Is the VND appreciating? Yes, but the impact is limited so far
/I have written a fair amount (here and here and here) about both trade flows and the currency, especially in regard to US pressure on Vietnam to lower its trade surplus with the states. For many reasons, the Vietnamese central bank and government have kept the VND/USD exchange rate mostly stable with steady low-level devaluation over time. The reasons it doesn’t want a currency that depreciates quickly include:
Fear that a falling VND would boost exports even more and get the country labeled a currency manipulator.
Concerns around USD-denominated debt at both the government and local level. If the currency depreciates too quickly, it may be hard for the government and companies to make principle and interest payments.
Import-led inflation. If imports are necessary (say oil or food), then the rising costs will just feed into inflation in the country. .
But a side effect of the stable-ish VND/USD rate is that as many of the world’s currencies depreciate against the dollar, the VND has appreciated against them. Funny how that works. We see this all the time with currencies pegged to the USD (like most of the Arab Gulf countries).
Source: Vietnamese Customs, chart by Vietecon.com
An appreciated VND means that Vietnamese exports look more expensive. And this article points to exports to China, in particular, getting more expensive. Companies are scared that soon they will be forced to 1) lower prices to remain competitive or 2) lose market share due to their higher prices. I would assume that Vietnam is a low-cost provider of most of these goods, so a few percentage point increase in prices could really hurt demand.
Source: Vietnamese Customs, chart by Vietecon.com
First, let’s look at overall trade balances. We wrote about the types of exports that have done well this year here. Computers and footwear were the only ones that grew significantly. It got worse in the first half of May, when exports fell 15%. Computers (+18%) and machine parts (17%) were the only ones that held up. Every other big category was down double digits. Year-to-date, exports are flat after these figures.
Imports were down even more than exports: -21%, driving the year-to-date figure to -3%. That resulted in a deficit (more imports than exports) of $1bn. For the year, the country is still at a surplus of $1.4bn, but just 2 weeks took it down by 40%.
Source: Yahoo finance, chart by Vietecon.com
It’s hard to tell how much we should read into these figures. We saw a similar pattern in the trade balance back in 2019. Then, the surplus came down $3.4bn.
But I wanted to look and see if we can start to see the impact on any countries. It is extremely time consuming to pull the data, so I focused on China which seems like one of the most obvious areas where we would see the trends quickly and a massive trade partner for Vietnam. This article explicitly talks about how exports to China are already hurting.
Why China? The exchange rate between the USD and the CNY has depreciated (see chart), meaning it takes more CNY to buy a USD than previously. Caveat here: we saw a deeper devaluation last year starting in August. That’s when trade tensions between the two countries started to heat up. But it rose again through early January.
Source. Vietnamese Customs, chart by Vietecon.com
But let’s take it as a given that the situation is a bit worse this year, because the world is generally more fragile, demand is already weak, so higher prices are likely to cut into that demand even more. We should start to see some sort of impact on trade with China, given that the VND has appreciated.
However, we can’t really say that trade with China is much worse this year, based on the data through April. The chart to the left shows imports and exports to China and the deficit. It doesn’t look that different to me, in fact. The decline in February was basically the same as what we saw last year (driven by Tet/Chinese New Year). There is a bit of a new dip in both exports and imports in April, but it doesn’t seem too bad.
I bet we will see a further decline in both exports and imports to China in May. If so we should start to be worried. Remember that trade effects are not homogeneous across the economy. Certain sectors and companies will suffer, especially if they have made their business off selling low-priced goods to China. Or other countries - remember that the USD has risen against GBP and a bit against the EUR. That’s why so many people in the article above are starting to worry.
This is just another economic hardship that the government needs to take into account. Stimulus is great, but it would be meaningless if it was more than offset by the appreciation of the exchange rate.