Currency issues — VietEcon

Yesterday, I mentioned that if things get worse for net exports (and I should have said capital flows as well), we could see a depreciation in the currency, unless the SBV started to use its reserves to protect it.

And today I saw this article from Vietstock today that says that the currency is likely to fluctuate this year.

Looking at the history of the USD/VND exchange rate, you can really see that it has depreciated over time, but with two times where it was accelerated. The first was in the Great Financial crisis, when it fell from just under 16,000 VND to the USD in early 2008 to above 20,000 by May 2011 for a 20% decline. This isn’t actually too bad, compared to depreciations in other countries.

For example, Egypt went from a fixed exchange rate of just under EGP9 per dollar on Nov. 2, 2016 to above EGP15 on Nov. 3. It settled around EGP18. That’s because the Egyptian central bank was fixing the exchange rate and was unable to do so any more, so it floated it until it got to a new equilibrium, and it then allowed it to float around that.

the second acceleration was around 2015, although it was much less.

Looking at the whole history, since 2003, the SBV has allowed the currency to slowly depreciate, including this year. At the beginning of the year, it cost you VND23,155 to buy USD1, but now it costs you VND23,259, or VND154 more. That equates to a 0.5% decline. And the SBV has been pretty consistent with that - looking at the past 5 years, the VND has declined about 6%, or a bit over 1% per year.

Now there, are three main buckets for hard currency sources and uses:

Net imports (also generally called the current account, although the current account includes a few other things): If there are more imports than exports, they need to be paid with hard currency. We saw yesterday that we have net exports (meaning a source of cash) of almost $3bn through April, so things are holding up here. That of course is just merchandise: there is also services exports/imports, and those net against the merchandise.
Capital account: I don’t have the full capital account, but according to the article, FDI was down almost 10% in the first four months of the year, but it was still $5.2bn. There are probably some capital outflows (investments by Vietnamese abroad, among other things), but all told it seems like there is money coming in.
Reserves at the central bank: This is normally within the capital account, but I want to highlight it here. The article says that reserves went up $4bn since the end of 2019, reaching $84bn. So that means some combination of the current account and capital account added up to $4bn. Looking at FDI and net exports, it appears around $4bn went out through investments or paying off debt or in services.

But even with the money coming out, the absolute reserve figure was up 5%. So it seems like there is plenty of firepower for the SBV to continue to support the economy without having to go for a massive adjustment in the foreign exchange.

However, there are risks to this. The USD has appreciated against other currencies. It is up 3% against the EUR, 6% vs THB. Because the VND has not depreciated as much against the USD, that means it actually appreciated against these other currencies, which might not be great for exports to these countries.

The main risk for the SBV is that they hold the line against the USD, which allows for stability for foreign investors and helps anyone borrowing in USD. But you could see exports fall, if prices to target markets go up too much.

It wouldn’t surprise me if the SBV allowed for a bit more depreciation than they are doing now. But we will have to see.