Tuesday, 22/09/2015 10:44

What if the VND continues to depreciate?

At least two financial institutions have predicted that the dong will continue depreciating against the US dollar.


A report released on August 20 by the Hong Kong and Shanghai Banking Corporation (HSBC) Vietnam said the dong could lose 2 percent of its value more from now to the end of the year.

Meanwhile, the latest report by the Ban Viet Securities Company (VCSC) said the State Bank of Vietnam might continue to widen the forex trading band.

The institutions came to the conclusion based on the fact that the Chinese yuan has depreciated sharply and may depreciate further. According to Rabobank, the Chinese central bank will have to stop supporting the yuan in early December and let the currency depreciate because of lower foreign exchange reserves.

China is selling foreign currencies to support the yuan. Analysts from Deutsche Bank, Barclays and Societe Generale estimated that in August 2015 the Chinese central bank had to use $100-200 billion from its foreign exchange reserves to stabilize the yuan, but it was too costly.

If China does not continue stabilizing the yuan and Vietnam wants to maintain the competitiveness of its products against Chinese goods, the State Bank of Vietnam (SBV) would have to devalue the dong further.

This was why SBV widened the forex trading band twice in August and raised the interbank exchange rate once, which led to a 3 percent devaluation of the dong against the dollar.

Counting the two previous exchange rate adjustments, the dong has lost 5 percent of its value this year.

Five percent is a significant depreciation, considering that the dong/dollar exchange rate had stabilized in the last two years.

However, compared with other currencies, the depreciation is still modest.

If the dong continues depreciating…

What if the dong continues to lose its value? “The prices of import goods will increase,” said Nguyen Tri Hieu, a renowned banking expert.

Toyota Vietnam plans to raise the selling prices of some domestically assembled products and import models by 4 percent in October.

The Vietnam Animal Feed Association said the weaker dong would lead to higher production costs, because imports account for 60-65 percent of total expenses in the industry.

As for an economy with high trade deficit like Vietnam ($13 billion in the first eight months of the year), the local currency depreciation has made imports more expensive and affected domestic production, because most imports are input materials for production.

However, according to HSBC, the high public debt won’t allow Vietnam to devalue the dong too sharply.

Because of this, Vietnam will continue pursuing a strong dong policy as it has done in the past several years.

vietnamnet
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