(VOVWORLD) - Fitch Solutions have revised its 2021 average forecast for the Vietnamese currency to 22,900 VND per USD from 23,000 VND per USD previously and 22,800 VND per USD from 23,200 VND per USD in 2022 as the central bank tolerates a stronger dong over the short term.
 The Vietnamese dong has averaged 23,930 VND per USD in the year-to-October. ( Photo enternews.vn) |
The financial services provider also forecast the dong to average 23,000 VND per USD in 2023.
Since July 2021, the Vietnamese dong has strengthened by 1.3% against the US dollar and the unit has averaged 23,930 VND per USD in the year-to-October.
“We expect the dong to stabilise around its existing stronger level following its appreciation since July 2021 against the greenback. We maintain our view that strong net inflows from trade and foreign direct investments (FDI) will continue to drive dong strength, but more importantly, the central bank appears to be favouring a stronger dong in order to curb imported inflation from high global commodity prices and international logistics costs,” Fitch analysts said in a report released this week.
According to Fitch, the recovery in export earnings in the coming months should support the dong. Although trade will still suffer disruptions over the fourth quarter of this year due to some COVID-19 containment measures in place, measures by the Government to resume operations of factories should still aid some recovery in activity in the final quarter during the peak business season.
“Fundamentally, trade volumes will continue to be supported by the EU-Vietnam Free Trade Agreement and the UK-Vietnam Free Trade Agreement. We forecast Vietnam’s current account surplus to reach 3.5 per cent of GDP in 2021, narrowing against 6.6 per cent in 2020.”
Fitch believed that the dong trading stronger over Q3 2021 can be attributed to two factors. First, the SBV seeking to curb imported inflation arising from high global commodity prices, given the Government’s goal to contain inflation below 4 per cent. Secondly, the SBV’s agreement with the US on its currency practices so as to stave off punitive tariffs.
Fitch expect the dong to stabilise around 22,750 VND per USD over 2022, which seems to be a level of comfort for the authorities balancing imported inflation and export competitiveness.
Even if the USD were to strengthen further under the scenario of an unexpected hawkish shift of the Federal Reserve, Fitch believe that the SBV has more than sufficient foreign reserves at 99.8 billion USD as of June 2021, equivalent to about four months of import cover, to curb volatility on the dong.