From the beginning of the year to mid-March, the situation on the foreign exchange market was fairly stable with fluctuation of about 0.2-0.3%, within the monetary policy operation target of the State Bank of Vietnam (SBV). However, since then, the exchange rate has swelled.
In the end of last week, the SBV announced the central exchange rate at 23,235 dong per US dollar. At the SBV’s Operation Centre, the buying selling exchange rates were 23,175 23,650 dong per US dollar. At banks, the buying selling exchange rates were respectively 23,510 23,700 dong per US dollar at Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), 23,560 23,720 dong per US dollar at Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), 23, 548 23,708 dong per US dollar at Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), and 23,570 23,710 dong per US dollar at Vietnam Technological and Commercial Joint Stock Bank (Techcombank).
Most banks sharply lowered their listed rates compared to the end of the previous session, but the dong/US dollar exchange rate tended to rise fairly strongly across all channels with an increase of 1.7 two percent compared to the beginning of March 2020.
In the context when the economy is at risk of declining growth due to the severe impact of the ongoing Covid-19 pandemic the SBV has significantly reduced operating interest rates.
In addition, since businesses have temporarily stopped their production and business activities, the demand for loans is not high, and commercial banks have started to lower both short-term and long-term mobilisation interest rates.
This contributes to reducing the attractiveness of holding dong, thereby increasing the expectation of the dong devaluation in the near future, even though the level of interest rate reduction is not high.
Talking to Da utu Chung khoan newspaper, leader of many banks said that with the expectation of a further decline in the interest rate level, the pressure on the exchange rate still exists.
The pressure on the dong from this aspect will only decline when the US central bank applies a strong capital injection method with unlimited bond purchase packages, pushing the reference interest rates of the US to nearly zero and that will reduce deposit rates in the US.
In fact, the foreign exchange market has started to have concerns. Although the SBV has purchased a large amount of foreign currencies since 2012, especially in 2019, in the first months of 2020, the US dollar supply and demand was no longer as favourable as in previous years, affected by the impacts of the global economic downturn due to the Covid-19 pandemic.
In the first two months of 2020, Vietnam’s export sector weakened, only increased by 2.4 percent compared to the same period of last year compared to the seven to eight percent increase at normal times.
The foreign direct investment (FDI) continued to increase but at a moderate level. The foreign indirect investment (FII) also decreased when foreign investors increased selling of Vietnam’s financial assets to manage risks when the risks of a global economic recession are becoming relatively clear.
In the first three months of 2020, it is estimated that foreign investors net sold nearly 200 million US dollars of shares, reversing most buying transactions in 2019 (approximately 300 million US dollars).
From the beginning of last week, the exchange rate has tended to go up when the fluctuations on the world financial market have become stronger and stronger.
Nevertheless, Pham Thanh Ha, director of Monetary Policy Department of the SBV, said that from the beginning of 2020 to the time before the Lunar New Year holiday, in the context of an abundant foreign currency supply and favourable international market, the market exchange rate was fairly stable and the SBV continued to purchase a large amount of foreign currencies to increase foreign exchange reserves.
After the Lunar New Year holiday, the foreign currency market was under certain pressure from the developments related to the Covid-19 outbreak, but the exchange rate did not volatile considerably. On some days, the exchange rate fell close to the SBV’s buying rate and credit institutions (CIs) continued to sell foreign currencies to the SBV.
According to Ha, “the foreign currency status is still positive. The market liquidity is basically remains smooth. Legitimate foreign currency needs of customers are fully met by CIs.
Yun Liu, HSBC’s economist, said that the current monetary policy is still at a moderate level even when the real interest rate of the dong has been low for a long time to ensure a cautious view on capital.
The current policy interest rate is five percent per annum, lower than the average inflation rate of 5.92 percent (as of February 2020).
While the inflation pressure is likely to ease in the coming months, the average inflation in 2020 is still forecasted to stay above the target of four percent and higher than the average level of 2.8 percent in 2019.
Yun Liu also said that contradictory policy trends may prevent investment flows and weaken the dong.
This seems to have been reflected in the investments in the domestic stock market which have been slowing down in the recent time.
In addition, the FDI disbursement in the first two months of 2020 fell by five percent to 2.5 billion US dollar. With the current unstable situation in the world, the FDI flows into Vietnam are predicted to even slow down more in the near future.
“However, we believe that the US dollar/dong will gradually appreciate. In 2019, the SBV supplemented a record high value of 25 billion US dollars to the national foreign exchange rate reserves and the authorities are ready to use this amount to ease the foreign exchange rate fluctuations, thereby limiting the potential spreading affects which may lead to inflation rise.
However, the significant depreciation of the dong will bring negative impacts, such as limiting the inflows of FDI in Vietnam,” said Yun Liu.
The expert added that the foreign exchange rate by the year is forecasted to be 23,450 dong per US dollar, which means that the dong will devaluate by 1.2 percent against the US dollar in the whole year, along with the assumption that the Chinese yuan will be kept stable.
This modest decline will help reverse the reduction of the Chinese yuan/dong since April 2019, which was said by HSBC’s expert to become a problem for Vietnam when considering competitiveness.
According to MBSecurities, from now until the end of 2020, the dong/US dollar exchange rate will remain stable with favourable basic factors. The common trend is that the dong depreciates against the US dollar, and at some points of time, the decline may be more than three percent compared to the beginning of the year. Nevertheless, in the end of the year, the depreciation will be just about two percent, because the factors supporting the US dollar’s strength will gradually disappear.
