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14 Feb 2025

Econ Digest

The Vietnamese Dong has hit a historic low and is likely to weaken further; the State Bank of Vietnam is expected to maintain its policy rate until year-end 2025.

คะแนนเฉลี่ย

•    The Dong has hit a record low amid the risks of a new round of trade war. On Tuesday (February 11, 2025), the Dong dropped 0.6%YTD to VND25,535/USD, passing the previous historic low reported for the end of December 2024. The main factors contributing to this drop were the risks of a new trade war, as Vietnam’s trade surplus with the US widened to USD123 billion in 2024, and the State Bank of Vietnam’s decision to lower the daily reference exchange rate for the US dollar to VND24,522/USD.

•    Under Trump 2.0 policies, Vietnam is expected to see a smaller trade surplus with the US this year, leading to a reduction in the current account surplus, which is one of the factors pressuring the Dong. The Vietnamese government is facing the challenge of either being hit with higher tariffs on Vietnamese goods by the US or having to increase imports from the US; both of which would result in a reduction in the trade surplus.

•    In addition, increased capital outflows have been seen in  the stock and bond markets, along with other investments, leading to Vietnam’s financial account deficit, which is another factor pressuring the Dong. Normally, Vietnam receives over USD10 billion in FDI each year, which is a key factor supporting the financial account surplus. However, there have been capital outflows from the stock and bond markets, plus sectors such as finance and banking, totaling more than USD40 billion, since 2023. This factor along with higher interest rates abroad stemming from the Fed’s high policy rates, coupled with persistent fragility in Vietnam’s financial fundamentals has led to its financial account deficit for Vietnam.  

•    Looking ahead, the Dong is likely to weaken to VND25,600/USD by the end of 2025 due to risks from Trump’s tax measures and the Fed’s delay in cutting interest rates. The State Bank of Vietnam’s ability to intervene in support of the Dong is somewhat limited, as it must maintain an adequate level of international reserves. Between February and October 2024, the State Bank of Vietnam used approximately USD6 billion of its international reserves to stabilize the Dong, reducing its reserve coverage from 3.79 months of import in February 2024 to 2.45 months in October 2024 (The IMF suggests that a country’s international reserves should cover three months of imports).

•    In addition, Vietnam’s inflation rate is on the rise, reaching 3.63% YoY in January 2025. The State Bank of Vietnam has set a target inflation rate of no more than 4.5%.

•    Therefore, to maintain the stability of its currency and inflation, the State Bank of Vietnam is expected to keep its policy rate steady at 4.5% until the end of 2025, which is based on the assumption that the Fed will cut interest rates twice by 25 basis points each this year.

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Econ Digest

Vietnam