Foreign exchange rate forecast not to be under great pressure as in 2022

The foreign exchange market in September and October 2022 was under huge pressure in the wake of global uncertainties. In this context, the State Bank of Vietnam (SBV) had to increase the selling price of the US dollar six times within just two months (from September to November 2022), with a total increase of VND1,720, equivalent to 7.4%.

This year, the dollar has recently also skyrocketed against the Vietnamese dong to exceed the threshold of VND24,000 per dollar. Vietcombank on September 5 listed the selling rate at VND24,240 while the rate at BIDV was VND24,230.

According to Tran Ngoc Bau, CEO of financial data provider WiGroup, the recent exchange rate shock is due to the rising dollar need of firms to pay some contracts. It is not because of a capital withdrawal out of Vietnam.

In addition, psychological factors also contribute to the recent volatility of the exchange rate as people are concerned that the scenario of September and October of 2022 will repeat.

However, Bau said the context in 2022 and this year is quite different.

Bau explained the current context is completely different from the end of 2022 when the dollar was actually withdrawn out of Vietnam due to fear of a chain breakdown. Currently, the Vietnamese banking system is much more stable and there is no withdrawal of capital.

Moreover, the current account balance is relatively strong, while it is forecast the overall balance this year will also have a slight surplus. Meanwhile, at the end of 2022, the current account was relatively weak as service exports didn’t recover and export surplus was weak, Bau said.

Besides, Bau said, regarding the interest rate difference between Vietnam and the US, the context is also completely different when last year the Fed raised interest rates strongly while under the current period, the Fed is going to the final stage of the interest rate hike cycle.

Inflation has also shown signs of increasing recently, but according to Bau, there is no basis for the indicator to exceed 3.5% this year. This factor will provide good support for the SBV to continue its policy of supporting the economy.

From the analysis of exchange rates and inflation, Bau believes the SBV will not increase interest rate in the near future, but the interest rate level from now until the end of the year will be flat or slightly decrease, not falling sharply as in recent times.

There is not much room left to reduce interest rates so the SBV can only cut the rate by one or two more times. Instead of using the interest rate tool, the SBV will focus on opening up the money supply and credit, applying many supportive policies for the banking industry, and being soft in regulation to expand money supply and credit, Bau predicted.