HCMC - HSBC Bank has predicted the State Bank of
Vietnam (SBV) will pare back intervention and allow the domestic currency to
depreciate further in the coming months as the central bank’s foreign exchange
reserves are getting increasingly thin.
In its
macroeconomic report released on January 6, HSBC said the widening trade
deficit is piling pressure on the Vietnam dong and foreign exchange reserves.
The
Vietnam dong-U.S. dollar exchange rate has been at the upper side of the
central bank’s band since early 2015. The pressure on the domestic currency has
intensified due to the heightened yuan weakness.
In the
last quarter of 2015, the SBV kept its promise to refrain from devaluing the
dong further out of a desire to maintain a stable currency. However, since the
central bank’s foreign exchange reserves are increasingly thin as import cover
had fallen to 2.1 months as of the third quarter of 2015, the agency is likely
to pare back intervention and allow the currency to weaken further in the months
ahead.
Early
this week, the central bank launched a new fixing mechanism that allows for a
more market-based setting of the reference rate for the currencies.
Besides,
with growth having firmly shifted gears to the 6-7% range, HSBC predicted
inflation to rebound emphatically in the second half of this year, though the
uncertainty around this outlook is quite high, given the difficulty of
forecasting the path of oil prices.
“What we
do know, however, is that some administered prices, such as school fees, will
be increased this year. Together with base effects from stabilizing oil prices
and a likely pick-up in food inflation, we forecast headline inflation to pick
up to 3% year-on-year by the end of the first half and hit 5.1% year-on-year by
the end of the second half, breaching the central bank’s target,” the bank said
in the report.
The
central bank has sounded more relaxed about the price outlook. In a recent
interview with local media, SBV governor Nguyen Van Binh explained that the
central bank intended to keep policy rates stable at current levels if
inflation is contained in the 3-5% range.
He also
said the central bank would target annual credit growth of 18% year-on-year
though this could be raised as high as 20%, HSBC commented.
Even if
credit growth is managed at the lower end of the target and core inflation
stays contained due to further commodity price disinflation, it would be
prudent to commence gradual tightening in the second half of the year to
mitigate the risks of another overheating of the economy. In the past, a tilt
towards an overly pro-growth policy has resulted in credit booms and
overheating, which ultimately led to currency instability and required sharp
policy tightening to reverse.
As such,
HSBC expected the central bank to switch to a tightening mode this year.
However, the aforementioned comments by the central bank governor, as well as
the recent shift in the government’s policy stance towards a more pro-growth
orientation, raise the risks that tightening will be delayed.
“Given
that, we are less than half way through financial sector reforms and bank
balance sheets remain fragile, we would be worried if credit growth begins to
consistently top 20%,” it added.
In the
report, HSBC maintained its 2016 gross domestic product (GDP) forecast of 6.7%
year-on-year for Vietnam, which is in line with the government’s growth target.
The bank raised the 2017 forecast by 0.1 percentage point to 6.8% year-on-year.
Dinh Duy
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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