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

Update: September, 09/2019 - 08:07

Compiled by Thiên Lý

On August 23 the State Bank of Việt Nam set the benchmark exchange rate at VNĐ23,127 to the dollar, weakening the đồng by VNĐ5 compared to the previous five days (August 19).

The daily reference rates at its transaction office were VNĐ23,200 for buying and VNĐ23,771 for selling.

At banks the greenback was steady. It was VNĐ23,145 and VNĐ23,255 at Vietcombank, a VNĐ10 depreciation of the Vietnamese currency since August 19.

Techcombank and BIDV set them at VNĐ23,139 and VNĐ23,259.

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 đồng so far this year.

It is the Chinese currency’s depreciation that has had a big impact on the Vietnamese đồng, 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 Việt Nam’s biggest trade partners.

The trade deficit with China is widening. In the first eight months of this year Việt 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 đồng 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 Việt 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 Việt Nam’s recent currency intervention, citing movements in both directions and net foreign exchange purposes that had the “reasonable rationale” of rebuilding reserves.

Việt 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, Việt Nam is one of the most trade-dependent nations in the world, with exports equivalent to more than 100 percent of GDP.

While Việt 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 đồng in the second half of 2018, the US noted.

It proposed that Việt 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 Việt 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 đồng from depreciating.

Việt 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 Việt 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 đồng into securities subsidiaries in Việt 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 VNĐ300 billion (US$13.04 million) in 2007 to VNĐ4.3 trillion ($187 million) last year.

Thanks to this, Mirae has become the second largest securities company in Việt Nam behind only Saigon Securities Incorporation, whose charter capital is more than VNĐ5 trillion (US$217.4 million).

KIS Vietnam has increased its capital by VNĐ784 billion (US$34.1 million) to nearly VNĐ1.9 trillion (US$82.6 million), while Maybank Kim Eng and Shinhan Vietnam increased theirs to VNĐ1.056 trillion and VNĐ812 billion.

KB Vietnam has received approval to increase its capital from VNĐ300 billion to VNĐ1.68 trillion.

Yuanta Vietnam, which has also completed a hike from VNĐ300 billion to VNĐ1 trillion, becoming one of 18 brokerage companies in Việt Nam with charter capital exceeding the VNĐ1 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 Việt Nam, they said.   

Their experience and skilled manpower are coming in handy for them in Việt 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 Việt Nam.

Many foreign securities firms have a charter capital of at least VNĐ1 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