Exchange rate: hard work for Vietnam’s central bank this year

03.04.2017

Due to developments in both domestic and international economic sectors during the first quarter of 2017, the exchange rate is considered the most unpredictable factor influencing the monetary market in 2017, online finance newspaper cafef.vn reported.

The exchange rate is considered the most unpredictable factor influencing the monetary market in 2017. 

According to experts, while the demand for foreign currency seems to increase, the currency supply tends to decrease. This is expected to pressure the exchange rate.

Statistics from the General Department of Customs indicated that the country’s trade deficit has reached US$1.8 billion from early this year through March 15, 2017, compared with a trade surplus of nearly $1 billion in the same period of 2016. The main reason is the strong increase in the demand for imported machinery and equipment, due to stronger economic growth in 2017.

The exchange rate has also been affected by the US Federal Reserve (Fed) interest rate hike. The Fed decided to increase interest rates by 0.25 per cent on March 16, 2017. This was the second increase in the last three months. 

At the same time, the Fed signaled the possibility of there being two or three more interest rate hikes in 2017.

Rising interest rates also mean that the cost of using US dollars is increasing, and both global Foreign Direct Investment (FDI) and Foreign Indirect Investment (FII) flows will tend to decline and return to the US. 

This is also the economic strategy under President Donald Trump, in which he wants those American businesses investing overseas to return to the USA.

Experts, therefore, forecast that the State Bank of Viet Nam is unlikely to be able to purchase as large amounts of foreign currency as in 2016. 

Last year, the central bank bought a record high $10 billion in foreign currency.

Also, pressure on the exchange rate is likely to come from higher inflation this year.

After the record low price drop in 2015, the prices of basic commodities rebounded significantly in 2016, and in the early months of 2017. 

In particular, oil prices increased by 22 per cent, while rubber and steel prices also rose by 53 per cent and 71 per cent, respectively. 

Therefore, there remains a risk of having a large trade deficit, as Vietnam’s economy heavily depends upon both imports and exports.

In addition, the roadmap for adjusting price hike for essential commodities managed by the State, such as health services, fresh water and electricity, will be forced to be implemented in 2017, after repeated postponements.

The pressure caused by inflation comes from both inside and outside the economy. 

Hence, it is a challenge to control the average inflation rate below 4 per cent, as targeted by the Government. 

The high inflation rate will lead to a corresponding increase in deposit interest rates. 

This movement will directly affect the psychology of the public and businesses, as they tend to hoard foreign currency against the downward movement of the đồng.

However, with record high foreign exchange reserves of above $40 billion, and the flexible central reference exchange rate management being currently applied, it is expected that the exchange rate will still be controlled and adjusted according to market signals, while the shocks suffered by the exchange rate in the past will not be repeated.

ANZ has also forecast that the đồng would be devalued by only 2 to 3 per cent against the US dollar this year. 

Source: Vietnam.net

Photo: CBR Investment AG