Institutions, foreign and domestic, have confidence in the stability of the dong, despite the depreciation of many local currencies in ASEAN.
In its August report, Rong Viet Securities showed that the dong/dollar exchange rate has been mostly unchanged this year, commenting that this is a rarely seen phenomenon, because Vietnam always incurs a trade deficit with China.
As of the end of September, the official exchange rate announced by SBV had increased by 1.5 percent, while the exchange rate applied by commercial banks in their transactions has nearly stayed unchanged compared with the end of 2018.
According to Bao Viet Securities, there are two reasons which have helped the Vietnam dong stabilize in value and not depreciate despite the Chinese yuan devaluation.
First, Vietnam had a trade surplus in the third quarter of the year ($4.28 billion), which helped increase the foreign currency supply.
Second, there is pressure on the Vietnam dong when the Chinese yuan sharply depreciates. However, the risk of the US government considering Vietnam as a currency manipulator has forced SBV to take more cautious steps when pumping dong into circulation and buying foreign currencies.
Bao Viet Securities thinks that in the last three months of the year, the Vietnam dong may depreciate compared with the dollar as the trade surplus may decrease in the time to come and the US-China trade war becomes more unpredictable. However, the pressure on the dong is not high.
|Institutions, foreign and domestic, have confidence in the stability of the dong, despite the depreciation of many local currencies in ASEAN.|
In general, the institution believes that the dong depreciation in 2019 won’t be higher than 2 percent.
Foreign institutions also believe in the stability of the dong.
Analysts from Fitch Solutions believe that the dong will continue to be stable in the remaining months of 2019 and may weaken very slightly in 2020.
The institution believes that FDI will keep flowing strongly into Vietnam in the time to come. Foreign investors are relocating parts of their supply chains out of China and the remaining parts of Asia and Vietnam benefit from the trend.
Most FDI has been going to the manufacturing sector. However, Fitch believes that FDI will also go to infrastructure in the time to come as experts warn about the overloading of infrastructure items. The strong rise of the middle class and wealthy in Vietnam will attract FDI into the retail sector.
Fitch predicted that import companies may increase the purchase of dollars in the time to come. Commercial banks are not allowed to provide medium- and long-term foreign currency loans to make payments for imported goods and services.
Vietnam’s forex reserves have reached a record high $63.9 billion.
Fitch predicted that the dong/dollar exchange would be VND23,650 per dollar in 2021.
The central bank believes that for an open economy like Vietnam, the sharp devaluation of the local currency will not help boost exports, but will do more harm than good.
Since China is Vietnam’s biggest trade partner, the sharp yuan devaluation will affect Vietnam’s imports and exports with China.