Vietnam has no intention to manipulate the dong, says MOFA

In response to media questions on how Vietnam will react to being included in the US Treasury’s currency manipulation watchlist, Ministry of Foreign Affairs spokesperson Le Thi Thu Hang said at a recent press conference that the country “has never carried out a scheme nor had an intention to manipulate the local currency in a bid to gain a trade advantage”.

The Vietnam government, according to Hang, rather seeks to foster economic restructuring and enhance the business and investment environment for local and foreign companies. Vietnam’s macroeconomic and monetary policies, meanwhile, are managed in a synchronous and flexible manner, in line with the actual development of Vietnam, in a bid to achieve the macroeconomic goals and facilitate the socio-economic development of the country.

“We are willing to discuss with the US Treasury on issues related to economics, trade, finance and other fields,” noted Hang.

The State Bank of Vietnam (SBV) and related government bodies, meanwhile, have coordinated with the US Treasury to address a number of issues related to macroeconomic and foreign exchange policies. 

The Vietnam-US relations, as Hang noted, have made positive progress over the past years. The economic and trade ties will continue serving as a focus and a driving force in the comprehensive partnership between the two nations.

According to Maybank Kim Eng (MBKE) Research, Vietnam's risk of being labeled as a currency manipulator is low as the US is not likely to make Vietnam the next target, given the current amicable relationship between the two.

The criteria adopted by the US Treasury to assess if a country is manipulating the value of its currency include a significant bilateral goods trade surplus with the US of at least $20 billion during the trailing four quarters of the review period, a material current account surplus greater than 2 per cent of GDP and an one-sided intervention in its currency market in which net purchases of foreign currency exceeding 2 per cent of the country’s GDP.

Vietnam has experienced a bilateral goods trade surplus with the US that exceeds the threshold of $20 billion since 2014, reaching $39.5 billion in 2018.

Concerning the current account surplus, Vietnam may have met the second criteria of having a current account surplus that is higher than 2 per cent of GDP.

According to MBKE, Vietnam’s current account surplus was generally below the 3 per cent threshold between 2015 and 2017. However, latest available official data shows that Vietnam’s current account surplus, as of 2Q 2018, amounts to 5.4 per cent of GDP.

More recent data is unavailable publicly, but the government may be willing to share the latest current account surplus data with the US Treasury, especially if there are signs that the current account surplus has been narrowing in the second half with slowing exports and China tourist arrivals.

For the third criteria, the US Treasury assesses countries with total net purchases of foreign currency, conducted repeatedly, in excess of 2 per cent of GDP over a period of 12 months as having engaged in “persistent, one-sided” intervention in the FX market.

Vietnam's total net purchases of foreign reserves in 2018 estimated to be +$6.3 billion or 2.6 per cent of its GDP. The country also appears to be a net buyer of foreign reserves in 8 out of 12 months based on the monthly reported data on foreign reserves balances.

Despite these criteria being met, MBKE thinks the risk for Vietnam being label as a currency manipulator is low.

“We do not think the US will make Vietnam the next target given the current amicable relationship. The Trump administration may also not want to pick unnecessary fights with other smaller Asian countries and alienate them, amid an escalating trade war with China,” noted the report.

“The recent news that the US plans to delay imposing auto tariffs by up to six months also appears to signal that the Trump administration may not want to pick unnecessary fights with other countries amid escalating trade tensions with China.”

Pressure on Vietnam to correct the trade imbalances, meanwhile, is also lower compared to other larger countries. Vietnam runs a much smaller absolute trade surplus with the US as compared to countries like China ($419.2 billion in 2018), Germany ($68.3 billion) and Japan ($67.6 billion).

In addition, Vietnam’s current level of foreign reserves (estimated to be $67 billion as of April 2019) is still considered to be lower than the adequate levels suggested by the IMF’s Assessing Reserve Adequacy (ARA) metric. The IMF recommends that Vietnam’s gradual reserve accumulation should continue.

Given the current frontier market and lower income status for Vietnam, this begs the question as to whether it is really fair to label Vietnam, which needs to accumulate foreign reserves to build up its external buffer, as a ‘currency manipulator’.

“It is also evident from market reactions that the Vietnamese dong has been strengthening since news of Vietnam being included in the list of potential currency manipulators were floated on May 9, 2019,” Maybank Kim Eng noted.