The State Bank of Vietnam (SBV), the country’s monetary authority, could weaken the local currency by 3%-4% further in 2016 as the U.S. Federal Reserve (Fed) is poised to hike interest rates soon, Ho Chi Minh City Securities Corp. (HSC) said in a recently-issued report.
There is a high likelihood that the Fed will lift rates next month in anticipation of rising consumer prices. The scale of impact on Vietnam will depend on the number of rate hikes that Fed will conduct, HSC said.
“The impact on Vietnam will be insignificant if the Fed raises interest rates once by 25 basis points after a long time of keeping rates flat,” the brokerage house noted.
An interest rate liftoff will have negative effects on (i) Vietnam’s currency, which is pegged to the U.S. dollar, and its thin forex reserves, and (ii) the country’s solvency given mounting public debt.
HSC also forecast that Vietnam’s gross domestic product would expand 6.3% next year due to a tightened fiscal policy, yields of government bond could rise 50 basis points, and deposit and loan rates would increase correspondingly.
“We expect credit growth to slow to 15% and the money supply (M2) to increase 17% in 2016,” HSC analysts said, noting that their forecasts would be revised later.
Glenn Maguire, chief economist for South Asian, ASEAN and the Pacific at Australia and New Zealand Banking Group (ANZ
), said last week that the Vietnamese dong could depreciate 5% to 7% next year as the SBV may devalue the currency twice in the coming 12 months.
The SBV has devalued the dong three times this year with 1% each and widened the trading band of the dong to 3%, resulting in a devaluation of 5% of the dong, to soften effects of the Chinese yuan devaluations and speculation on the Fed’s rate hikes.