Vietnam is trying to increase exports to stop economic growth from stalling after cutting growth targets because of the global financial crisis. A wider trading band gives more scope for the dong to weaken against the dollar, helping the exports.

Nguyen Phuoc Thanh, general director of Vietcombank, the country’s third largest lender, told Thanh Nien Daily, “The increase in trading band for the dong may see the black market forex rate slightly volatile for the next couple of days.”

Nguyen Duc Vinh, chief executive officer of the Hanoi-based Technological and Commercial Joint Stock Bank, said the decision would certainly create greater flexibility for both commercial banks and their customers in the trading of foreign currency.

“A weaker dong will help Vietnamese exporters after a recent slowdown in exports,” Vinh said. “We also don’t need to worry that it will exacerbate a trade deficit because global prices of major commodities are cheaper now than in previous months.”

The dong declined 0.01 percent to VND16,838 per dollar at 5:15 p.m. Thursday in Hanoi, 2 percent weaker than the rate set by the central bank, according to data compiled by Bloomberg. The State Bank fixed the reference rate at VND16,511 against the dollar Thursday.

“Considering Vietnam is an external deficit country, its currency has declined the least in Asia ex-Japan against the dollar in the last six months,” said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp. in Singapore. “So, a move toward a more pliable exchange rate may be the way to go in terms of reflecting underlying fundamentals. If you look at surplus countries like Malaysia and Singapore, their currencies have weakened more.

“A weaker currency will reflect fundamentals. Secondly, it will provide an export boost and thirdly, it will reduce the cost of intervention.”

He expects the dong to head to VND17,000 against the dollar by the end of the year.

The dong has weakened just 1.4 percent since the end of September even as the Indonesian rupiah slid 12 percent and South Korean won dropped 11 percent after global funds pulled money out of emerging markets, leading to a shortage of dollars.

“There is certainly some degree of currency re-alignment following the weakness in other regional currencies,” said Joseph Lau, a Hong Kong-based economist at Credit Suisse AG.

“The global environment will be increasingly more bearish next year and the government is taking account of that.”

Lau also expects the dong to weaken “towards the VND17,000 level in the near term.”

Non-deliverable forwards contracts indicate the dong will fall to VND17,320 in the next year. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are settled in dollars.

Exports slow

Vietnam’s exports to the US grew 20 percent in January-August, the slowest pace since January 2007, to US$8.04 billion, according to figures from the US International Trade Commission. Growth was 29 percent at the start of the year.

“The global financial crisis which started in the US has become worse and is spreading to other countries,” Governor Nguyen Van Giau said in a separate statement posted on the State Bank’s website Thursday. “Faced with the risk of an economic recession, other countries need to have a preventive plan.”

On November 3 the central bank cut the benchmark interest rate to 12 percent from 13 percent and lowered banks’ compulsory reserve to 10 percent from 11 percent to “maintain reasonable growth” in the economy.

Source: TN, Agencies