Currency Forecast - VND: To Continue Outperforming In Total Return Terms - JAN 2018

Vietnam Currency Forecast
Spot 2017 2018
Source: BMI, Bloomberg. Updated: October 27
VND/USD, ave 22,721 22,730 23,025
VND/EUR, ave 26,568 25,684 25,327
SBV Rate, % eop 6.25 6.25 6.25

BMI View: We forecast the Vietnamese dong to remain stable against the USD over the near-term as the central bank is keen and able to manage the currency. Over the longer-term, we forecast the VND to weaken moderately against the dollar given higher inflation and an expensive REER, but higher real GDP growth should bring about outperformance in total return terms.

Short-Term Outlook (three-to-six months)

The Vietnamese dong has remained stable against the USD since the start of the year, and it looks like the currency could remain anchored over the near-term given that the SBV is keen and able to continue managing the currency to keep inflation in check and maintain confidence on the dong. To be sure, Deputy Governor of State Bank of Vietnam (SBV) Nguyen Thi Hong indicated on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Finance Minister meeting on October 19-21 that the central bank is "confident" of maintaining the dong's value and that "such high levels of foreign reserves will allow us [SBV] to step in to stabilise the money market when needed".

Stability Likely To Continue In Near-Term
Vietnam - Exchange Rate, VND/USD
Source: BMI, Bloomberg

Foreign reserves reached all-time highs of USD45.0bn according to government estimates, and recent strength in the equity market suggest that Vietnamese assets remain well regarded by investors. With the December US Fed rate hike mostly priced and the SBV likely to keep interest rates on hold ( see ' Additional Rate Cuts Could Lead To Macro Instability', October 11), we expect the dong stability to last through Q118.

Long-Term Outlook (six-to-24 months)

Our view on the Vietnamese dong over the long-term has not changed much since our last analysis, and we continue to expect the currency to weaken moderately against the greenback in spot terms over the medium term due to higher inflation relative to the US and an expensive real effective exchange rate (REER). In total return terms, however, the VND is likely to outperform the USD thanks to superior real GDP growth and positive fiscal reform momentum. This informs our forecast for the currency to average VND23,025/USD in 2018, and VND23,400/USD in 2019.

REER Still Above Historical Average
Vietnam - Real Effective Exchange Rate
Source: BMI, Bloomberg

While the SBV is able to keep the exchange rate stable for short-periods of time, higher inflation (which we forecast to average 4+% over the coming quarters) will necessitate a weaker VND in order to retain its export competitiveness. Additionally, although the dong's REER has fallen from its peak in January 2017, it is still trading significantly above its 10-year moving average and slightly above its 5-year moving average with the recent uptick (see chart). This suggests that the dong is marginally overvalued, and given the potential for valuations to mean-revert, over the longer-term, this should act as a headwind for the currency.

That said, a strong economic growth outlook should support a higher fair value for the dong over the longer term and allow for higher real interest rates, resulting in total return gains. Vietnam posted real GDP growth of 7.5% y-o-y in Q317 and cumulative growth of 6.4% y-o-y in the first nine months of 2017, making it one of the fastest growing economies in the world. We believe that Vietnam will continue to enjoy robust growth over the coming years, underpinned by political stability, strong foreign direct investment inflows raising productivity, higher savings and labour force participation rate supported by favorable demographics, and greater economic and trade liberalisation. This should see the export-oriented manufacturing, construction, and services sectors continue to outperform, informing our forecast for Vietnam's real GDP growth to average 6.6% over the coming years.

Risks To Outlook

Risks to our dong forecast are skewed to the downside. Firstly, an acceleration in the rate-hiking cycle in the US could lead to a drying up of dollar liquidity. Secondly, the Vietnamese economy is heavily dependent on trade and foreign direct investment. As such, a potential rise in global trade protectionism pose significant risks to its growth prospects and currency.