Vietnam's economic outlook for 2022: VND could turn more neutral

The interbank USD/VND exchange rate has dropped strongly from August 2021, when the State Bank of Vietnam (SBV) reduced the rates for spot purchases.

How is FED spinning its plates?

The interbank USD/VND exchange rate has dropped strongly from August 2021, when the State Bank of Vietnam (SBV) reduced the rates for spot purchases. This decision was made after the US and Vietnam agreed that Vietnam would not intentionally interfere in the market to depreciate VND. Besides, USD supply remained abundant due to the rebound in remittances, FDI, and trade surplus in September 2021. For 3Q21, the USD/VND rate decreased by 1.04% to VND22,768 from VND23,008.

Meanwhile, the unofficial rates slightly decreased in 3Q in line with the downtrend of the interbank rates, coming from: (1) the gap between domestic and international gold prices narrowed down; and (2) restricted demand for USD trading in the wake of prolonged social distancing. The USD/VND unofficial rates dropped by 0.8% to VND23,150 from 23,340 by the end of the third quarter.

The NEER and REER of VND increased in the third quarter as the USD strengthened before and after the FOMC meeting, when the FED signaled that tapering could begin as soon as November 2021, and the dot plot indicated that many Fed officials would be willing to raise interest rates as soon as 2022.However, the NEER and REER of VND don’t put pressure on the VND devaluation.

As of December 30, 2021, the USD/VND exchange rate on the interbank market was traded at 22,788 VND/USD, down nearly 1.3% compared to the end of last year. While the purchase price of USD at commercial banks also decreased by 330–400 VND/USD, equivalent to 1.5–2%, the selling price decreased by 250–330 VND/USD, equivalent to 0.8–1.4%.

VND is one of the few currencies in Asia that has appreciated against the USD in 2021.

However, VNDirect said that its optimistic view of VND has turned more neutral for 2022 for the following reasons:

First, the USD may regain the upper hand as the Federal Reserve (FED) has begun QE tapering in November 2021 and plans to hike rates three times in 2022. Meanwhile, the ECB and BOJ are likely to keep their policy interest rates at low levels in 2022 to finance accommodative fiscal policy and support the economic recovery.

Second, inflation pressure in Vietnam could pick up in 2022.

However, VNDirect sees that the fundamental factors that kept VND stable in recent years remain unchanged, including the current account surplus and higher foreign exchange reserves (FX reserves). "Vietnam’s account surplus would widen to 1.9% of GDP in 2022F from an expected deficit of 0.4% of GDP in 2021F. From a current level of USD 105bn, Vietnam's FX reserves would reach USD 122.2bn at the end of 2022 (equivalent to 4.1 months of imports). As a result, we see the USD/VND stable at 22,600–23,100 in 2022F, and the VND would move in a relatively narrow range vs. the USD", VNDirect said.