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Increase of 1-2% to USD/VND rate this year appropriate

Released at: 20:27, 03/02/2018

Increase of 1-2% to USD/VND rate this year appropriate

Mr. Nguyen Tri Hieu. Photo: Quang Huy (VET)

Senior banking expert Nguyen Tri Hieu shares his thoughts with VET on the USD/VND exchange rate this year.

by Quang Huy

Despite there being times when it fluctuated slightly, Vietnam successfully stabilized the USD/VND exchange rate in 2017. How will this task proceed in 2018?

There is a high possibility that the US Federal Reserve will raise interest rates this year. The signals indicate that it will continue tightening monetary policy, and any adjustment to US interest rates will have an immediate impact on the USD/VND exchange rate.

I believe it will be much more difficult to stabilize the USD/VND exchange rate in 2018 than last year. We might have to accept the fact that there is a possibility that the US Fed will raise interest rates and therefore it is reasonable for the USD/VND exchange rate to be adjusted within the 1-2 per cent margin.

Any such adjustment is backed by a number of factors. First, Vietnam cannot just keep the VND/USD exchange rate at a low level forever, because this is not in line with the trend towards a global economy, especially when the US interest rates increase. Second, export activities by local enterprises will be negatively affected if the USD/VND exchange rate is not adjusted upwards.

When exchange rates are kept low or stable, this encourages more exports and puts local products in very stiff competition at a time when a series of free trade agreements are coming into force this year. The effect of exchange rate hikes, therefore, will help prevent massive imports coming into Vietnam and provide more support for Vietnamese enterprises.

A stable USD/VND exchange rate might be positive and create confidence for consumers and economic organizations on the policy front, but in terms of foreign trade it will not be beneficial for the country’s economic growth as Vietnam relies heavily on exports.

What will be the key factors supporting the State Bank of Vietnam (SBV) in managing exchange rates this year?  

The fact that the SBV bought a record amount of foreign exchange reserves in 2017 and early-2018, raising the amount to $54.5 billion by mid-January, is a positive. This is the best way to ensure that the central bank can intervene in the market when necessary. The central exchange rate mechanism will also continue supporting the management of exchange rates in 2018.

The central exchange rate mechanism will continue reducing pressure from the USD on the movements of the VND. The central bank has proved to be very flexible in terms of trading foreign exchange and managing the foreign exchange market.

Trade, foreign investment, and overseas remittances made important contributions to the overall picture of exchange rates in 2017. What is your prediction about the impact of these contributions to the stability of the USD/VND exchange rate and the foreign exchange market in 2018?

It was shown that the wave of foreign direct investment (FDI) in 2017 strongly supported the central bank in managing exchange rates last year. I hope that foreign investors will continue being interested and pour money into Vietnam this year, especially through the recent and upcoming initial public offerings (IPOs) of State-owned energy firms. Foreign investors, especially those from South Korea and other Asian countries, are very much interested in buying shares in Vietnamese energy companies.

I don’t have high expectation for remittances because this it very much depends on global economic trends and the US economy. We all know that half of remittances to Vietnam come from the US. The stability of the exchange rate in 2018 will be decided by trends in import and export activities and the flexibility of the SBV in managing foreign exchange policy.

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