VND expected to remain stable in strenuous year

As markets rung in their first trading week of 2019, brokerage houses in Vietnam and the region have released forecasts for the Vietnamese currency. Most reports were positive about the VND, which only lost 2.6 per cent of its value against the USD in 2018 and was highlighted as one of the few resilient currencies in the region. The general consensus among analysts is that the VND will not depreciate more than 5 per cent this year.

The biggest reason for the VND’s stability, according to researchers, is a milder USD in 2019. Following three years of multiple hikes, the US Federal Reserve (Fed) has signalled a less aggressive tone this year, as the US economy is growing slower than expected. At least two rate increases are in store for 2019, and analysts believed that the US central bank will reduce the frequency of hikes. Similar to other ASEAN currencies, the export-reliant VND tends to be vulnerable to Fed rate hikes.

“The Fed is likely to halt its current hike cycle after two more increases in 2019 and the USD may not be rallying as much as other currencies. As a result, there are less pressure on the USD/VND exchange rate and VND’s depreciation can be within a small range in 2019, unless the Chinese yuan (CNY) goes down a lot,” said Pham Hong Hai, CEO of HSBC Vietnam.

In fact, besides the USD, the CNY is another currency that has major influence on the VND. Back in August 2015, the State Bank of Vietnam had to reduce the VND exchange rate by 3 per cent, in order to maintaining Vietnam’s export competitiveness amid a devalued CNY. As the CNY may weaken further as a result of the US-China trade war, questions have been raised whether Vietnam should once again devaluate the VND. Analysts believed that this is not necessary.

Economist Can Van Luc pointed out that for starters, the CNY may not devalue more than 5 per cent this year, despite the trade war, since the Chinese government wants to maintain the stability of its currency and prevent capital from escaping China. Moreover, Luc warned that the risks of devaluing Vietnam’s currency currently outweighs the benefits.

“It is not just a tug-of-war between the CNY and VND. Before reducing the value of the VND, we have to take into account a wide range of factors, from macroeconomic stability and export figures to inflation and foreign debt. This is why I am against devaluing the VND in 2019,” said Luc calling for further liberalisation of the VND, which includes allowing companies to buy and sell foreign currencies to banks instead of taking out loans in the USD, EUR or JPY.

Other supporting factors include a steady inflow of remittances, which grew by 15.1 per cent year-on-year to reach $15.9 billion in 2018. As an important channel of foreign inflows, remittances from the 4.5 million Vietnamese people abroad take up 6.6 per cent of Vietnam’s GDP. The figure is expected to rise further in 2019 as more Vietnamese people go overseas for work or immigration, and policies continue to encourage inbound remittances.

This year, Vietnam is also expected to carry out a number of stake sales for major state-owned enterprises. On top of the list is BIDV’s strategic partnership with KEB Hana from South Korea, and Vietcombank’s upcoming auction for 10 per cent of the shares.

A slew of other industry leaders are also preparing for state withdrawals, such as airport operator Airports Corporation of Vietnam, oil retailer Petrolimex, brewery Habeco, garment maker Vinatex, or construction material producer Viglacera.

Large-scale transactions like these are important for the Vietnamese currency, because overseas investors will pay in foreign currency and add to Vietnam’s foreign reserves, thus giving the VND a boost.

For example, in 2017, Vietnam earned $4.8 billion thanks to its historic stake sale of Sabeco in December and $391 million from a small divestment of Vinamilk in March. The total sum is equivalent to 8.6 per cent of Vietnam’s foreign reserves at the time.

However, some analysts are more cautious with their predictions. In a recent report, Peter Chia, FX strategist from UOB Group (Singapore), stated that the VND may be negatively affected by the ongoing US-China trade war, because the two countries are Vietnam’s biggest trading partners.

If Vietnam’s exports drop in 2019 due to global tensions, the VND is likely to weaken since the Vietnamese economy is heavily dependent on exports.

“The VND has stabilised in a tight range around VND23,300 for one USD since August 2018, even as the trade dispute between the US and China continued to escalate. Going forward, we can expect further weakness in the VND in the next four quarters towards VND24,000 for one USD,” Chia wrote.

Other analysts expect a range between VND23,500 and VND23,800.