World Economy

Pressure Expected on Vietnam Currency

Pressure Expected on Vietnam Currency Pressure Expected on Vietnam Currency

The interest rate hike by the US Federal Reserve is expected to increase pressure on the dong in the context that Vietnam is trying to push economic development and employment by seeking export-led growth.

The Fed raised the range of its benchmark interest rate, for the first time in nearly a decade, by a quarter of a percentage point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs, Reuters reported.

It has indicated that it would raise interest rates four more times before the end of 2016.

Former governor of the State Bank of Vietnam, Cao Sy Kiem, said pressure on the dong’s exchange rate would rise next year. Some countries recently weakened their currencies against the dollar anticipating the US interest-rate hike.

“If the dong is not devalued, the country’s exports will find it hard to compete in the US, Vietnam’s biggest export market,” Kiem said.

Export-reliant Vietnam posted a trade deficit of $3.8 billion in January-November, compared with a $2 billion surplus in the year-ago period. Shipments grew 8.3%, below the government’s 10% target.

However, HSBC said in a recent report that Vietnam’s high external debt limits the room for the central bank to let the currency weaken too fast.

“As such, we have decided to revise our forecast and now expect the dong to depreciate against the dollar by an additional 2% in 2015, and then a further 2% in 2016,” it said. “Our year-end forecast for dollar-dong is 22,800 for end 2015 and 23,300 for end 2016.”

The US rate hike may encourage investors to leave from newly emerging economies for the US, Kiem said.

Economist Can Van Luc said the Fed’s move would raise the interest rate on Vietnam’s overseas debts.

Vietnam’s external debt had risen to close to $70 billion by end-2013. Most of the government’s external debts are concessional in nature and almost half of it carries interest of less than 1%.

After the US rate hike, the dong traded at the ceiling level of 22,547 a dollar Friday, according to prices from local banks.

It can trade as much as 3% on either side of the official reference rate, which has been left unchanged at 21,890 since the third devaluation of this year on August 19. The weakest level permitted at the current range is 22,547.

Vietnam’s foreign exchange reserves have increased 2.7% to $37 billion so far this year, Nguyen Van Binh, the governor of the central bank, said recently.

The figure would reach $40 billion if other items such as gold reserves, estimated at 10 tons, and deposits in foreign currencies by the treasury and credit institutions with the central bank are included, he said.