Pressures on Exchange Rate Weighed

NSFC said core inflation in 2016 will not be much higher than in 2015, estimated at 3 per cent, and inflation will be lower than core inflation, projected at 2-3 per cent.

Compared with the inflation target of less than 5 per cent set by the National Assembly, Vietnam will have wide room for adjusting prices of basic commodities as well as exchange rates. According to NSFC, 1 per cent increase in exchange rate will result in 0.06 - 0.1 percentage point of inflation. This impact is lower than that in volatile times.

 

The forex forecast by NSFC is based on the balance of foreign currencies. Particularly, the balance of payments will have some advantages. Firstly, FDI disbursement is expected to increase from US$13.2 billion in 2015 to US$13.5 billion in 2016. Secondly, foreign portfolio investment is project to climb in 2016. Thirdly, overseas remittances are forecast to reach US$14 billion in 2016 from US$13 billion in 2015. The Government plans to issue US$3 billion of bonds to international capital markets.

 

However, there are unfavourable factors to the balance of payments like rising trade deficit. Imports are forecast to increase in 2016 and the growth rate is higher than export growth because rising investment will give rise to higher demand for imported machines and equipment. NSFC predicted that trade deficit will climb to US$4 billion in 2016 from US$3.2 billion in 2015.

 

Besides, the depreciation of local dong against the US dollar will affect Vietnam’s export price competitiveness, especially agricultural exports.

 

Given these factors, this agency predicted that pressures on exchange rates in 2016 will be somewhat stronger than in 2015 and this will require more flexible and cautious policies. Besides, exchange rate policy in particular and monetary policy in general must be synchronously supported by other policies such as fiscal policy and trade policy.

 

NSFC said that interest rates will be placed under pressures from various factors. For instant, rising inflation will increase people's expectations, thus causing pressures on deposit interest rate hikes. Credit demand by the private sector continues to increase while government bond issues do not decline. Higher interest rate on US dollar on the world market will help narrow the gap between interest rates of domestic currency and foreign currencies. This trend will limit the possibility of the State Bank of Vietnam (SBV) to lower interest rates to ensure the stability of exchange rates.