Although the US dollar/dong exchange rate is still stable in the short term, the depreciation of the Chinese yuan will create great pressure on the domestic exchange rate.
Abundant supply
“The exchange rate market is stable”, “The dong continues to move sideways”, or “The dong continues to stand firm against the falling momentum of the Chinese yuan”, etc. are the assessments of securities companies about the exchange rate in the recent time.
Indeed, the escalating US-China trade war has made the Chinese yuan/US dollar exchange rate to fall below the psychological 7 level for the first time in more than 10 years in early August and continuously decline ever since. Overall, the Chinese yuan has fallen by four percent against the US dollar in August. The trade war has also caused many currencies of emerging economies in Asia to drop sharply, such as the Korean Won (down by 8.6 percent since the beginning of the year), Rupee of India (down by 3.6%), etc.
However, the domestic exchange rate was still stable. Accordingly, although the reference exchange rate in August was adjusted up and down alternately and only increased by 0.26 percent compared to the end of July, the exchange rates at banks remained stable. Specifically, closing the session on August 31st 2019, the central reference rate of the State Bank of Vietnam (SBV) rose by 63 dong to 23,133 dong per US dollar, but the US dollar/dong interbank exchange rate still decreased by eight dong compared to the end of July 2019, being traded at 23,197 dong per US dollar. Meanwhile, the exchange rates at banks fluctuated around 23,200 dong per US dollar. On the free market, the dong was traded at 23,215 dong per US dollar, only slightly up by 15 dong (+0.05%) against the exchange rate on July 31st.
The stability of the exchange rate has been extended in the early days of September. Although in the morning session on September 10th, the SBV raised the reference rate by three dong to 23,135 dong per US dollar after reducing 12 dong in the previous two sessions, the exchange rates at banks almost recorded no change. The buying rates of banks are currently ranging between 23,110 and 23,130 dong per US dollar, while the selling rates are popular at 23,240 23,260 dong per US dollar. These rates have not changed compared to the end of July, only equivalent to the rates in the end of 2018.
According to securities companies, the abundant supply of foreign currency is the main reason helping the exchange rate in the domestic maintain stability from the beginning of the year until now. According to KB company, the surplus trade balance, the sale of stake of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) to Keb Hana, etc. have made the outstanding amount of foreign currencies at banks to be high (in a surplus of about 1.5 to two billion US dollars).
Meanwhile, Saigon Securities Incorporation (SSI) also cited statistics of the SBV which showed that the overall payment balance of Vietnam recorded a surplus of 1.93 billion US dollars in the second quarter (Q2) of 2019, and 9.14 billion US dollars in the first six months of 2019. Meanwhile, the trade balance in August was in a surplus of about 1.7 billion US dollars much higher than the surplus recorded in July (43.2 million US dollars). In the first eight months of the year, the surplus was about 3.4 billion US dollars, not to mention the Foreign Direct Investment (FDI) disbursement reached 1.41 billion US dollars in August and 11.96 billion US dollars from the beginning of the year, up by 6.3%, etc. “The abundant foreign currency supply and the attractive buying rate (23,200 dong per US dollar) have helped the SBV continue to buy foreign currency,” said SSI.
The exchange rate will continue to be stable.
According to SSI, the foreign exchange reserves of Vietnam are currently high at the highest level in history. That will be an important buffer to help the SBV manage the exchange rate. In addition, with the dong/US dollar exchange rate difference of above one percent and the positive foreign currency supply, particularly when the season for remittances is approaching, the US dollar/dong exchange rate is likely to remain stable around 23,200 dong per US dollar.
That is in the short term, while in the long term, it can be denied that the continuous depreciation of the Chinese yuan is creating pressure on the domestic exchange rate. According to forecasts of many international financial institutions, if the US imposes a 25 percent tax rate on all Chinese goods, the Chinese yuan may fall to 7.88 yuan per US dollar.
Dr Pham Sy Thanh director of the Chinese economic research programme of the Institute for Economic and Policy Research (VEPR) predicted that the Chinese yuan may fall to 7.35 yuan per US dollar in the end of this year, compared to the current level of around 7.156 yuan per US dollar.
According to economic experts, if the domestic exchange rate remains stable in the context when many currencies in the region, particularly the Chinese yuan, it also means that the domestic currency will appreciate. That will cause many disadvantages for export activities and make the trade deficit from China more serious. In this context, many economic experts recommended that the domestic exchange rate should follow the trend, which means that the dong should be devalued in line with the devaluation of the Chinese yuan in order to avoid creating unfavourable pressure on exports.
Nevertheless, the current difficulty is that Vietnam is still on the “currency manipulation” watch list, so it is not possible to depreciate too strongly. Even according to securities companies, the SBV will choose an appropriate time to sell foreign currency. This move is to both avoid being labelled “currency manipulation” by the US, and to help stabilise the exchange rate within a three percent amplitude as initially targeted.
“The SBV is under great pressure to change the exchange rate management mechanism as well as the exchange rate goal. The SBV may also reduce the level and the power of the impact, so that the exchange rate will be more flexible in the near future. Along with that, the target of depreciating currency will need to be cleverly adjusted to avoid devaluation,” KB recommended.
