According to ANZ’s Asia Pacific Economics – Greater Mekong Outlook report released on March 31, the Greater Mekong currencies have generally strengthened against the USD on the back of a more dovish US Fed statement to hold on to its the target range for the interest rate at 0.25 to 0.5%.
“In the near term, we see further downside risk in USD/Asia. Nonetheless, we think that the US Fed will likely hike the fed funds rate by a total of 50 basic points in 2016, implying a less aggressive pace of tightening, with the June Federal Open Market Committee (FOMC) a live meeting,” the report read.
The State Bank of Vietnam has adopted a new FX mechanism on January 4, when it set a daily USD/VND reference rate, while keeping the +/-3% trading band.
“We think that the new methodology will allow for more frequent yet smaller adjustments in the VND. On a year-to-date basis, the VND had strengthened 0.9% against the USD. Given the selloff in the USD following the FOMC, we are seeing downside risks to our December 2016 USD/VND forecast of 23,000.”
Meanwhile, the country’s credit growth, according to economist Eugenia Farbon Victorino of ANZ Banking Group’s ASEAN and Pacific region, rose to 19% year-on-year in November 2015 as bank risk appetite improved. The recovery in the real estate sector was supported by loans to the construction sector.
Foreign direct investment (FDI) is off to a good start in 2016, with a year to date (YTD) print of $2.74 billion in the first quarter, up from $1.217 billion over the same period in 2015.
Trade balance in the first quarter posted a YTD surplus of $776 million, as import growth contracted on the back of unfavourable base effects. Imports surged in the first half of 2014, driven by capital equipment and machinery. We expect export production to be boosted in 2016 as the investment in manufacturing capacity last year bears fruit.
Headline inflation maintained its rise, reaching 1.69% year-on-year in March, the fifth straight month of rising inflation slowing in pace. However, following the rebasing of the CPI series, ANZ is paring its inflation forecasts to 1.7% year-on-year in 2016 and 2.5% in 2017 (from 2.0% and 2.7% respectively).
“Assuming the central bank allows sufficient flexibility in the USD/VND rate, interest rates may rise as VND liquidity will likely remain adequate. However, so long as the central bank keeps a cap on deposit rates in the hope of discouraging the inefficient use of capital, the room to raise policy rates is limited,” noted the report.
