surplus with the US continued to rise significantly, with the surplusreaching 47 billion USD over the four quarters through June 2019.
“However,its current account surplus narrowed to 1.7 percent of GDP, and while Vietnam frequentlyintervenes in the foreign exchange market to maintain a close link to the USdollar, intervention was done both ways. Net purchases of foreign exchange wasalso only at 0.8 percent of GDP in the four quarters to June 2019.”
TheUS Treasury adds a country to its currency manipulator watchlist if it meetstwo of three criteria: trade surplus with the US of at least 20 billion USD,current account surplus of at least 2 percent of GDP andpersistent, one-sided intervention in the currency equivalent to 2 percent ofGDP in six months of a year.
Fitchanalysts forecast the dong to average just slightly weaker by about 1 percentand to average 23,475 VND per US dollar in 2020.
Asfor long-term outlook, the dong would gradually depreciate against the US dollar dueto its overvaluation and Vietnam’s higher inflation vis-à-visthe US to average 23,650 USD per dollar in 2021, they predicted./.
VNA
