Hanoi (VNS/VNA) - The Vietnamese dong was expected to remainbroadly stable against the US dollar over the remainder of 2019 and to beslightly weaker on average over 2020, buoyed by robust foreign directinvestment (FDI) inflows, dollar purchases by businesses, and a healthy foreignreserve position, experts forecast.

The dong has remained stable against the dollar at around 23,200 VND since Julyand has averaged 23,260 VND year-to-date.

"The dong will remain stable as FDI inflows are expected to remain strongover the coming months with a quick resolution to the US- China trade warunlikely. Businesses will probably continue shifting part of their supplychains out of China and to the rest of Asia, and Vietnam is expected to be astrong beneficiary of this move given its positive business environment, manyfree trade agreements, and a low cost, large and relatively young labourforce," finance expert Nguyen Tri Hieu  told Viet Nam News.

According to Hieu, the bulk of FDI flowing into Vietnam remained in themanufacturing sector due to the relocation of supply chains, although risingdemand for infrastructure would also create opportunities and thus lure FDIinto the infrastructure and construction industry over the coming months.

Hieu also believed a burgeoning middle class on the back of rapid economicgrowth would also continue to attract FDI into the retail sector. During thefirst nine months of 2019, total FDI increased by 3.3 percent over the sameperiod in 2018 to 26.2 billion USD, of which wholesale and retail accounted for1.4 billion USD.

Meanwhile, strong prior inflows of FDI into the manufacturing sector as well as Vietnam’sposition in the global supply chain were expected to increase the country’simports in tandem with its exports. Given that global trade is mainlytransacted in US dollars, this points towards an increase in dollar demandamong businesses.

As a result, domestic firms will likely increase purchases of the US dollarover the coming months. Meanwhile, as part of a regulatory amendment announcedin August, commercial banks will no longer provide mid and long-term foreigncurrency loans for offshore payment of imported goods and services. Theamendment aims to reduce dollarisation in the economy and to improve theinterest rate transmission of monetary policy. Under the new regulation, localimporters will have to borrow in dong and buy dollars to fulfil offshore paymentobligations.

In addition, experts said the nation’s good foreign reserves would also helpstabilise the dong in the coming months. The latest data showed Vietnam’s foreignreserve position was at 63.9 billion USD in May, representing three months ofimport cover.

Can Van Luc, Chief Economist at the Bank for Investment and Development ofVietnam, believed the State Bank of Vietnam (SBV) had sufficient foreign exchangereserves to continue its course of active intervention to ensure currencystability, which suggests the dong would likely see minimal volatility over thecoming months.

As for long-term outlook, analysts from Fitch Solutions Macro Research expectedthe dong to persist on a gradual depreciatory trend against the dollar due tohigher structural inflation in Vietnam versus the US and the dong’sovervaluation. Fitch forecast the unit to average 23,650 VND per USD in 2021.

Fitch forecast inflation in Vietnam to average 3.3 percent between 2019 and2021, above the 2.2 percent average forecast for the US over the same period.It continued to expect upside inflationary pressures to stem from higherlivestock prices due to the ongoing spread of African swine fever in Vietnam,which had affected all 63 provinces, and strong demand for building materialsfrom a pipeline of both public and private sector projects to exert pressure oninflation in the housing and construction materials category.

Additionally, the dong’s real effective exchange rate (REER) is trading 10.6 percentabove its 10-year average, which suggests currency overvaluation, althoughFitch believed that some of the strength in the REER could be attributed toproductivity gains. Nonetheless, higher structural inflation in Vietnam andexcessive currency strength would diminish Vietnam’s export competitivenessover the long run, which would weigh on the country’s economic growth giventhat exports accounted for 95.4 percent of GDP, Fitch said, adding that itthought the SBV would favour a weaker dong in the long run./.