Vietnam to weather the trade storm

Experts say Vietnam’s economy will be negatively impacted by the current trade war between the US and China, Photo: Le Toan

Rocking USD

The State Bank of Vietnam (SBV) last Friday softened its daily fixing from VND22,655 per dollar the previous day to VND22,650, following its continuous adjustments to the reference rate that has seen the dong weakened over the course of a week, with VND22,615 per dollar quoted on Monday, VND22,625 on Tuesday, and VND22,640 on Wednesday.

Across local banks like Vietcombank, the pair was traded at VND22,985 per dollar on the sell side and VND22,915 on the buy side at the closing session last week, an increase of VND15 on both sides from the day before. At other commercial banks, the exchange rate also edged up by VND10-20 a dollar, with the highest USD/VND rate being posted at VND22,995 per dollar at Sacombank.

The unofficial USD to VND rate, meanwhile, went above the VND23,000 barrier, to settle at between VND23,050 and VND23,070 as of Friday (June 29), remaining unchanged from Thursday.

The FX volatility over recent weeks was seen as a result of the strengthened USD following the expected interest rate hike of 0.25 basic points that the Federal Reserve (Fed) announced at its mid-June meeting.

According to Barry Weisblatt, head of Research at Viet Capital Securities (VCSC), given the strengthening of the US dollar globally, the dong has witnessed some modest weakness, at approximately a 1 per cent devaluation in the year to date, but it is “quite mild compared to what emerging countries like Argentina, Turkey, Indonesia, and others have experienced.”

In a note released in the Mekong Economic Outlook last month, Irene Cheung, senior strategist for Financial Markets Research at ANZ, said, “It appears that the SBV is guiding the USD/VND rate higher, especially since April, as seen in the daily USD/VND fixing. This follows a period of broadly steady fixings since mid-2017.”

“It is our understanding that there are some USD debt payments coming up at the end of June that are sucking some USD out of the market,” wrote chief economist Michael Kokalari of VinaCapital in his latest economist’s note dated June 22. “This is also happening in China at the moment. It also appears that the SBV has been buying dollars in recent days, which is the opposite of what they should be doing now because this also puts pressure on the Vietnam dong.”

The butterfly effect

Apart from the Fed rate rise in mid June, central banks around the world have also followed up with certain changes in their monetary policies. In particular, the European Central Bank revealed that it will end its quantitative easing by the end of 2018, through a reduction in bonds purchased in the second half, and the People’s Bank of China has cut its required reserve ratio (RRR) by 0.5 percentage points to boost credit supply to smaller enterprises.

How these policy changes take a toll on the local economy is examined by experts like Noelan Arbis, economist for ASEAN at HSBC Global Research.

Arbis said that apart from some incremental downward pressure on the dong due to a stronger dollar, the Vietnamese economy has not been greatly impacted from incremental tightening in global monetary policy.

“We do not expect any significant impact on overseas remittances stemming from policy changes in the US,” he told VIR.

Meanwhile, Weisblatt of VCSC pointed to two global developments that are affecting Vietnam: the US-China trade war tensions and a strengthening USD. “In both cases these are indirect impacts. Developments in China with its RRR cuts and yuan devaluation have largely been reactions to these. Developments in the EU and Japan have a less significant impact on Vietnam than these two main drivers.”

Echoing Weisblatt’s view, Cheung of ANZ foresaw some risks going forward for Vietnam, primarily trade issues between the US and Asia that could impact Vietnam, as well as rising global oil prices that could push up the country’s inflation.

Capital market

The impact of the monetary policy movements worldwide on the domestic capital market, according to Weisblatt, is somehow more magnified.

He told VIR that even if the VND remains stable, global investors may withdraw from emerging and frontier markets in general if they perceive weaknesses. “Vietnam’s market could suffer some contagion effects. And even though domestic investors still account for much of stock market flows, locals tend to follow foreign trends in buying and selling.

“So, we could see, and have already seen, some disconnect between a relatively strong economy and a weak stock market. Foreign indirect investment will flow out of Vietnam even though our currency is less affected than in other markets,” said Weisblatt.

The head of research added that this has been the main driver of the correction from April to June and could continue to weigh on market valuations, even though solid earnings growth is anticipated.

“Note that the falling US dollar was a key support for Vietnam’s hugely impressive market gains from 2017’s last quarter to this year’s first quarter. It is therefore not surprising to see the reverse happening as the dollar strengthens.”

Commenting on the capital flows into the Vietnamese economy, which primarily come in the form of foreign direct investment (FDI) and are usually long-term in nature, HSBC’s economist Arbis said that the flows will not be susceptible to higher short-term rates in the US due to incremental tightening by the Fed.

“Trade tensions are perhaps a bigger risk in the short term, but even here, the impact on long-term FDI flows should be minimal,” noted Arbis.

Meanwhile, according to Kokalari of VinaCapital, should the depreciation of the VND against the USD stay below 2 per cent, the dong should not affect Vietnamese stock markets. “However, other factors could continue to weigh on the VN Index, as sentiment towards emerging markets is obviously poor and could get worse with upcoming elections in Turkey and Mexico, for example.”

Trade war

While all eyes and ears are on the trade tension between the US and China, its side effects could worry neighbouring markets, including Vietnam.

Weisblatt nevertheless said that the US policy of protectionism has not been directed at Vietnam but mostly at China, the EU, and, to a lesser extent, at Canada and Mexico.

In the short term, Vietnam could actually benefit from this protectionism, because Vietnamese exports could become more competitive compared to products from companies being hit by tariffs. “For example, as China puts tariffs on US agricultural exports, we have seen strong Chinese demand for Vietnamese products,” Weisblatt said.

However, he went on to say that in the long term, trade wars would slow global growth and therefore reduce demand for imported goods, which is not good for Vietnam increasingly becoming an export-driven economy - or for anyone else.

“Furthermore, Vietnam does have a sizeable goods trade surplus with the US. If President Trump took direct aim at Vietnamese imports, that would be problematic. It seems unlikely right now that he will do so, but President Trump is highly unpredictable. While a slow-down in exports from a trade war would hurt GDP growth, it would not likely impact FDI. Most FDI decisions are made on long-term parameters that extend beyond the current US presidential term.”

HSBC’s Arbis said, “Vietnam is increasingly export-dependent and is highly active in pan-Asian supply chains. As a result, trade tensions are not a welcome development. However, note that Vietnam is continuing to build manufacturing capacity in a wide range of industries, which provides for a relatively bright outlook compared to some ASEAN neighbours, irrespective of trade frictions.”

“The VND has shown over the past few years that it is more sensitive to trade flows than to interest rate movements,” Weisblatt said. “So, the outlook for the rest of the year would again depend on the severity of trade wars and their impact on exports. We do also believe that the Vietnamese government is in a pretty good position to support the strength of the dong due to the high level of foreign reserves.”