De-Dollarisation Efforts Bearing Fruit

BMI View: The Vietnamese dong has remained stable within a narrow range of VND20,815/US$-VND21,238/US$ since the beginning of 2012, and we expect this trend to continue as we head into 2014. Furthermore, there is increasing evidence that the economy is evolving rapidly to become less reliant on the US dollar. We believe that Vietnam's improving macroeconomic fundamentals (benign inflation, robust current account dynamics) will continue to play a major role in supporting the SBV's de-dollarisation efforts over the years.

De-dollarisation efforts undertaken by the State Bank of Vietnam (SBV) over the years have yielded conclusive results in stabilising the exchange rate and reinstalling confidence in the domestic currency. Not only has the Vietnamese dong remained stable within a narrow range of VND20,815/US$-VND21,238/US$ since the beginning of 2012, but we also see increasing evidence that the economy is evolving rapidly to become less reliant on the US dollar. According to figures published by the SBV, banking system credit in Vietnamese dong grew by 11.0% year-on-year (y-o-y) in October, while credit in US dollars declined by 13.6%. Meanwhile, the ratio of foreign currency deposits over broad money supply has fallen sharply from around 30% in the 1990s to 16% by late-2011 and just 12% as of August 2013.

Seasonal Selling Pressure Dissipates

Closing The Gap
Vietnam - Exchange Rate VND/US$, 12-Month VND/US$ NDF Outright & Spread

De-Dollarisation Efforts Bearing Fruit

BMI View: The Vietnamese dong has remained stable within a narrow range of VND20,815/US$-VND21,238/US$ since the beginning of 2012, and we expect this trend to continue as we head into 2014. Furthermore, there is increasing evidence that the economy is evolving rapidly to become less reliant on the US dollar. We believe that Vietnam's improving macroeconomic fundamentals (benign inflation, robust current account dynamics) will continue to play a major role in supporting the SBV's de-dollarisation efforts over the years.

De-dollarisation efforts undertaken by the State Bank of Vietnam (SBV) over the years have yielded conclusive results in stabilising the exchange rate and reinstalling confidence in the domestic currency. Not only has the Vietnamese dong remained stable within a narrow range of VND20,815/US$-VND21,238/US$ since the beginning of 2012, but we also see increasing evidence that the economy is evolving rapidly to become less reliant on the US dollar. According to figures published by the SBV, banking system credit in Vietnamese dong grew by 11.0% year-on-year (y-o-y) in October, while credit in US dollars declined by 13.6%. Meanwhile, the ratio of foreign currency deposits over broad money supply has fallen sharply from around 30% in the 1990s to 16% by late-2011 and just 12% as of August 2013.

Closing The Gap
Vietnam - Exchange Rate VND/US$, 12-Month VND/US$ NDF Outright & Spread

Seasonal Selling Pressure Dissipates

The seasonal surge in demand for US dollars as businesses rush to meet their short-term US dollar-denominated debt obligations towards the end of the year, has also started to dissipate. Indeed, selling pressure on the Vietnamese dong, which tends to escalate during the final quarter of the year, appears to be relatively mild as we approach the end of 2013. Following the surprise announcement by the SBV in November that it will refrain from devaluing the currency amid the recent sell-off across emerging Asia FX, the spread between the 12-month non-deliverable forward (NDF) on the Vietnamese dong and the spot rate narrowed by as much as 752 points (see chart). This vindicated our view that the discount that is being priced into the 12-month NDF to reflect investor expectations of a devaluation and/or the risk premium that investors demand for holding the Vietnamese dong, would continue to narrow going forward ( see 'VND: Stable Outlook Still In Play, But Appreciatory Pressures Are Building', March 13 2013).

Keeping Investors At Ease
Vietnam - Headline Consumer Price Inflation & Components, % chg y-o-y

Underpinned By Improving Fundamentals

We believe that Vietnam's improving macroeconomic fundamentals have played a major role in supporting the SBV's de-dollarisation efforts over the years, and we expect this trend to continue throughout 2014. We expect benign inflation, improving current account dynamics, and the Vietnamese government's stance on prioritising macroeconomic stability over rapid growth, to continue to underpin the stability of the Vietnamese dong.

We have mentioned before that high inflation in the past has been a major contributing factor for Vietnam's exchange rate policy woes. Recent evidence of a gradual pickup in credit growth as the economic rebound begins to gather pace has raised concerns among investors that inflationary pressures could resurface as we head into 2014. From our perspective, however, we believe that credit growth is unlikely to return to the high double-digit rates seen over the past decade (credit growth averaged 27% annually from 2002 to 2011). We expect headline CPI to average a benign 6.3% in 2014, and this should help to underpin confidence in the Vietnamese dong.

No Repeat Of Double-Digit Growth
Vietnam - Outstanding Credit, VNDbn (LHS) & % chg y-o-y (RHS)

The country's strengthened foreign reserve stock should also allow the State Bank of Vietnam (SBV) to intervene, if necessary, to shield the currency against speculative selling pressure. According to figures published by the Asian Development Bank, the country's foreign reserves stood at US$20bn at the end of September, which is equivalent to around 2.4 months worth of import cover (the highest level since 2009). Accordingly, we maintain our view that the exchange rate will remain stable at around the current level of VND21,100/US$ over the coming months. In H214, we see scope for the currency to appreciate to around VND20,560/US$ by the end of 2014, supported by a robust outlook for foreign direct investment (FDI) inflows and remittances.

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