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ECC predicts 3-5% decrease in VND value in 2009
Analysts have advised businesses to be wary of VND/US$ exchange rate fluctuations in 2009 after witnessing the heavy fluctuations in 2008 and the trading band adjusted five times. They say the exchange rate fluctuations may also affect opportunities to access credit.
Eurocapital Securities Company ECC has released the results of a survey which says that in 2009, the basic interest rate cuts will not be as strong and continuous as they were last year. However, ECC’s experts believe that the devaluation of the local currency is likely to occur, which would affect many businesses.
The stories that need to be repeated
Pha Lai Thermopower Plant (PPC) has been cited as the typical example of the losses businesses have incurred due to the exchange rate fluctuations.
PPC got JY37bil. In the period between June and November 2008, the yen price increased by 7.73% against the greenback. In September-November 2008 alone, the Japanese yen revaluated by 20-25% against the dollar and 30-40% against the euro. PPC suffered a double loss on the loan as the VND lost its value against the dollar, and the dollar lost its value against the yen.
The exchange rate fluctuations had had such strong impacts that the company had to report no profit and could not pay dividends in November 2008.
Besides PPC, many other companies also had to spend time explaining to their shareholders about quarterly profit decreases due to the exchange rate fluctuations. A plastics company listed at the HCM City Stock Exchange in May and June 2008 reported the loss of up to VND5bil a month just because of exchange rate fluctuations.
Warnings for 2009
ECC’s survey said the greenback revaluation will continue in 2009, but the rate will not be as strong. Transaction exchange rates quoted by commercial banks are always at the ceiling levels allowed by the State Bank of Vietnam. Moreover, bad news like decreases in foreign direct investment, overseas remittance and export turnover have been putting pressure on the VND.
ECC has predicted that the VND may decrease by another 3-5% in 2009, which would lead the exchange rate to reach VND17,500-17,800/US$1. If the trading band is widened by the State Bank of Vietnam, possibly to 5%, the highest possible rate could be VND18,400/US$1.
According to ECC, there are some factors that support the slight value decrease of the local currency, including the narrower trade deficit (Vietnam’s exports are believed will decrease, but imports will also decrease). Meanwhile, foreign direct investment disbursement will remain high despite the decrease in registered investment capital. Overseas remittance is predicted to see the decrease of $2-4bil, while Vietnam may mobilise $2-3bil worth of capital with international bonds.
If Vietnam can successfully mobilise capital, the payment balance will remain stable. However, ECC said that the bad scenario could also occur if the said above things do not occur. If so, the exchange rate could reach VND19,000-19,500/US$1, or the VND lose 8-10% in value.
In principle, the VND devaluation will benefit exports and bring disadvantages to import companies. ECC said that some industries will bear stronger impacts. The pharmaceutical industry imports up to 90% of materials; therefore, the greenback value increase will lead to the input production cost increase, while companies cannot easily raise sale prices, as medicine is a product under the strict control of the state.
The milk industry now also imports 80% of input materials. However, dairy producers can target domestic sources. The seafood industry will benefit from the weaker currency, especially as exports markets are being narrowed.
VietNamNet, Tien phong
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