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Dong to drop as inflation deters investors, HSBC says
The Vietnamese dong will continue depreciating as the highest inflation in more than a decade deters investors, according to HSBC.
The currency has slipped 0.7 percent this year, wiping out all of last year’s gains, as the nation’s stock index has plummeted 42 percent since early this year.
The exchange is the world’s worst performer this year.
Record food and oil prices may widen the nation’s current-account deficit and curb corporate earnings growth.
“We see some near-term weakness,’’ said Richard Yetsenga, a foreign-exchange strategist at HSBC in Hong Kong.
“The key concerns are that inflation and excessive domestic growth have been allowed to persist.
Those pressures have flipped from dong positive to dong negative.”
ABN Amro Bank NV also said the dong will weaken in a report published last week, whilst Morgan Stanley’s currency strategist Stewart Newnham says his forecast of 4 percent gains this year “may have been too optimistic.”
Goldman Sachs Group Inc. said the State Bank of Vietnam bought dollars on March 25.
The group said the move, which aimed to making the nation’s exports more competitive, pushed the dong about 1.8 percent lower that week.
The dong declined 0.03 percent to 16,114 per dollar Tuesday, and may slip 0.7 percent to 16,217 by the middle of the year, said Yetsenga.
He predicted that the currency may close the year around 16,135.
There was an “acute” lack of onshore dollar supply last quarter due to foreign-loan repayments, remittances and increased trading volumes as exports and imports rose, said Morgan Stanley’s Newnham in a research note middle this month.
“Onshore dollar funding pressures have undermined the dong and investor confidence,” he said.
Slowing growth
Economic growth has slowed in the first quarter to an annualized 7.4 percent pace as the global economy cools and the nation’s inflation rate grows.
Vietnam’s government said April 4 that it plans to reduce its target for economic growth to 7 percent this year.
“The depreciation of the dong can be partly attributed to the growing demand for dollars from rising imports and expectations that the central bank may have to hold down the value of the dong to bolster export growth,’’ wrote economist Helen Qiao in the Goldman Sachs report.
The dong changed little since April 14 when the central bank said it would expand the dong’s daily trading band to 2 percent on either side of a daily fixed rate aimed at slowing the 19.4 percent inflation rate.
It didn’t say when the State Bank of Vietnam would widen the band.
“The central bank will have to tighten monetary policy further to regain monetary control if it cannot allow any dong appreciation to curb inflation,’’ said Qiao at Goldman Sachs.
In a recent statement, the International Monetary Fund (IMF) said the dong was the third-best performer among Asia’s 17 most-traded currencies versus the dollar as Vietnam’s economy was overheating.
The IMF said high interest rates were probably needed in Vietnam to reign in inflation.
tn, Bloomberg
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