High trade surplus helps reduce exchange rate pressure

15:08 | 11/12/2018 Finance - Banking

(VEN) - Flexible management of monetary policy and a high trade surplus are expected to limit exchange rate fluctuations in the final months of 2018.

high trade surplus helps reduce exchange rate pressure
Exchange rate fluctuations will not be large in the last months of 2018

In the first nine months of 2018, Vietnam’s total export-import turnover reached US$352.43 billion, an increase of 13.6 percent compared to a year ago. Of this figure, exports stood at US$178.91 billion, a year-on-year increase of 15.4 percent, while imports totaled US$173.52 billion, up 11.8 percent compared to the same period last year. These import, export results yielded a trade surplus of US$5.39 billion.

Given the high trade surplus coupled with large foreign exchange reserves, exchange rates remained stable. However, the ongoing US-China trade war is generating concerns. In addition, domestic interest rates are still a pressing issue when the US Federal Reserve (FED) leaves the roadmap for interest rate hike. This pressure will increase or decrease depending on the fluctuations of the CNY (the Chinese yuan), as China is one of Vietnam’s biggest trading partners. A stable CNY will help maintain the stability of the exchange rate in the region, including the Vietnamese dong. Continued FED interest rate hikes could challenge Vietnam’s macroeconomic stability.

In 2018, exchange rates are projected to increase by three percent barring unexpected fluctuation. This is still under the central bank’s control, given the devaluation of local currencies of some regional countries such as the Philippines, Indonesia and China.

Banking expert Nguyen Tri Hieu said the depreciation of the Vietnamese dong by two percent would increase the value of imports. As a result, the total added value of the economy may decline by 1.2-1.6 percent.

An increase in exchange rates will create pressure on importers, who will have to spend more to import machinery, equipment and materials serving production, resulting in a fall in revenues. In case the exchange rate increase, businesses have to consider plans to increase their selling prices.

According to the Bao Viet Securities Joint Stock Company (BVSC), the US dollar will continue to increase slightly in

the last months of the year, creating pressure on the USD/VND exchange rate. The State Bank of Vietnam may

increase the exchange rate by 1-1.5 percent.

Thao Duong