The recent devaluation of the Vietnamese dong has made things more difficult for importers, and increased the national debt burden.
The central bank in Hanoi weakened the reference rate 1 percent to 21,458 dong per dollar, effective Jan. 7. The currency is allowed to trade as much as 1 percent on either side of the reference rate.
Assessing the devaluation, HSBC said it a recent report: “While we had been expecting further VND weakness this year, the move happened sooner than we had thought. However, given the extent of USD strength against most emerging market currencies in early 2015, and with USD-VND having been closing in on the topside of the band for the past few weeks, it does not come as a complete surprise.”
Economist Nguyen Tri Hieu said it was the correct decision of the central bank given that the dong had come under increasing pressure on foreign exchange markets late last year.
Asian currencies have more generally weakened against the greenback because of assumptions that the US Federal Reserve would begin to raise interest rates this year.
The central bank devalued the dong to avoid disadvantages against other currencies, he said.
The move would encourage exports and stabilize the forex market, facilitating economic development, and increase the competitiveness of locally-made products in the domestic market, he said.
However, the dong devaluation could lower profits for foreign investors when they move their capital out of Vietnam and increase prices on imported products.
The government aims to exceed 10 percent export growth this year.
In fact, a lot of Vietnamese products, including those slated for export, depend on imported materials. Many of Vietnam's key exports, such as garments and footwear, are made from up to 90-percent imported materials. For this reason, the devaluation will not significantly increase export revenues generated by manufactured goods which require imported raw materials, as their cost will rise, said former central bank governor Cao Sy Kiem.
The government expects a trade deficit of $5-6 billion this year, compared with a surplus of nearly $2 billion last year.
Nguyen Hong Mai, director of a Hanoi-based firm, which imports medical equipment, said her firm recently signed a contract to import over $2 million worth of goods. The dong devaluation is expected to raise their cost by some $20,000.
She said she signed the contract more than a month ago, when the foreign exchange rate was VND21,210 per dollar. “The exchange rate fluctuation will greatly affect business plans, especially for importers, in the near future.”
The Director of a firm which imports home appliances from Thailand also expressed its concerns: “We spend hundreds of thousands of US dollars on imported products every month, so the dong devaluation will greatly raise our input cost. Meanwhile, it is difficult to raise selling prices amid stagnant purchasing power.”
“It means profits at companies like ours will fall,” he said.
The dong devaluation is also expected to raise Vietnam’s burden to repay overseas loans.
The impact of the shift could be seen as Vietnam scrambled to pay off the principal and interest on a number of overseas loans this year, said CEO of HSBC Vietnam Pham Hong Hai. However, the government’s foreign debts are often long-term, so the impact of the devaluation gets divided up each year.
“Thus, the important thing is how to use the loans in an effective manner to ensure the loans generate more than their costs, including those caused by the devaluation of the dong,” he said.
Vietnam’s public debts are estimated at nearly VND2.4 trillion ($114.3 billion), or 60.3 percent of the country’s GDP, of which overseas loans are equal to 39.9 percent of the GDP, according to the Ministry of Finance.
Continue to be devalued
In a recent report, ANZ said it expects further devaluations in 2015 and forecast the Vietnamese currency would reach 22,050 per dollar by the end of the year.
Trade balance in 2014 posted a record surplus of $1.98 billion. Vietnam has been recording annual trade surpluses in the past 3 years, supporting the current account surplus. Combined with the robust FDI flows, which reached a total of $20.2 billion in new and additional registered FDI, the dong has proven to be one of the less vulnerable currencies in the region.
Nevertheless, the bank does not expect the VND to be immune from the general strengthening of the greenback, especially when the US Federal Reserve starts its tightening cycle over the next 12 months, it said.
Meanwhile, HSBC expects another 1 percent depreciation later in the year, pushing USD-VND to 21,750.
Cenbral Bank Governor Nguyen Van Binh said Vietnam will keep the dollar/dong exchange rate within a 2-percent band in 2015, similar to 2014, to ensure stability on the country's foreign exchange market.
In Vietnam, investors big and small consider US dollars and gold safe havens.
In 2014, Vietnam's economy grew 5.98 percent, the highest growth in three years. The government has set a growth target of 6.2 percent this year.