VND to average slightly weaker in 2020
Monday, January 20,2020AsemconnectVietnam - The Vietnamese dong (VND) would average just slightly weaker by around 1 percent to VND23,475/USD in 2020 due mainly to an predicted decrease in foreign direct investment (FDI) inflows and higher imports.
This forecast was highlighted in a 2020 outlook newly released by Fitch Solutions, a macro-research entity under the financial service provider Fitch Group. VND has remained stable and averaged VND23,230/USD in 2019.
FDI inflows are predicted to ease slightly over the coming quarters, providing less support to VND and underscoring our mildly depreciating view.
2019 saw US$38 billion in total registered investment capital, up 7 percent on year. The processing and manufacturing sector continued to attract the bulk of FDI at US$24.6 billion, which accounts for 64.6 percent of the total registered investment capital during 2019. Over 2020, Fitch Solutions believes that infrastructure and human capital bottlenecks will see
FDI into the manufacturing and processing sector ease.
Positive demographic trends, rising incomes and a growing middle class will continue to support the retail sector, and this informs FDI inflows into wholesale and retail would grow significantly, partially offsetting the cooling of manufacturing FDI.
Vietnam’s imports are also likely to rise over the coming months, outpacing exports and putting weakening pressure on VND. A shortage of meat in the country has begun to see inflation spike.
Inflation in December 2019 came in at 5.2 percent on year, up from 3.5 percent on month, led higher by a 9.2 percent year-on-year inflation in food prices, up from 5.6 percent over the same period. This is likely to see Vietnam ramp up imports of animal protein to deal with the shortfall.
Given that under normal circumstances, Vietnam’s imports and exports have generally exhibited a very close correlation, likely due to manufacturing inputs accounting for the bulk of imports, Fitch analysts expect higher food imports to see total imports outpace exports over the coming months.
The research entity expects the State Bank of Vietnam to seek to limit the pace of VND weakening, given that Vietnam remains on the US Treasury’s currency manipulator watchlist at its January 2020 report.
The US Treasury adds a country to its list if it meets two of the three criteria, including a trade surplus with the US of at least US$20 billion, a current account surplus of at least 2 percent of GDP and one-sided intervention in the currency equivalent to 2 percent of GDP in six months of a year.
A meeting of all three criteria risks Vietnam coming under punitive trade measures from the US, although Fitch Solutions said this scenario as quite unlikely.
Vietnam was included in the list as its goods trade surplus with the US continued to rise significantly, with the surplus reaching US$47 billion over the four quarters through June 2019.
However, its current account surplus narrowed to 1.7 percent of GDP, and while Vietnam frequently intervenes in the foreign exchange market to maintain a close link to the US dollar, intervention was done both ways. Net purchases of foreign exchange was also only at 0.8 percent of GDP in the four quarters to June 2019.
Regarding the long-term outlook stretching up to 24 months, VND is forecast to persist on a gradual depreciatory trend against USD due to VND’s persistent overvaluation and higher structural inflation in Vietnam versus USD. As such, the unit would potentially average VND23,650/USD in 2021.
VND’s real effective exchange rate (REER) is trading 11.7 percent above its 10-year average, which suggests currency overvaluation. While some of the strength in the REER could be attributed to productivity gains, an overvalued currency would in general still weigh on export competitiveness, dragging on export earnings and the strength of VND.
Fitch Solutions forecast inflation in Vietnam to average 5.7 percent in 2020 and 4.2 percent in 2021, mainly on the back of food inflation, far above 2.2 percent in USD for both years.
It also expect the shortage of pork due to the African swine fever in Vietnam to continue raising prices for animal protein in the country. Given the view that pork production is likely to only recover somewhat closer to 2023, the research firm expects elevated food inflation (40 percent of the inflation basket) due to the pork shortage and substitution into alternative animal proteins to continue over the coming two years at least, pushing up headline inflation.
High inflation would also weigh on Vietnam’s export competitiveness in addition to incentivising imports, which combined, would pressure VND weaker over the long run. Given that export’s account for a significant 95.4 percent of GDP, Fitch experts believe that the central bank will favour a weaker VND to support growth, although the pace of depreciation is more likely than not to be very gradual, given still incoming FDI inflows.
Source: VOV.VN
Solutions proposed to improve investment environment in HCM City
Expanding markets, fruit and vegetable exports continue to increase
China is Vietnam's third largest rice import partner
DAILY: Vietnamese pepper prices rose by 500 VND on March 15, 2024
DAILY: Vietnamese coffee prices increased by 100 VND on March 15, 2024
Which product had the strongest growth of export turnover in February, earning more than 200 million USD?
China is Vietnam's largest wood chip export market
In the first 2 months of this year, textile fiber exports earned more than 666 million USD
Bright economic spots at beginning of the year
Expanded land use rights expected to attract OV investment in real estate
PM urges enhancing credit access, absorption to fuel growth
In 2023: Wood pellet export earned nearly 680 million USD
DAILY: Vietnamese pepper prices fell by 1000 VND on March 14, 2024
DAILY: Vietnamese coffee prices decreased by 100 VND on March 14, 2024
Plan of Hai Duong province for a period of 2021 - 2030, ...
Organize space reasonably and harmoniously, focusing on connecting Hai Duong in common development space, actively contributing to the ...Plan of Hau Giang province in a period of 2021 - 2030, ...
Sustainable forestry development program in a period of ...
Supporting industry development program in Da Nang city in ...
Implementation plan of Scheme on promoting agricultural, ...
Hanoi harnesses “soft power” of culture in development
Since joining the UNESCO Creative Cities Network in the “Design” category in 2019, Hanoi has organised a multitude of activities relating ..."Happy Tet 2024" to open in Hanoi
Vietnamese literary works served up at Brussels restaurant