The Vietnam dong is expected to depreciate by two percentage points at the end of 2017 ending a period of stability that lasted throughout the year

vnd expected to see end of year dip

Since the start of this year, the USD/VND exchange rate remained relatively stable, hovering around VND22,700 to the dollar. However, this period of calm is likely to end soon, as Vietnam enters its busy end-of-the-year business season.

Economic expert Nguyen Tri Hieu said that Vietnamese businesses may require more foreign exchange notes to import materials and pay their overseas partners. Moreover, the US Federal Reserve (Fed) may announce further rate hikes at the end of this year, which usually pushes up the USD on the global market.

“Foreign exchange has been steady since the start of 2017 thanks to the ongoing inflows of foreign investment, mild inflation, and strong liquidity at banks. However, the Vietnamese currency may depreciate by 2% at the year’s end due to seasonal reasons,” he said.

Since May, the USD Index has lost 4.51%, standing at 93.46 points on August 17. This fall has greatly supported the stability of Vietnam’s currency. In fact, according to recent statistics from the National Financial Supervision Council (NFSC), rates at commercial banks dropped by 1.3% over the past seven months.

In the open market, foreign exchange also went down by 1.14%. Even when the Fed hiked its interest rate 0.25% in June, the foreign exchange market in Vietnam stayed calm.

The only notable difference is that Vietnam’s central daily rate, managed by the State Bank of Vietnam (SBV), edged up by 1.24%. The rate on August 17 stood at VND22,450 per dollar, slightly higher than the VND22,159 figure quoted on January 1. NFSC analysts reckoned that the central bank had to slightly devalue the domestic currency to support Vietnam’s exports, which benefit from a weaker VND.

According to researchers at Saigon Securities Incorporation (SSI), this ongoing tumble of the greenback has indeed supported VND exchange rates. However, they also highlighted challenges posed by a weaker USD. Specifically, euro/USD rates have gone up by 8.96% year-on-year, while the Japanese yen lost 6.18% against the VND.

“This will impact on Vietnamese firms who earn profits or have outstanding loans denominated in euro or Japanese yen. It’s clear that a fall in the USD doesn’t affect USD/VND rates but it affects other foreign currencies in the Vietnamese market,” SSI wrote.

Meanwhile, Vietcombank Securities concurred with the forecast of a 2% VND dip in the fourth quarter of 2017. In the third quarter, the brokerage reckoned, the domestic currency will remain stable.

Stability in USD/VND exchange rates does not only help Vietnam’s export companies manage their business, but also dampens the need for USD speculation in Vietnam, according to expert Nguyen Tri Hieu.

The zero percent interest rate for USD-denominated deposits allows companies that earn their revenue in foreign currencies to enjoy much lower lending rates, while inpiduals are discouraged from hoarding USD.

“To prevent unfavourable changes in foreign exchange, export firms in Vietnam should sign currency forwarding contracts,” said Hieu. “Moreover, I believe that the SBV is likely to keep the VND relatively stable, despite any slight devaluation in the coming months. This will support Vietnam’s end-of-year export and also keep the foreign exchange market calm.”

Source: VIR