Vietnam’s widening trade deficit is putting pressure on the Vietnamese dong (VND) and FX reserves, the Hongkong and Shanghai Banking Corporation (HSBC
) has said in its latest report.
Heightened weakening of the Chinese yuan and China’s fixing reforms have intensified the pressure on the VND, which has caused the USD/VND rate to trade at the upper side of the State Bank of Vietnam (SBV)’s band since 2015.
Given that the central bank’s reserves are looking increasingly thin, with import cover having fallen to 2.1 months as of Q3/2015, the SBV is likely to pare back intervention and allow the currency to depreciate further in the months ahead, said the bank.
The SBV on January 4 introduced a new fixing mechanism for the VND that would allow a more market-based setting of the reference USD/VND rate. The rate was set at 21,907 dong a dollar on January 6, 11 dong higher than the fixing of 21,890, which had been in place since August 19, 2015.
The bank expected Vietnam’s gross domestic product (GDP
) to expand 6.7% year-on-year in 2016, in line with the government’s growth target, as the dual engine of domestic demand and exports should stay strong.
Its GDP growth forecast for Vietnam has been raised by 0.1 percentage point to 6.8% in 2017.
“Macro policy management will likely get trickier this year, as continued strong growth gradually stokes price pressures. On the external front, we expect exports to return to double-digit growth even as global growth remains lackluster,” says the report.
Foreign direct investment (FDI) is predicted to rise further this year, reflecting improvements in the investment climate, says HSBC, adding that the new investment, coupled with continued market share gains in key products, would boost Vietnam’s exports.
HSBC expects inflation to rebound emphatically in the second half of the year with growth having firmly shifted gears to the 6%-7% range.
Some administered prices, base effects from stabilizing oil prices and a likely pick-up in food inflation could cause headline inflation to pick up to 3% year-on-year by end-H1 and hit 5.1% year-on-year by end-H2 this year, breaching the State Bank of Vietnam (SBV)’s target.
“We think it would be prudent to commence gradual tightening in the second half of the year to mitigate the risks of another overheating of the economy,” the bank said, predicting the SBV would switch to a tightening mode this year, delivering the first 50bp hike in Q3/2016.
Some Vietnamese brokerage houses and economists have predicted the VND would weaken by between 3% and 5% this year, following 6% depreciation in 2015.
During 2015, the SBV weakened the mid-point USD/VND rate three times in January, May and August, with 1% each, and widened the trading band of the dong twice to +/-3%.
Supporting the forex rate comes at a cost when Vietnam’s foreign currency reserves dropped by $6.7 billion to $30.3 billion at the end of September 2015, according to data of the International Monetary Fund (IMF
) quoted by HSBC.