Source: WB

Will the exchange rate go sideways?

According to the report on the socio-economic situation in 11 months of 2022 by the General Statistics Office, the USD index in November 2022 increased by 8.71% over the same period in 2021; average in 11 months of 2022 increased by 1.83% compared to the same period last year. Experts of the World Bank (WB) said that the VND appreciated mainly due to the weakening of the USD in the international market. All major currencies and currencies of Vietnam's neighbouring countries fell against the US dollar. However, according to the WB, the SBV's raising the central policy interest rates by 200 basis points in September and October 2022 also helped ease pressure on the local currency.

It can be seen that, compared to the pressure from foreign currency a few months ago, now Vietnamese import and export enterprises are also more secure in exchange rate fluctuations. Experts of SSI Securities Company said that the foreign currency rate tended to move sideways in the rest of the year. The primary factors related to foreign currency supply have many positive points, such as disbursed foreign direct investment capital (FDI), indirect investment capital (FII), trade balance surplus or cash flow from newly disbursed foreign currency loans…

According to the General Statistics Office, the trade balance of goods was estimated to have a trade surplus of US$ 10.6 billion (in the same period last year, the trade surplus was US$ 0.6 billion). In addition, several successful international capital raising and mobilization deals, such as International Development Finance Corporation (DFC) signed a loan of US$ 200 million to SeABank; ADB and VPBank signed a social loan package worth US$ 500 million; Proparco - a French development financial institution and MSB cooperated to finance a credit worth US4 30 million with a term of 5 years for green projects…

Considering solutions to prevent risks

Although the foreign currency exchange rate has shown more positive signs from the market context and the SBV's flexible management ability, exchange rate fluctuations' impact on enterprises' operations are still there. As a result, each type of enterprise will be affected differently.

The enterprises that use foreign loans to finance production and business activities will be most affected by exchange rate risk. For example, in the third quarter of 2022, Century Yarn Joint Stock Company announced an exchange rate loss of US$ 400,000 due to the purchase of input materials and payment of the short-term debt in US dollars in the context of the strong appreciation of this currency. As a result, the Company's profit after tax in the third quarter of 2022 decreased by nearly 20% compared to last year's period, mainly due to exchange rate losses. However, in the opposite direction, enterprises that are net exporters and do not have US dollar debt will benefit from a stronger US dollar.

Besides, the increase in the exchange rate also causes the price of gasoline, input materials, and production costs to increase. Furthermore, rapid inflation in key export markets of Vietnam, such as the US and EU, has made people tighten their spending, and orders have decreased clearly from the third quarter to now. Therefore, according to experts, if the VND depreciates more strongly against the USD, it will further reduce the competitiveness of Vietnamese goods compared to other countries with the same production capacity. On the other hand, the decrease in export orders also reduces the exchange rate supply, while the price of goods imported into Vietnam increases because of inflation, thus putting some pressure on the currency market.

In this context, according to experts, enterprises that want to limit   exchange rate risks in the coming months should participate in the foreign currency futures market or options or participate in the derivatives market to protect the money; at the same time can use financial services of banks to hedge exchange rate risk.

However, the "hot" story in the current context of monetary policy is interest rates. Before, the SBV had to raise the operating interest rate twice to "save" the exchange rate. Therefore, entering 2023, for the economy to stabilize and help enterprises recover, many people believe that the exchange rate should be allowed to fluctuate to a certain extent to stabilize interest rates. This level of fluctuation will have to be calculated and considered carefully with the balance of factors such as inflation, trade balance, balance of international payments, and debt payment... If the interest rate cannot be reduced, it may cause a bad debt increase. As a result, enterprises had to stop their production and business expansion plans… affecting the financial system and the economy.

Banking and finance expert Dr Nguyen Tri Hieu said stabilizing the exchange rate and the dong was a prerequisite for economic stability. However, at this time, it was difficult to balance supply and demand for foreign currency, and the State Bank could not forever use foreign exchange reserves to stabilize the exchange rate.

According to WB experts, due to tightening financial mobilization conditions globally and weak external demand, Vietnam's monetary authority may consider allowing the exchange rate to be more flexible. In response to external shocks. This policy can be supplemented by judicious use of the reference rate and prudent use of direct exchange rate intervention to protect foreign exchange reserves. The WB also recommends that coordinating fiscal and monetary policies is important to maintain price stability in the context of rising domestic inflation.