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Last updated: Friday, July 20, 2018


Stable Exchange Rate and Confidence in Local Currency

Posted: Wednesday, August 09, 2017

One of outstanding results in the first half of this year was stable dollar exchange rate despite some unfavourable factors such as the third rate hike by the Federal Reserve (Fed) and higher dollar exchange rate growth in many other countries than Vietnam.

The average exchange rate in the first six months of 2017 grew only 1.39 per cent from that of a year earlier, much lower than the corresponding growth of 3.91 per cent in the same period of 2016.

Not only forex reserves increase
According to the State Bank of Vietnam (SBV), the world market has been quite volatile since the end of 2016 due to impacts from economic and political fluctuations from big countries. However, SBV has kept a close watch on market developments to announce appropriate central rates. Previously, exchange rate was listed with a certain upper limit and exchange rates at commercial banks were subject to sudden increase pressures, thus causing exchange rate fluctuations. Now, with daily-adjusted central exchange rate policy, exchange rates quoted at commercial banks are also adjusted daily, helping avoid sudden shocks.

Exchange rate stability is also an important result of lower inflation than a year ago. Consumer price index (CPI) in June 2017 dropped 0.17 per cent over June 2016 (rising 0.46 per cent). CPI in the January - June period edged up 0.2 per cent, compared with a growth of 2.35 per cent. Average underlying inflation in the first six months of this year was also lower than a year ago (1.52 per cent versus 1.8 per cent).

Foreign fund flows into Vietnam kept going up. Foreign direct investment (FDI) continued to grow, reaching US$7.72 billion (up 6.5 per cent) and forecast to record high of US$15.8 billion set in 2016. Foreign indirect investment (FII) has been still on the rise since the beginning of the year, reaching roughly US$20 billion.

Stable exchange rates enable the SBV to buy more foreign currencies to increase its foreign exchange reserves to a record level of more than US$40 billion that the SBV had reached in 2016. Increased foreign exchange reserves will help ensure financial security. Stable exchange rates are also an opportunity to control inflation.

As the exchange rate was stable, the domestic gold price did not increase in tune with world prices. Importantly, domestic and world price gaps are not big enough to stimulate illegal gold import, which usually pushes up dollar prices.

Potential pressures
Pressures on the foreign exchange market are still heavy and even tend to grow more strongly in the remaining six months of the year. According to some experts, exchange rates may pick up 2 - 3 per cent by the end of this year. Nevertheless, Vietnamese dong is forecast to not depreciate significantly as inflation is contained below 4 per cent and abundant forex reserves of the SBV.

External exchange rate pressures may intensify as the Fed signalled more rate hikes in the next few years, expected to reach 3 per cent by the end of 2019.
But, the biggest concern is the return of trade deficit. Especially, the depreciation trend of Chinese yuan will cast a big impact on Vietnamese dong while trade deficit between Vietnam and China is on the upward trend, rising from US$23.7 billion in 2013 to US$28 billion in 2016. According to a report released by the Ministry of Planning and Investment, Vietnam ran a trade deficit of US$2.7 billion in the first five months of 2017, equivalent to 3.4 per cent of total import-export value and approximately equal to the target of 3.5 per cent set by the National Assembly. This may push up pressures on the rising supply of foreign currencies but abundant foreign exchange reserves may help diminish such pressures considerably, according to experts.

With stable exchange rate and flexible regulatory policy of the SBV, macro-economic stability and growth continued. Nevertheless, any growth must accept a certain devaluation. According to experts, dong depreciation will support growth. People and businesses always expect the SBV's policies to support growth, promote production and business, and increase confidence in the domestic currency by stabilising exchange rates.

Bao Chau

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