The shortfall is hurting confidence in Vietnam’s economy, with Australia & New Zealand Banking Group Ltd. saying last week that interest rates will rise and the currency will depreciate. The dong weakened to as much as 18,650 per dollar Tuesday, according to a telephone directory information service run by state-owned Vietnam Posts & Telecommunications, compared with an official rate of about 17,860.

“A sustainable growth path for the Vietnamese economy is likely to require a more sustainable and smaller trade deficit,” wrote Alaistair Chan, a Sydney-based economist for Moody’s Economy.com, a unit of New York-based credit ratings company Moody’s Corp.

Vietnam’s economy expanded 5.8 percent in the third quarter, accelerating from 4.5 percent in the previous three months. The government is targeting a 6.5 percent expansion next year.

The recent increase in the trade deficit stems from a faster recovery in domestic than external demand, Chan said in e-mailed comments Wednesday.

“This means the economy has to come up with relatively more dollars, which it has done partly through borrowing,” Chan said by e-mail.

Dong instability

Vietnam’s central bank said last month that it is seeking loans from organizations such as the Asian Development Bank and the World Bank to prevent instability in the dong.

The weaker dong will limit the recovery in import demand, according to Moody’s Economy.com. Imports fell 22 percent in the 10 months through October from a year earlier, after dropping 25 percent through September.

Twelve-month non-deliverable forwards put the dong exchange rate against the dollar 13 percent weaker a year from now, according to Moody’s Economy.com, which warned that such prices “should be interpreted with care” due to low liquidity in the futures market.

While non-deliverable forward rates for the dong “have been consistently too bearish, the direction seems right,” Chan said by e-mail. “The black-market value is also a good indication of market expectations.”

A weaker dong helps Vietnam’s export competitiveness, Chan wrote. Vietnamese shipments abroad declined 14 percent through October from a year earlier, an improvement from a 15 percent slide through September.

“Exports are also recovering but the recovery is uneven across different sectors,” Chan wrote. “A robust recovery in Vietnam’s exports will require a revival of demand in final markets in the US and Europe.”

Source: Bloomberg