Inflation may curb Vietnam's benefits from weaker dong, UN says

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The fastest inflation in Southeast Asia may erode Vietnam's export advantage from a devalued currency, the United Nations said.

The dong has weakened 5.7 percent since November, when the central bank made the first of two moves to depreciate the currency. A declining dong "puts additional competitive strain on the exports of other Asean countries," the United Nations Economic and Social Commission for Asia and the Pacific said, in a report released Thursday.

"There was some concern among neighboring countries about how the dong devaluation would affect them, but because the inflation rate in Vietnam is high, that erodes some of the benefits of the weaker currency," said Nagesh Kumar, chief economist for the UN commission and lead author of the report, in a telephone interview today from Bangkok.

Vietnam's inflation is the fastest among the countries in the Association of Southeast Asian nations, according to data compiled by Bloomberg. Inflation was 9.23 percent last month, after reaching a one-year high of 9.46 percent in March.

Inflation will still probably quicken to almost 11 percent this year, Citigroup Inc. said in research published on April 23, after the latest figures were released.

Vietnam needs to bring the rate down to about 5 or 6 percent to benefit from a weaker currency, Kumar said.

"A 5 percent inflation rate is considered healthy for developing economies," he said. "Too low an inflation rate is not conducive to rapid growth."

Export competition

The dong devaluations were aimed at reducing Vietnam's trade deficit and stabilizing the foreign-exchange market, the UN said. A weaker currency can boost exports and reduce imports.

The dong traded at 18,965 against the dollar as of 2:21 p.m. in Hanoi. Vietnam recorded a monthly trade deficit of $1.25 billion in April, up 8 percent from $1.16 billion in March.

The country's primary export competition from within the region would come from Thailand, Indonesia, Cambodia and the Philippines, Kumar said.

"Thailand and Vietnam are both rice exporters and target similar markets," he said. "For clothing the competition is primarily Indonesia, and Cambodia is emerging there as well."

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