Rising greenback value raises alarm over capital outflow

11-Aug-2018 Intellasia | The Saigon Times | 6:02 AM Print This Post

The upward trend of the US dollar in most markets and the ongoing interest rate hikes by the US Federal Reserve (Fed) have raised concerns over capital outflows from emerging countries, including Vietnam.

At a workshop on the July-December economic forecast and impact of the US-China trade war, held on August 8 in Hanoi, Tran Toan Thang from the National centre for Socioeconomic Information and Forecast stated that the greenback is expected to pick up even further because of the bright economic outlook of the United States and countries that are depreciating their currencies.

In addition, the Fed may continue to raise interest rates by a combined 1.25 percentage points going into 2019.

The Chinese yuan has slid significantly against the greenback over the past few months as a result of the capital withdrawal tendency of foreign investors.

As explained by Pham Sy Thanh, director of the Chinese Economic Studies Programme, the era of China’s cheap exports to the United States has ended. As such, the domestic currency depreciation to aid exports is no longer significant.

In addition, China’s balance of payments surplus in the year’s first half was some $250 billion and foreign reserves dropped by $30-50 billion. This means approximately $300 billion has flowed out of China.

“This stems from investors’ concern that prolonged US-China trade tensions will affect their operations in China,” Thanh said.

Besides the rising trend of the greenback, the United States’ tax reform bill has also contributed to capital flows back to the United States.

Thang noted that corporate income tax in the United States, which is also imposed on profits generated overseas, has dropped sharply to 21 percent. This will make US firms operating in Vietnam reconsider their strategies and potentially return to their home country instead of expanding their business operations.

The tax cuts may result in some countries acting to keep US firms on their soil, affecting the competitiveness of Vietnam’s investment environment. This is evidenced by China’s decision to exempt US firms from paying taxes to prevent them from taking profits out of China.

According to Nguyen Xuan Thanh from Fulbright University Vietnam, Vietnam experienced a current account surplus in January-June, particularly in imports and exports, incoming remittances, capital disbursement in the foreign direct investment (FDI) sector and disbursement of indirect capital in the stock market.

Thanh stated that greenback shortages in the coming period are not concerning.

Sharing this view, Andreas Hauskrecht, a professor of Indiana University, noted that a large proportion of foreign capital in Vietnam comes from FDI activities, which is a stable, long-term source of capital.

Meanwhile, hot money from foreign indirect investment (FII) can easily find its way out. FII capital inflows have not been noticed in the year to date, but some $600 million of FII capital has been sent out of Vietnam, according to Hauskrecht.

However, this amount is not significant and does not cause much pressure on the exchange rate, Hauskrecht said. Even with good FDI disbursement results, the dong may appreciate if the central bank does not buy foreign currencies, he added.

According to Thanh, in the medium and long run, if the trade war escalates, China’s FDI capital will flow to Vietnam to avoid the United States’ sanctions. Disbursements of FDI capital in Vietnam will then be positive, and the pressure on the exchange rate will be minimal.



Category: Finance, Vietnam

Print This Post