The dong once again showed its sensitivity, especially in the context of unpredictable fluctuations in the global market.
According to the market update, in May 2019, the Chinese Yuan (CNY) has depreciated by about three percent and has been the currency facing the sharpest falls in Asia. However, CNY has tended to decrease several times. From May 2018, when the tension of trade relations between the US and China climbed, CNY began to enter the chain of continuous depreciation.
From June 7, 2018, when the US officially taxed on imported goods from China, CNY also decreased accordingly. By July 13, 2018, the central rate of the People’s Bank of China was announced at 6,693 CNY/USD; compared with the exchange rate on June 7, 2018 (starting date of tax imposition) of 6,388 CNY/USD, which was 4.8 percent lower.
As for the dong, the CNY devaluation is usually associated with the dong devaluation. However, not every downward trend of CNY is in parallel with the decline of dong. In the first 4 four months of 2019, dong remained relatively stable. Meanwhile, CNY continuously devalued with US dollar, which means that dong appreciated against CNY.
In fact, more than a month ago, CNY was exchanged for 3,466 dong but up to now this rate is 3,387 dong, which means CNY depreciated by 2.3 percent against dong and dong strongly increased against CNY.
It is worth mentioning that, within the last one year, when CNY dropped strongly compared to US dollar and other major currencies, there has been no research and evaluation of any impact published by the management agency, researches from import and export enterprises as well as response scenarios.
CNY continued to decline while the dong appreciated. It is certain that the trade balance between Vietnam and China, in which China has been dominant for many years, will continue to expand. When the dong appreciates, Chinese goods will be cheaper and beneficial for importers. On the contrary, it will be very detrimental for exporters. Because CNY is one of eight currencies calculated in the central exchange rate of Vietnam.
“CNY devaluates, Chinese goods become cheaper, compete better with goods produced by Vietnam. Many of our businesses will fall into a difficult situation due to not being able to compete with China,” said economist Nguyen Tri Hieu.
According to the General Statistical Office, after the first four months of the year, Vietnam has trade deficit from China to $11.9 billion, up 53.8 percent over the same period.
Nguyen Duy Hung, vice Chair of Dong Nai Import and Export Association, director of Hung Thinh Phat Co., Ltd said that the chain impact of the exchange rate was the key thing to discuss. The increase of 0.4 percent of the USD/VND exchange rate in the past month did not affect too much to Hung Thinh Phat. “But what I fear is the indirect impact of this exchange rate adjustment,” Hung said.
He analysed that after the continuous increases of petroleum price, the “payback” of the exchange rate made the price increased much more strongly. “With consecutive increases in electricity and petrol prices, input costs have been pushed to a higher level while output is difficult to increase. Therefore, businesses face the problem of balancing costs to overcome this tough period “, Hung emphasized.
Therefore, Hung proposed in this context, the exchange rate policy should be cautious to avoid shocking businesses, especially small and medium enterprises, when almost all of them can not hedge to protect themselves. “We have a Small and Medium Enterprise Development Assistance Fund to help businesses access capital with low interest rates. Why don’t we think about assisting businesses to avoid exchange rate shocks,” he proposed.
With a series of new factors appearing in the largest trade war in history, China may continue to loosen monetary policy to support the economy, and CNY will continue to weaken accordingly.
And therefore, from now until the end of the year, the dong may depreciate by over two percent after having dropped by 0.8 percent since the beginning of the year. “This means that the dong will depreciate by about three percent this year. But in my opinion, it does not exclude the possibility that the dong will lose more than this level, bringing the exchange rate to the resistance level of 24,000 dong,” Hieu analysed.
In a recent statement, Pham Thanh Ha, director of the Monetary Policy Department said that, through monitoring of the State Bank of Vietnam (SBV), the market liquidity was still stable, balancing the overall foreign currency supply and demand, which is still relatively favourable.
“If necessary, SBV is ready to sell foreign currencies to intervene with an appropriate selling rate to stabilise the market, contributing to macroeconomic stability,” said Ha.
The second half of 2019 will be a period of pressure for operating monetary policy of SBV when the exchange rate is related to a series of other macroeconomic indicators such as public debt, import and export. “But the principle of flexibility and sticking with the market still has to play the leading role in the current context”, Hieu affirmed.
In the context of turmoil, currencies have many complicated and unpredictable movements; the next period will be a test to measure the resilience of the dong.
