Be cautious with exchange rate pressure in 2019

03-Jan-2019 Intellasia | Dien dan Doanh nghiep | 6:00 AM Print This Post

2018 was a successful year in terms of exchange rate operation, and many forecasts show that the pressure on exchange rate in 2019 will be reduced thanks to positive movements of domestic and international factors.

According to the statistics of the National Financial Supervisory Commission (NFSC), the central exchange rate has increased by about 1.5 percent, the exchange rate at commercial banks increased by 2.8 percent and the free market exchange rate increased by 3.5 percent compared to the beginning of the year in the context of US Dollar Index has increased about five percent compared to the beginning of the year.

Narrow exchange rate gap

The central rate has been steadily increased by the State Bank of Vietnam (SBV) since the beginning of December, even though the increase is not large. This move is quite contrary to the evolution of US dollar in the world market when the US Dollar Index against the basket of six major currencies has decreased by 0.8 percent compared to that the end of November.

However, the buying and selling prices of US dollar in commercial banks tend to decrease. Currently, the selling price of US dollar is about 23,320-23,330 dong/US dollar, while the buying price is about 23,210-23,330 dong/US dollar, 45-50 dong lower than the end of November level.

Explaining this move of SBV, many banking experts said that the gradual increase in the central rate of SBV is necessary to gradually narrow the gap of dong with regional currencies, especially dong/Chinese yuan.

For example, with Chinese yuan devaluating more than five percent against the US dollar since the beginning of the year, correspondingly the domestic currency of China is also about 3.5 percent lower than dong. SBV statistics also clearly showed that. If at the beginning of the year, the cross-exchange rate of Chinese yuan compared to dong was at 3,444.86 dong/Chinese yuan, so far it has dropped to 3,304.33 dong/Chinese yuan, i.e. Chinese yuan has decreased by 4.08 percent compared to dong. This will cause disadvantages to Vietnam’s exporting activities, especially the two-way trade between Vietnam and China, and at the same time, continue to create pressure on dong depreciation in the long term.

“SBV changed the exchange rate gradually to support exporters, especially in the context that Chinese yuan is falling sharply against the US dollar, which can make Chinese goods flood into Vietnam when the US-China trade war is still going on unpredictably,” said Dr Nguyen Tri Hieu, a banking and financial expert.

Carefulness is never redundant

The exchange rate kept stable in 2018, on one hand, was thanks to SBV’s flexible management. On the other hand, other factors such as stable macro economy, controlled inflation helped businesses, investors and people believe in dong, which were also factors that supported the stability of exchange rates.

2018 is about to close, then how will the exchange rate be in 2019? In general, the forecasts all state that the pressure on the exchange rate will ease in the coming year. “In 2019, pressures on exchange rate will be reduced since domestic and international factors tend to be more favourable than forecasts,” NFSC said and cited two reasons to prove this judgment.

Firstly, US dollar may not increase a lot, may even be weaker.

Secondly, domestic inflation is likely to be controlled at about four percent due to the minor increase in world commodity prices and weaker exchange rate pressures.

Dr Nguyen Tri Hieu, a banking and financial expert also said that in 2019, the frequency of the Federal Reserve (FED)’s rate hikes will gradually decrease since interest rate is touching the inflation target. At the same time, if the US economic growth continues to decline, the US dollar may reverse, making the exchange rate pressures lighter. “If the international money market is not too strong, the exchange rate in 2019 will continue to be stable as in 2018, since SBV has sufficient resources to intervene into the market when necessary”, Nguyen Tri Hieu stated.

However, according to Ngo Dang KhoaHSBC Vietnam’s Head of Foreign Exchange and Capital Market, although FED reduces the frequency of interest rate hikes, interest rates in the US will continue to increase. Therefore, exchange rate pressures will still exist, and will indirectly be affected by fluctuations of Chinese yuan. “With current flexible monetary policy, other measures used to operate the market need to balance between economic growth factors and macro stability,” Khoa said.

Dr Le Xuan Nghia, member of the National Monetary and Financial Policy Advisory Council also said that in the long term, there are still some factors that create pressures on the exchange rate such as trade surplus, reducing financial balance. This will put pressures on the overall balance as well as the management of the exchange rate in 2019. Therefore, SBV may be cautious and act in the direction of stabilising the real exchange rate to maintain exports in the first half of the coming year.


Category: Finance, Vietnam

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