The exchange rate will fluctuate with an upward trend.

The foreign exchange market is expected to remain relatively stable in the third quarter, before potentially experiencing more significant fluctuations in the final quarter of the year. The exchange rate will generally remain high, fluctuating in an upward trend, commonly ranging from 21,800 VND to 21,890 VND.

According to the Vietnam Investment and Development Bank (BIDV), although the State Bank of Vietnam (SBV) issued strong messages at the end of May affirming its commitment to not adjust the exchange rate by more than 2% and its readiness to intervene to maintain market stability, the potential risks to the exchange rate are undeniably significant.

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The evolution of the foreign exchange market, in addition to traditional supply and demand factors, will depend closely on the attitude and methods of the State Bank of Vietnam in managing the foreign exchange market.

BIDV forecasts that the foreign exchange market will remain relatively stable in the third quarter, before potentially experiencing stronger fluctuations in the final quarter of the year. "The exchange rate will generally remain high, fluctuating in an upward trend, commonly ranging from 21,800 VND to 21,890 VND," BIDV stated.

According to this bank, the two most important factors identified to support the fundamental stability of the market are the active regulatory role of the State Bank of Vietnam and the maintenance of an overall balance of payments surplus.

Regarding the State Bank of Vietnam's (SBV) role, the SBV has consistently issued messages about its commitment to maintaining stability in the foreign exchange market during the last six months of 2015, within the committed range. Although this is a difficult task, the SBV's determination and consistency in its policy will be a major plus, helping to boost market confidence. Furthermore, the significant improvement in national foreign exchange reserves over the past few years provides a strong foundation to support the SBV in this challenging task.

According to BIDV's assessment, the State Bank of Vietnam (SBV) could potentially sell up to 5-6 billion USD, equivalent to the trade deficit in a worst-case scenario. Therefore, "if no major shocks occur simultaneously in the market, the SBV will most likely achieve its exchange rate management target this year."

Regarding the overall balance of payments, it is projected to continue showing a surplus of approximately $3 billion in the last six months of 2015. As for the trade balance, the trade deficit is expected to persist in the last six months of the year, but the deficit is not expected to widen further, remaining around $3-4 billion.

Furthermore, examining the structure of import and export goods in the first six months of the year reveals a sharp increase in the import value of machinery, equipment, raw materials, and electronic components, primarily concentrated in the FDI sector. With the rapid increase in imported machinery, equipment, and raw materials for export production in the first half of the year, export expectations are more optimistic in the second half.

According to statistics from the past four years, the export growth rate in the second half of the year compared to the beginning of the year (an average of 15.63% over the past four years) is usually higher than the import growth rate (an average of 11.66% over the past four years). This cyclical trend is likely to continue this year.

In addition, other capital flows such as FDI, FII, ODA, remittances, etc., are expected to remain favorable with supporting factors. These include:

Firstly, the government's policies have been undergoing many changes aimed at supporting the attraction of foreign capital flows. For example, the amended Enterprise Law and Investment Law, officially effective from July 1, 2015, will create a more favorable environment for investment and business activities; Decree 60/ND-CP/2015 will expand the "room" for foreign investors to own shares in public companies; and the privatization of state-owned enterprises will continue to be promoted.

Secondly, several bilateral and multilateral trade and cooperation agreements that Vietnam has participated in, or will be signed in 2015, will be positive factors attracting investment capital into Vietnam to take advantage of these bilateral/multilateral agreements.

Third, Vietnam-US relations are making historic progress and promise to create a significant shift in investment flows from the US to Vietnam.

Fourth, the Chinese economy is causing significant concern among investors, and this is also seen as an opportunity for the Vietnamese economy to attract investment capital. It is projected that FDI disbursement could reach $6-7 billion, net FII around $400 million, and ODA disbursement around $3-4 billion.

However, BIDV also believes that, given the market conditions this year, the potential risk factors that put pressure on the foreign exchange market are very significant.

This is because the trade balance could still worsen under two scenarios: The global economic recovery weakens due to fluctuations in Asia (China, South Korea, ASEAN, etc.) and Europe (the Greek issue), causing Vietnam's exports to fall short of expectations; and rapid domestic economic growth leads to a sudden surge in import demand. Consequently, the trade deficit could widen to approximately $1 billion per month.

Furthermore, the possibility that the State Bank of Vietnam (SBV) will not extend Circular 43 regulating foreign currency lending in 2016 will put pressure on the demand for foreign currency to reduce outstanding foreign currency loans in the remaining months of the year. “This is quite reasonable given that VND lending interest rates have been significantly reduced and are currently at an acceptable level for businesses, especially in priority sectors. At the same time, the SBV continues to demonstrate its commitment to gradually reducing the dollarization of the economy,” BIDV commented.

Another crucial factor to consider is the timing of the US Federal Reserve's interest rate hike. Given recent statements, it's highly likely the US Federal Reserve will raise interest rates sometime in 2015. This would lead to higher USD interest rates in international markets and a continued upward trend for the USD, thereby indirectly putting pressure on the domestic foreign exchange market.

BIDV also believes that the generally cautious market sentiment may lead to continued hoarding of foreign currency, and that the foreign currency position of the banking system could fluctuate sharply, negatively impacting exchange rate movements.

According to Hanoi Moi