VND likely to remain on a stable footing in 2018

Experts have started to offer their predictions for the Vietnamese dong (VND) in 2018, and most agree that Vietnam’s currency has a good year ahead. This is a stark contrast to previous years, when the VND was usually expected to weaken against the US dollar. That said, analysts seem to have differing opinions on the strength of Vietnam’s currency.

The most positive prediction comes from Standard Chartered, which forecasts that the VND will appreciate by 1 per cent against the USD, ending 2018 at VND22,600 per dollar. FX strategist Eddie Cheung told VIR that this rally is partly attributable to a weakening USD – a statement many might find surprising, given the US economy is doing better this year. The world’s largest economy is forecast to grow by 2.5 per cent in 2018 thanks to robust domestic consumption and tax reforms that can boost firms’ earnings.

“We believe the US Federal Reserve will hike interest rates twice this year, and usually the yield gap between short-term and long-term rates will narrow. From our observation, this compression usually leads to a weaker USD,” said Cheung. Another factor is that the US fiscal deficit may get worse due to lowered corporate taxes, causing pressure on the dollar.

When asked whether a strong VND would hurt Vietnam’s export competitiveness, the Standard Chartered analyst pointed out that the euro, which represents one of Vietnam’s biggest trade partners, is expected to strengthen by 5 per cent against the USD this year. This is higher than the bank’s forecast for the VND rally, which means Vietnam’s products will remain affordable for European importers in 2018.

“The Chinese yuan is forecast to strengthen by 1 per cent as well. If the dong can match this level, Vietnam’s exports won’t lose much of their competitiveness,” Cheung said.

The VND is also backed by strong foreign interest in Vietnam’s state divestment programmes. According to Nguyen Thanh Lam, deputy head of retail research at Maybank Kim Eng Securities, Vietnam’s forex rates in 2017 have been supported by record-high capital inflows, especially during the share sales of dairy giant Vinamilk and top brewery Sabeco.

Vietnam’s foreign reserves now stand at $54.5 billion, the highest level ever recorded. Disbursed foreign direct investment stood at $17.5 billion in 2017 and trade surplus reached $2.7 billion.

“Vietnam’s economy will continue its strong growth in 2018, inflation will remain low, and ongoing foreign capital inflows will help with the trade surplus and foreign exchange rates,” said Lam.

In 2018, Vietnam is putting many of its prized state firms on sale, including PV Oil, the second-largest oil retailer and sole exporter of crude oil; Binh Son Refinery, the operator of the Dung Quat oil refinery; PV Power, the second-largest electricity retailer; and Vinachem, the national chemical group. These sales are expected to lure in foreign capital, help grow Vietnam’s increasing foreign reserves, and boost the VND, Maybank Kim Eng predicts.

Other analysts share the optimism for the VND, but seem to take a more cautious approach. ANZ economist Eugenia Victorino believes that the VND will weaken at a slow pace to settle at VND22,900 per USD by the end of 2018.

“Vietnam’s foreign reserves are at a record high. However, the State Bank of Vietnam (SBV) still needs to collect more foreign notes as the reserves only equal three months of Vietnam’s imports, which means they are very low according to World Bank standards,” said Victorino.

Brokerage house Vietcombank Securities also predicted a 2 per cent depreciation of the VND in 2018. In their latest report, the securities firm pointed out that the SBV has gained great experience from the daily fixings scheme, which drives down speculation and prevents major swings in foreign exchange rates.

“Any external influences will be reflected gradually, not all at once like they have been before, as the daily fixings mechanism allows the SBV to be more flexible in its management,” said the report.