Economists concerned about dong devaluation, FDI drain on US rate hike

By Ngan Anh, Thanh Nien News

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If the dong is not devaluated, the country’s exports will find it hard to compete in the international market (Photo: Ngoc Thang)

If the dong is not devaluated, the country’s exports will find it hard to compete in the international market (Photo: Ngoc Thang)

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The interest rate hike by the US Federal Reserve (FED) is expected to increase pressure on the dong in the context that Vietnam is trying to push economic development and employment by seeking export-led growth.
The FED raised the range of its benchmark interest rate, for the first time in nearly a decade, by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs, Reuters reported.
It has indicated that it would raise interest rates four more times before the end of 2016.
Former governor of the State Bank of Vietnam, Cao Sy Kiem, said pressure on the dong’s exchange rate would rise next year. Some countries recently weakened their currencies against the dollar anticipating the US interest-rate hike.
“If the dong is not devalued, the country’s exports will find it hard to compete in the US, Vietnam’s biggest export market,” Kiem said.
Export-reliant Vietnam posted a trade deficit of $3.8 billion in January-November, compared with a $2 billion surplus in the year-ago period. Shipments grew 8.3 percent, below the government's 10 percent target.
However, HSBC said in a recent report that Vietnam’s high external debt limits the room for the central bank to let the currency weaken too fast.
“As such, we have decided to revise our forecast and now expect the dong to depreciate against the dollar by an additional 2 percent in 2015, and then a further 2 percent in 2016,” it said.
“Our year-end forecast for dollar-dong is 22,800 for end 2015 and 23,300 for end 2016.”
The US rate hike may encourage investors to leave from newly emerging economies for the US, Kiem said.
Economist Can Van Luc said the FED’s move would raise the interest rate on Vietnam’s overseas debts.
Vietnam's external debt had risen to close to $70 billion by end-2013. Most of the government's external debts are concessional in nature and almost half of it carries interest of less than 1 percent.
After the US rate hike the dong traded at the ceiling level of 22,547 a dollar Friday, according to prices from local banks. It can trade as much as 3 percent on either side of the official reference rate, which has been left unchanged at 21,890 since the third devaluation of this year on August 19. The weakest level permitted at the current range is 22,547.
Nguyen Thi Hong, an SBV deputy governor, said the strengthening of the dollar against the dong was due to psychological factors before the FED meeting to raise interest rates. Local banks are fully meet demand for the greenback from individuals and enterprises, she said.
Vietnam's foreign exchange reserves have increased 2.7 percent to US$37 billion so far this year, Nguyen Van Binh, the governor of the central bank, said recently.
The figure would reach $40 billion if other items such as gold reserves, estimated at 10 tons, and deposits in foreign currencies by the Treasury and credit institutions with the central bank are included, he said.
Hong said the SBV is closely monitoring the market and would use monetary tools for market stabilization.
"In terms of policy, the SBV will stabilize the foreign exchange market and foreign exchange rate."
In August Vietnam became one of the first countries in Asia to intervene in currency markets after China devalued the yuan, by devaluing the dong by 1 percent and widening the dollar/dong band twice.
The dong has weakened by around 3 percent in the interbank market in 2015 against a central bank's pledge to let the currency slip by 2 percent.
Hong said economists should not be too concerned that foreign investors could pull out their investment in Vietnam en masse. The government has promised to ensure a stable economic environment and facilitate their business in the country, she said.
With foreign portfolio investment in the country not being significant, any pullout would not put pressure on the local financial market, she added.
Measures
The central bank said it is abolishing a ceiling on interest rates on dollar deposits by individuals in an attempt to avoid hoarding of the greenback. The change came into effect last Friday.
In September the central bank, to increase the attractiveness of the dong, reduced the interest rates on dollar deposits offered by banks to organizations and companies to zero percent from 0.25 percent previously.
The move was expected to encourage people to sell foreign currencies to banks instead of depositing them.
Kiem said the dollar has recently strengthened over other currencies, encouraging people and enterprises to hoard dollars, not just for payments, tourism and studying abroad, but also for profits.
In Vietnam, many people have the habit of holding dollars as a hedge.
Economist Nguyen Tri Hieu said the zero interest rate could work for a while but harm the economy in the long term.
People holding dollars might choose to invest their savings in other countries to benefit from higher interest rates, and if that happened the policy would have had the opposite of the intended effect on the market, he pointed out.
“To prevent dollarization and stabilize the forex market, the most important thing is to increase confidence in the dong.”
Vietnam needs to keep a low and stable public debt ratio and create a strong financial market, he added.

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