VND weathers Fed rate hike

Barry Weisblatt, head of Research at Viet Capital Securities JSC

What is your view on the dong's performance against the USD throughout 2017? Do you think the central bank has done well in keeping the dong stable so far this year?

Yes, the State Bank of Vietnam (SBV) has done well in keeping the dong stable against the USD this year, resulting in a 0.19 per cent appreciation in the interbank FX rate year to date (YTD). The policy of allowing daily fluctuations in the central rate, which was first introduced at the beginning of 2016, has proven effective in removing speculative pressures. At the same time, zero USD interest rates have helped to lower demand for the greenback. However, SBV has also received help from external agents. The dollar has been globally weak, with the Dollar Index Spot (DXY) declining 9 per cent YTD, indicating that in fact, the dong should be even stronger.

There have also been strong foreign currency flows coming to Vietnam. Robust exports have resulted in a trade surplus of $2.8 billion through November. Disbursed foreign direct investment (FDI) is up 11.9 per cent year-on-year (YoY) at $16 billion and there have been strong foreign inflows into the bond market (net inflows of around $750 million) and the stock market (net inflows of more than $1.1 billion), as well as from state divestment. These have helped SBV to build up foreign reserves to $46 billion.

Should we expect any further forex fluctuations towards the end of the year? Are there other pressures on the dong that we need to watch out for in December?

Thanks to the above reasons, the dong has been very stable during November, which did not happen in the past few years. The recent significant inflows from FDI and the state divestment process, as well as remittance inflows, should continue to support the value of the dong in the last month of the year, despite of a likely Fed hike in December. In fact, previous Fed hikes this year had really no impact on the dong or for that matter other currencies. We do not expect anything different this month.

However, as usual, the strong demand for the USD during the year-end would put some pressure on the dong. In addition, exports might rise at a slower speed, while imports should increase at a higher pace due to rising demand before the New Year and Lunar New Year (we expect a small deficit in December). But the impacts on the dong should be very small compared to the previous years. It is possible that the dong might go flat by the end of this year against the end of last year.

What is your opinion on the apparent slowdown of remittance flows in the first 11 months of the year? What do you forecast to be the total Vietnam receives this year?

Remittances are very difficult to forecast as people send money for a variety of different reasons. I do think there has been a fundamental shift over recent years from overseas Vietnamese sending home money to support their relatives to remittances in search of attractive investments. Remittances to Vietnam had a strong drop in 2016 to $9 billion from the $13.2 billion in 2015, which ended the steady growth trend lasting since 2010. It could be due to the zero-interest rate policy on USD deposits which has been applied by SBV in late 2015, or the Fed hikes in 2016.

According to SBV, the remittances reaching Ho Chi Minh City in the first 10 months hit $3.9 billion and is estimated to reach $5.2 billion (+6 per cent YoY) in 2017. Ho Chi Minh City usually accounts for around 60 per cent of total remittances in Vietnam.

We estimate total remittances in the 2017 financial year to stand around $9 billion, relatively stable compared to 2016. While the zero-interest rate policy on USD deposits and Fed hikes could have some impacts on remittance inflows in 2017, rising inflows to production businesses and the real estate sector should help remittance flows remain stable and healthy in the coming year. Currently, 72 per cent of remittances went to production activities, around 22 per cent to real estate, and only 6 per cent for personal spending.

RELATED CONTENTS:
	Shares of Viet Capital Securities hit the ceiling on first trading day
	Viet Capital Securities to be listed this Friday
	Viet Capital champions investors