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VND to average slightly weaker in 2020 ​

16:47 | 18/01/2020

VND would average slightly weaker by 1 percent due to easing foreign direct investment (FDI) inflows and higher imports in 2020.

vnd to average slightly weaker in 2020

In the long-term forecast, VND is said to stay on a gradual depreciatory trend against USD due to VND’s persistent overvaluation and higher structural inflation in Vietnam versus USD.

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