Dong set to sustain gains, Vietnam's biggest fund manager says

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The dong is set to sustain recent gains against the US dollar, damping concern of another devaluation of the currency, according to the securities unit of Vietnam's biggest fund manager.

Fitch Ratings last month cited lack of confidence in the dong and the gap between the official and black-market exchange rates in placing Vietnam's debt rating on negative watch. The currency has now stabilized, said Alan Pham, chief economist for VinaSecurities Joint-Stock Co., the brokerage unit of VinaCapital Investment Management Ltd., which oversees about $1.7 billion.

"The dong's value will stay stable in the near future, or may even show slight appreciation occasionally," Ho Chi Minh City-based Pham wrote in a research note. "With moderate inflation and adequate capital inflows, the dong's value is sustainable."

Vietnam's first-quarter trade shortfall of $3.5 billion is more than covered through inflows of foreign direct investment and remittances from overseas, Pham wrote. Disbursements from a $1 billion bond sale in January are also now complete, he said.

The deficit, inflation and the balance of payments are the three biggest influences on the exchange rate, said Pham. The trade gap should benefit from stronger exports in coming months, and inflation may ease to as low as 8 percent by year-end, from 9.46 percent in March, the research said.

The currency traded at 18,970 per dollar as of 10:45 a.m. in Hanoi, having strengthened from 19,085 a month ago. On the unofficial market, the dong changed hands at about 19,030, according to a telephone information service run by state-owned Vietnam Posts & Telecommunications.

"˜Fundamental shift'

The official and black-market exchange rates have "occasionally attained parity," and a narrowing of the gap signifies a "fundamental shift" in stability of the dong, he said. The gap between the two rates widened to as much as 12 percent late last year.

Foreign-exchange reserves fell to about $15 billion by the end of last year from $23 billion in 2008 as Vietnam defended the dong, according to Pham. The government has devalued the dong twice since November. The World Bank said this month it expects the reserves to increase to $17.5 billion this year.

Kevin Grice, a London-based economist at Capital Economics Ltd., predicted last month that the dong would stabilize this year, citing fewer strains on the balance of payments and rising capital inflows from remittances and foreign investment.

"Any further Vietnamese dong slippage to come will be small and orderly," Grice wrote. Capital Economics forecasts the dong will end 2010 at 19,200 per dollar, he said.

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