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Dong insulated from Brexit fallout

26/06/2016 23:37

Vietnam’s economy as well as its currency is unlikely to be adversely affected by the UK’s decision to opt out of the European Union.

Vietnam’s economy as well as its currency is unlikely to be adversely affected by the UK’s decision to opt out of the European Union.

As the votes counted in the UK referendum last week returned in favour of “Leave” rather than “Remain”, global economies reacted accordingly and markets have stumbled.

However, experts predict that the impact on Vietnam’s economy will be minimal.

“Britain may have voted to exit the EU, and markets are in a tizzy, but Asia should come through this episode with only a few scratches.

The trade exposure to the UK is minimal for most Asian economies,” noted Frederic Neumann, co-head of Asian Economics Research at HSBC Corporation.

Economic impacts

Vietnam’s direct export to the UK was reported to be around 3% of 2015 GDP, yet according to Neumann, including Vietnam’s would be more material should the broader EU were to experience a growth slump as a consequence of Brexit.

“The UK is not a significant direct destination for Vietnam’s exports, so we don’t see any direct medium to long-term impact on growth itself for Vietnam,” said Chidu Narayanan, a Singaporean-based economist for Asia at Standard Chartered Bank.

“What I would be more concerned about is how demand in general from the West is evolving-if the US is at the latest stage of its growth cycle, then that is more of a concern in terms of final demand from Vietnam’s perspective, rather than this instance of Brexit,” Narayanan told VIR.

Meanwhile, according to Maybank Kim Eng (MBKE) Research, Vietnam’s economy will be driven by internal factors, including credit growth, GDP growth, fiscal balance, corporate earnings, and other domestic events.

“The impacts from the Brexit on overall trade for Vietnam would be therefore likely insignificant from a trade-with-the UK point of view,” noted MBKE, highlighting that Vietnam’s export performance is driven by products including phones, computers, electronic products, agriculture, and textiles, rather than any country in particular where the UK is not an exception.

According to MBKE, the main implication for Vietnam following the Brexit relates to the EU-Vietnam Free Trade Agreement, which concluded late last year. “As the deal has not yet been ratified by the European Parliament, negotiations may have to start again, separately, between Vietnam and the UK, and Vietnam and the EU.”

VND stability

The Brexit result June 24 shook up the global currency markets, sending the pound itself to its lowest level in 30 years and saw the euro and other major currencies dropping accordingly.

However, the Japanese yen moved in the opposite direction, setting at under 100 a dollar.

“For foreign currencies in general, a “Leave” might mean that it’s a significant risk of sentiment and the AXJ [Asia ex-Japan], in general, might see some depreciation pressure,” noted Standard Chartered’s Narayanan. “With respect to the VND, we think it would be slightly less volatile than most, and more stable than other Asian currencies.”

The reference rate was posted at VND21,845 a dollar on June 24 on the central bank’s website, while on the previous day, the VND/USD rate was quoted at VND21,847.

Across  commercial banks, the greenback was traded between VND22,260-22,380 a dollar, an increase of VND5-50 a dollar compared to the previous day.

Given the trading band of 3%, banks could thus trade their dollar within the VND21,190-21,500 band.

“VND/USD will be driven by trade balance, (which has been in surplus of US$1.6 billion in the first five months of the year), and people’s sentiment, which depends on more internal factors, such as new government policies and transparency in terms of economic growth, attracting FDI, and environmental issues,” said MBKE.

According to the Ho Chi Minh City-based securities company, the central bank’s more accommodative stance supporting growth in the second half of 2016, along with a wider than previously estimated fiscal deficit, may put pressure on the dong in the months to come. “So far this year, the VND has appreciated 0.9% against the USD.”

HSBC’s Neumann said from an Asian perspective, two policy decisions need to be watched especially closely. “If Japan’s central bank stands idly by, without intervening directly in FX markets, and foregoes further easing either next week at an extraordinary policy meeting or its scheduled meeting in July, the yen could soar.”

In addition, Neumann added that fears over material renminbi weakness then quickly reverberate around the region leading to other currencies to fall as well, and possibly by more.

The moves by the Bank of Japan and the People’s Bank of China, according to Neumann, should be closely watched as the former could hurt lending and portfolio investment while the latter would hurt growth.

Source: VIR

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