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  • Writer's pictureVirtus Prosperity

The impact of exchange rates on the Vietnamese economy

First, we will learn about the factors that affect exchange rates:

1, Balance of payments:

The international balance of payments reflects the actual inflows and outflows of foreign currency in transactions between countries. The international balance of payments shows the financial position of a country as either a deficit or a surplus.

+, If the balance of payments regularly experiences a deficit (expenditure > income), the foreign exchange reserves of the country may decrease. This can lead to a tense foreign exchange situation, resulting in an increased demand for foreign currency and an increase in its price.

+, If the balance of payments has a surplus (income > expenditure), the foreign exchange reserves may increase. This leads to an increase in the supply of foreign currency in the market, which tends to decrease its price.

2. Inflation: the condition of high and unstable prices over a long period, leading to a decrease in the value of currency. When inflation is high, the currency loses value and therefore the exchange rate will decrease. Conversely, when inflation decreases, the exchange rate will increase.

3. Gross National Income: the total value of goods and services produced by a country in a year. When a country has a high income, its currency demand will increase, and therefore the exchange rate will rise. Conversely, when a country has low income, its currency demand will decrease, and thus the exchange rate will decrease.

4. Interest Rate: the fee that banks pay to depositors or the fee that borrowers have to pay to banks.

High interest rates can attract investors to invest in a country, thus increasing the demand for that country's currency and consequently raising the exchange rate. Conversely, when interest rates are low, the demand for a country's currency will decrease, leading to a decrease in the exchange rate.

The economic context of 2022 and the impact of exchange rates at present:

In the economic context of 2022, the continuous interest rate hikes by the FED to control inflation have affected the appreciation of the USD, thereby putting pressure on global exchange rates, including Vietnam's. Therefore, in the first half of 2023, the State Bank of Vietnam continuously reduced the policy interest rate to support economic recovery and alleviate pressures on the exchange rate. Additionally, the FED is also entering the final phase of its interest rate tightening cycle.

The USD/VND exchange rate has been continuously increasing recently due to conflicting monetary policies between Vietnam and the United States. The US Federal Reserve (FED) has been consistently raising interest rates while Vietnam has been continuously lowering interest rates.

Specifically, during the FED meeting on September 20th, although they did not increase interest rates, they expressed the possibility of future rate hikes. This led the State Bank of Vietnam (SBV) to decide to sell treasury bills to withdraw VND from the market in order to cool down short-term speculation on the exchange rate. Currently, the exchange rate is fluctuating around an average of 24,400 VND. According to Virtus, this is a reasonable choice given the excess money in the banking system, as evidenced by:

+, Credit growth as of the end of September 2023: nearly 7% (annual target of 14%).

+, Interbank interest rates maintained at the lowest level in a year, indicating that banks do not have a need for borrowing from each other due to the surplus of money.

Expectations for the second half of 2023:

Virtus Prosperity expects the exchange rate to fluctuate between 24,400 - 24,600 VND/USD in the last months of the year, assuming that the FED will continue to raise interest rates by an additional 25 basis points per month based on the following factors:

+, The State Bank of Vietnam will continue to strengthen the use of open market operations (OMO) tools to manage the exchange rate.

+, By the end of September, the country's total import-export turnover is expected to reach nearly 500 billion USD, with a trade surplus of nearly 22 billion USD.

+, The World Bank predicts that remittances to Vietnam will amount to 14 billion USD in 2023.

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