Experts at the Standard Chartered Bank expect the Vietnamese dong to depreciate further in the months ahead, trading at 20,600 by the end of the year, as the trade deficit remains vulnerable despite inflationary pressures.
The State Bank of Vietnam (SBV) has kept its policy rate steady since the turn of the year but opted to devalue the dong by 3.4 percent against the US dollar on February 10, following a 5 percent devaluation last November.
The rolling 12-month sum of Vietnam's trade deficit reached $14 billion in January 2010, and is on a widening trend, said Tai Hui, Regional Head of Research, Southeast East Asia, Standard Chartered Bank.
Several one-off factors explained the surge in the trade deficit. In particular, higher commodity prices led to stockpiling of steel products and rising net imports of oil and petroleum products, he said.
Commodity price increases were much less dramatic in late 2009 and January 2010, so they do not provide a satisfactory explanation for the recent widening of the trade deficit, Hui felt. "In our view, there is a more straightforward explanation: the relatively high speed of domestic economic growth compared with global growth."
During the three-month period from November 2009 to January 2010, Vietnam's exports grew by 17.3 percent year-on-year, but its imports expanded by a staggering 52.2 percent year-on-year.
Demand from the US, Vietnam's largest overseas market, is still sluggish. Exports to the US fell by 9.2 percent year-on-year in value terms in December 2009.
On a more positive note, Vietnam's exports to China have skyrocketed in recent months, with growth averaging 63 percent year-on-year in the three months between November 2009 and January 2010. Hence, China has been a key factor supporting Vietnam's export growth in the absence of support from the West.
Meanwhile, imports have also surged ahead. The widening of the trade deficit in November and December 2009 can be attributed to a rapid rise in imports of machinery and spare parts, reflecting strong investment growth.
However, the country's external trade position is still vulnerable to a surge in commodity prices, Hui said. "We expect inflation to exceed 10 percent by year-end and average 8.9 percent in 2010."