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The March Report: Pressures on the exchange rate still linger

  • The trade balance improved in the first half of February compared to the same period last year due to different timing of Tet holidays. Import activities usually slow down right before Tet to avoid increasing inventory. We believe that the trade deficit will return in March, when business activities come back to normal after the Lunar New Year, since on global markets commodity prices are still staying at low level despite a slight recovery in February.
  • The Dong liquidity in the banking system has improved significantly after Tet holidays. Interbank interest rates have gradually landed to almost normal levels. The interest rate gaps between VND and USD have decreased. Many banks that had sold USD to meet demands of the Dong payments and withdrawals of businesses and individuals during the Tet could buy back these dollars.
  • Foreign investors started to net buy securities in February after waging a huge sell-off in the last Q4. However, they can unwind their position at anytime, especially when the Fed fund rate hike is coming close, expected sooner or later in Q3. Foreign investors in Vietnam used to make a huge capital outflows when the Fed put QE3 ending on the table. We think this kind of pressure could wake up when Fed interest rate hike become more apparent.  
  • The dollar continued to maintain its appreciation against the main currencies as well as many other ones in the region. Risks of disinflation and weaker export have prompted central banks to join a recent feast of cutting rates, deliberately leading to sharper depreciation of local currencies. This will put pressure on the VND as it is still pegged quite stably to the USD.  

Trade balance will likely present deficits in the coming months unless commodity prices on global markets recover to the levels in mid-2014.

According to the Vietnam Customs, the trade balance in the first half of February, i.e. 2 weeks before the Tet holidays, showed up a surplus of $ 640 million, improved from a deficit of nearly $ 1.2 billion in the first half of February a year ago. However, this improvement is simply attributed to the Tet’s difference timing. Data in the past shows that import activities usually slow down right before Tet to avoid increasing inventory, so the trade balance of the first half of this February became surplus.

Two weeks before the holiday last year were the 2nd half of January. Compared this period with the 1st half of February this year  same time two weeks before the New Year, this year's trade balance surplus of 1.45 billion less than the second half of January last year.

When business activities come back to normal after the Tet, we believe that the trade balance will likely present deficits in the coming months unless commodity prices on global markets recover to the levels in mid-2014. Prices of raw materials and agricultural products despite some recoveries since early February but are remaining low, causing disadvantage to the countries that export commodities and import final goods.

We proved that this level of commodity price declines will make exports drop faster than imports, given Vietnam trade composition unchanged, meaning the trade balance of Vietnam will be worse than before.
 

The Dong liquidity in the banking system has improved significantly after Tet holidays. Many banks that had sold USD to meet demands of the Dong payments and withdrawals of businesses and individuals during the Tet could buy back these dollars.

During 1 month before Tet, the central bank injected into the banking system a total of VND 133 trillion, 44 trillion more than the Tet of last year, including 103 trillion pumped through OMO and 34 trillion of SBV notes matured. But after the Tet, money market has quickly returned to normal. Two weeks after the holidays, SBV has withdrawn about VND 141 trillion (more than the amount injected before Tet) by issuing notes and matured OMO.

Interbank interest rates also cooled down to the stable levels. The interest gaps difference between VND and USD have narrowed to the levels before Tet. We believe that the Dong liquidity will keep ample in the coming time, increasing the demand for foreign currency. In addition, many banks that had sold USD to meet demands of the Dong payments and withdrawals of businesses and individuals during the Tet could buy back these dollars.
 

Foreign investors started to net buy securities in February. However, they can unwind their position at anytime, especially when the Fed fund rate hike is coming close, expected sooner or later in Q3.

In the last February, foreign investors net purchased nearly VND 1.5 trillion on secondary markets, after net selling VND 11.7 trillion in the Q4 last year.

However, they can change their current moves at anytime when come risks from the world outside, especially expectation of the Fed funds rate hike in Jun or later in Q3/2015 is quite universal. Foreign investors in Vietnam used to make a huge capital outflows when the Fed put QE3 ending on the table. We think this kind of pressure could wake up when Fed interest rate hike become more apparent.
 

The dollar continued to maintain its appreciation against the main currencies as well as many other ones in the region.

Disinflation caused by plummeted oil and commodity prices enables countries to cut interest rates, make the currency devaluated and help their economy maintain the competitiveness in export, amid a stronger USD against other main currencies such as EUR and JPY. Out of 30 countries changing interest rates since the beginning of this year, there are 20 who cut policy rates. As the most recent, China and India, the large exporters of the world have lowered key interest rates by 0.25%. Countries in the region expected to follow suit are Thailand and Malaysia.

The more central banks have implemented monetary easing by lowering interest rates making their local currency depreciated against the USD. Thus VND become relatively stronger against the currencies of these countries, hindering export and investment activities in Vietnam.
 

VIETNAM’S MACRO AND MARKET INDICATORS


VIETNAM’S ECONOMIC CALENDAR IN MARCH


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