Viet Nam monetary policy likely to come under pressure from trade war

Monday, Sep 09, 2019 08:07

On August 23 the State Bank of Viet Nam set the benchmark exchange rate at VND23,127 to the dollar, weakening the dong by VND5 compared to the previous five days (August 19).— Photo

On August 23 the State Bank of Viet Nam set the benchmark exchange rate at VND23,127 to the dollar, weakening the dong by VND5 compared to the previous five days (August 19).

The daily reference rates at its transaction office were VND23,200 for buying and VND23,771 for selling.

At banks the greenback was steady. It was VND23,145 and VND23,255 at Vietcombank, a VND10 depreciation of the Vietnamese currency since August 19.

Techcombank and BIDV set them at VND23,139 and VND23,259.

These rates have barely changed since late last year.

Experts warned however that businesses, especially exporters, should actively use tools to hedge foreign exchange rate risks.

They said the central bank would likely face a lot of pressure from the escalating China-US trade war, which has forced many countries to depreciate their currencies.

The Chinese yuan fell below the key level of seven to the dollar earlier this month, and according to the South China Morning Post newspaper, it is likely to fall further if the trade war continues unabated.

The US alleges that China is deliberately weakening its currency to gain a trade advantage, while China strongly denied the allegations, claiming the yuan’s depreciation was caused by the market.

Whatever the truth may be, the yuan has lost around 2 per cent against the dong so far this year.

It is the Chinese currency’s depreciation that has had a big impact on the Vietnamese dong, suggesting the central bank could consider tweaking policy to ensure the stability of the monetary market and protect the competitive advantage of Vietnamese exports and businesses’ production capacity since China is one of Viet Nam’s biggest trade partners.

The trade deficit with China is widening. In the first eight months of this year Viet Nam imported US$49.2 billion worth of goods from China, and had a deficit of $25.4 billion.

The cheaper yuan has made Chinese products cheaper.

But in spite of the growing deficit, analysts said the central bank might not support exports if it wants to keep the forex rate steady at around +/– 1 per cent as it had indicated.

But others said there was a possibility it would depreciate the dong or weaken the benchmark foreign exchange rate if the yuan continued to weaken to protect Vietnamese exports.

They also said the central bank needed to closely watch the US-China trade war and major countries’ fiscal and monetary policies to monitor capital flows, and have specific measures to ensure there is a trade balance with the US and others.

However, the SBV also had to be careful with its monetary policy in order not to be labelled a “currency manipulator” by the US.

A few months ago the US added Singapore, Malaysia and Viet Nam to a watch list for currency manipulation, putting their foreign-exchange policies under scrutiny.

The US labels a country a currency manipulator if it meets two of the following three criteria: According to a source from Reuters on August 6 U.S. law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant bilateral trade surplus with the United States, and persistent one-way intervention in foreign exchange markets.

After determining a country is a manipulator, the Treasury is required to demand special talks aimed at correcting an undervalued currency, with penalties such as exclusion from U.S. government procurement contracts.

Vietnam was at risk of meeting all three criteria.

The US excused Viet Nam’s recent currency intervention, citing movements in both directions and net foreign exchange purposes that had the “reasonable rationale” of rebuilding reserves.

Viet Nam had a trade surplus with the US of $40 billion last year, twice the threshold of $20 billion.

The country’s current account balance with the US has also been rising over the last decade, reaching a surplus of more than 5 per cent of the GDP in the year ending June 2018, more than double the threshold of 2 per cent, according to the US.

According to World Bank data, Viet Nam is one of the most trade-dependent nations in the world, with exports equivalent to more than 100 percent of GDP.

While Viet Nam’s buying of foreign exchange outweighed selling over the course of last year, the central bank intervened in both directions, with selling used to resist downward pressure on the dong in the second half of 2018, the US noted.

It proposed that Viet Nam reduce its interventions and allow for movements in the exchange rate that reflect economic fundamentals, including gradual appreciation of the real effective exchange rate, which would help reduce Viet Nam’s external surpluses.

However, experts from KB Securities company said that between July 2018 and June 2019 the country’s net foreign currency purchases accounted for only 1 per cent of GDP because the central bank sold a huge quantity of dollars to prevent the dong from depreciating.

Viet Nam had to rebuild its reserves since in 2018 they were only equal to 2.9 months’ imports and foreign debt payments.

They said however that the possibility of the US putting Viet Nam in the watch list for currency manipulation would require the central bank to be vigilant.

Foreign securities firms see exponential growth

Foreign finance companies have in recent years poured trillions of dong into securities subsidiaries in Viet Nam, becoming big players in the market. The competition in the securities market is thus becoming increasingly fierce.

The US’s Mirae Asset Wealth Management gradually increased the charter capital of Mirae Asset Vietnam by 14 times from VND300 billion (US$13.04 million) in 2007 to VND4.3 trillion ($187 million) last year.

Thanks to this, Mirae has become the second largest securities company in Viet Nam behind only Saigon Securities Incorporation, whose charter capital is more than VND5 trillion (US$217.4 million).

KIS Vietnam has increased its capital by VND784 billion (US$34.1 million) to nearly VND1.9 trillion (US$82.6 million), while Maybank Kim Eng and Shinhan Vietnam increased theirs to VND1.056 trillion and VND812 billion.

KB Vietnam has received approval to increase its capital from VND300 billion to VND1.68 trillion.

Yuanta Vietnam, which has also completed a hike from VND300 billion to VND1 trillion, becoming one of 18 brokerage companies in Viet Nam with charter capital exceeding the VND1 trillion (US$43.5 million) threshold.

Analysts attributed the trend to their international experience and cheap availability of capital.

Most of the securities companies had operated in one or more developed markets before investing in Viet Nam, they said.

Their experience and skilled manpower are coming in handy for them in Viet Nam at a time when the market is looking forward to new products like derivatives and covered warrants, which are common in many overseas markets.

They are able to raise capital at a low cost in developed countries and invest in Viet Nam.

Many foreign securities firms have a charter capital of at least VND1 trillion, a pre-requisite to launch products such as derivatives and covered warrants.

To quickly enlarge market share, foreign securities firms have not only fully tapped their advantages but also adopted wise business strategies to exploit every market segment.

One of them is to offer retail investors low lending interest rates for margin trading. — VNS

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