US-China trade spat will exert exchange rate pressure on Vietnam

By Vien Thong   October 15, 2018 | 01:01 am PT
US-China trade spat will exert exchange rate pressure on Vietnam
Shipping containers are loaded to a ship at a port in Hai Phong City, Vietnam. Photo by Reuters
If US-China trade tensions drag on, Vietnam will still see good growth but face strong exchange rate pressures exerted by two major currencies.

After GDP growth reached 6.98 percent in the first 9 months of 2018, the highest in the past 8 years, it is relatively clear that the Government will reach its 6.7 percent growth target by the end of the year. Only a 6.11 percent growth in the fourth quarter to meet this objective.

Usually, the fourth quarter will have the highest quarterly GDP of the year, thanks to the rise in exports, production and consumption. Consequently, some experts are optimistic that this quarter’s growth is likely to exceed the third quarter (6.88 percent) to bring GDP in 2018 to 6.9 – 7 percent as predicted by major international financial institutions.

In its forecast, HSBC Vietnam made a rather safe prediction that GDP growth in 2019 would stand at 6.7 percent, equivalent to the bank’s forecast of growth for this year.

In line with this, GDP per capita is expected to improve from $2,321 in 2017 to $2,734 next year. However, inflation will rise to 4.2 percent, the bank said.

“The US economy is seeing strong growth, but the global economy is in decline and stagnating. However, while other countries in the region are showing signs of decline, Vietnam remains an exception,” said Pham Hong Hai, CEO of HSBC Vietnam at the ‘Infrastructure Outlook 2018’ conference last week.

The International Monetary Fund (IMF) has lowered its forecast for global economic growth in 2018 and 2019 due to the escalating trade war. In a recent development, President Donald Trump has reiterated his threat to impose tariffs on another $267 billion in Chinese goods, which comes on top of the $200 billion in goods he has already targeted earlier this year.

"Vietnamese companies, with the exception of the rubber industry, are increasing their capacity to export to the U.S. while the capacity of Chinese companies is decreasing," said Hai on prospects for 2018.

"Moreover, FDI will remain the main driver of growth as investors are likely to prioritise targeting Vietnam as opposed to other economies in the region.

"Investors have traditionally preferred China, but now they are paying more attention to Vietnam because of its free trade agreements (FTAs)," he said.

Although the outlook for 2019 is positive, the U.S.-China trade war still creates an unstable global economic environment. Vietnam has been trapped between the two major currencies, which both have extensive trade ties, economists said.

At the end of September, the U.S. Federal Open Market Committee (FOMC) raised the refinancing rate by 0.25 percent to 2.25 percent. This is the third interest rate hike this year, and another is scheduled to happen before the end of 2018.

This has led to an appreciation in the dollar, higher prices on imports into Vietnam, higher input costs and more pressure on exchange and interest rates.

Meanwhile, the yuan is likely to continue to depreciate if tensions drag out, aimed at limiting the damage done from the effect U.S. tariffs have on the price of Chinese goods. With export turnover to China reaching $35.5 billion, accounting for 17 percent of Vietnam’s export turnover last year, exports in general will likely suffer.

Vietnam also lies in the top 5 countries in the crosshairs of the U.S.’ protectionist policies given Vietnam’s high trade surplus with the U.S.

However, experts believe it is highly unlikely for Trump to launch a trade war against the country as Vietnam is willing to be flexible. Recent announcements from Prime Minister Nguyen Xuan Phuc also indicated that Vietnam is very willing to welcome investors as well as consume more goods from the U.S.

“We are also excited to know how you plan to do business or expand in Vietnam,” the Prime Minister declared in front of 40 leading U.S. firms in New York last September.

As the fourth quarter has just commenced, there are still many variables yet to be ascertained to make predictions for next year. Even the U.S.-China trade war with its global economic implications, is unpredictable, not to mention other risks not associated with the trade war itself.

“Vietnam has a great outlook, but the risk lies mainly in public debt. However, public debt has been falling. In addition, CPI at 4 percent or higher is also a risk for 2019,” Hai of HSBC noted.

In the medium and long term, the future of Vietnam’s economy, according to specialists, remains a big question. HSBC offers two scenarios by 2030. The first is optimistic, predicting growth of over 8 percent while the other sees GDP growth deceleration to a level below 4 percent.

According to Hai, the final outcome will depend on Vietnam’s ability to solve challenges in such issues as policy, productivity and infrastructure.

“We are looking forward to Government reforms because we are in the Industry 4.0 era,” he added.

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