Vietnam’s exchange rate remains stable amid Fed interest rate hike

The U.S. dollar/Vietnamese dong exchange rate would remain stable at 22,600-23,050 in 2022 amid the global currency tremors induced by the Federal Reserve’s tightening monetary policy, according to top broker VnDirect Securities.

Though the Fed’s interest rate hike has had impacts on Vietnam's multiple economic aspects, VnDirect analysts said they believed the "Vietnamese dong remains one of the most stable currencies in the Asia-Pacific region".

As the fundamental factors supporting the value of the Vietnamese dong remain robust in 2022, including a current account surplus and high foreign exchange reserves, the appreciation of the U.S. dollar should have little impact on Vietnam's exchange rate.

“The Vietnamese dong may fluctuate in a relatively narrow band (+/-1%) against the U.S. dollar,” they stated in a report.

The broker expected Vietnam’s current account surplus to grow to 1.9% of GDP in 2022, up from an estimated deficit of 1.0% in 2021.

The country's foreign exchange reserves are also predicted to jump from $105 billion to $122.5 billion by the end of 2022, equivalent to four months of imports.

However, VnDirect noted that the tighter global financial conditions have reduced the global growth outlook, lowering demand for Vietnam's exports.

The rising U.S. dollar interest rate exerts pressure on domestic interest rates, raising the probability of a 20-40 basis point increase in the Vietnamese dong deposit interest rate in late 2022.

A strengthening U.S. dollar would also raise the costs of new loans and debt repayment obligations in U.S. dollar. Vietnam's foreign debt accounted for 39% of GDP by the end of 2021. Given tighter liquidity in the international financial market, raising funds and bearing higher interest rates would be challenging for the government and companies, according to VnDirect.

Foreign indirect investment (FDI) inflows may continue to be net withdrawn in the coming months due to the influence of the "taper tantrum". However, given the consistent net selling of foreign investors over the last two years, the impact of net foreign sales will be moderate since the market has planned ahead of time.

Meanwhile, FDI inflows into Vietnam would be less affected as the country remains an appealing investment destination in the trend of diversifying global supply chains, the securities house noted.

VnDirect believed that the State Bank of Vietnam (SBV) would maintain the appropriate monetary policy until at least the end of the second quarter of 2022 due to several reasons.

Firstly, domestic demand has not fully recovered to pre-pandemic levels. Secondly, despite rising inflationary pressures in the coming months, the average consumer price index in the first half of 2022 is predicted to be 2.5% year-on-year, significantly below the government's target of 4%.

Finally, the SBV still prioritizes the goal of maintaining low interest rates to support businesses. Any monetary tightening would only take place in the second half of 2022, probably in Q4/2022, and the increase, if any, would be limited, to around 0.25-0.5%.

Analysts expected the central bank to maintain high credit growth to support the economy's recovery. "Credit inflows will be prioritized to the manufacturing and service sectors, especially industry, import and export, agriculture, forestry, and fisheries."

The SBV will strictly control the credit inflows into high-risk sectors like real estate, securities, and build-operate-transfer projects, the broker added. "We maintain our prediction of high credit growth at 14% year-on-year in 2022."

Dragon Capital, one of Vietnam’s leading investment funds, holds the same view on the VND value prospects in the near future, due to an abundance of U.S. dollars from Vietnam's trade surplus and foreign investment capital, as well as the return of international tourists post-pandemic.

Vietnam’s foreign exchange reserves have increased to $110 billion, nearly tenfold in the last decade, therefore, the SBV still has room to pursue the objective of preserving exchange rate stability.