Vietnam devalues dong first time in a year to spur exports

Bloomberg

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Vietnam devalues dong first time in a year to spur exports
Vietnam’s central bank devalued the dong for the first time in a year to help spur exports and vowed to ensure the stability of the currency as tension rises over a Chinese oil rig in disputed waters.
The State Bank of Vietnam devalued the dong by weakening its reference rate for the currency by 1 percent to 21,246 per dollar, according to a statement on its website late yesterday. The change, effective today, allows the dong to fluctuate as much as 1 percent on either side of the central bank’s fixing.
The dong fell 0.3 percent to 21,310 as of 3:41 p.m. in Hanoi and touched 21,360 earlier, prices from banks compiled by Bloomberg show. That was the biggest drop since Aug. 22. The currency was last devalued, also by 1 percent, on June 28, 2013. The central bank has said several times this year that it aims to weaken the dong as much as 2 percent in 2014. The benchmark VN Index (VNINDEX) of shares closed down 0.5 percent.
“This move is expected, even though the fundamental macro situation is pretty stable,” said Lai Tat Ha, head of currency trading at Hanoi-based Vietnam Technological & Commercial Joint-Stock Bank. “It’s because the dong’s exchange rate had been anchored for a year and the government is seeking ways to boost exports.”
Bonds drop
Vietnam’s policy makers are trying to bolster an economy that the World Bank estimates will grow 5.4 percent this year, slower than a government target of 5.8 percent. Last month’s protests following China’s placement of an oil rig in waters off Vietnam's coast halted production at foreign-owned factories in some areas for several days. The government will closely monitor sectors that may be affected and take “suitable actions,” Deputy Prime Minister Nguyen Xuan Phuc said June 12.
Government bonds fell. The benchmark five-year yield rose one basis point, or 0.1 percentage point, to 7.18 percent, according to a daily fixing from banks compiled by Bloomberg. The two-year yield climbed three basis points to 5.78 percent.
“After adjusting the dong’s exchange rate, the State Bank will take comprehensive measures and use monetary tools to ensure the stability of the foreign currency market,” the monetary authority said in the statement.
Vietnamese authorities will probably devalue the dong by another 1 percent this year, according to a research note today by Eugenia Fabon Victorino, an economics analyst at Australia & New Zealand Banking Group Ltd. in Singapore.
Record reserves
The dong’s 1.3 percent decline over 12 months, compares with drops of 17 percent for Indonesia’s rupiah, 4.3 percent for Thailand’s baht and 2 percent for Malaysia’s ringgit.
Consumer-price gains have stayed below 5 percent in the last four months, official data show. The government is targeting a 10 percent increase in exports this year to $145.4 billion. Overseas sales rose 15.4 percent in January through May from a year earlier.
Vietnam had a balance-of-payments surplus of more than $10 billion over the same period, the central bank said in yesterday’s statement. The monetary authority has bought about $10 billion in the first five months to lift foreign-exchange reserves to a record $35 billion, it said.
“Given that inflation was curbed to a low level in the first five months and the dong was kept stable over the past year, the central bank adjusted the dong’s exchange rate in order to help achieve the government’s economic targets,” the central bank said in the statement.
While China is Vietnam’s largest trading partner, the country must reduce its dependence and develop a contingency plan to cope with any “hiccups, turbulence,” Vietnam Chamber of Commerce and Industry Chairman Vu Tien Loc said in May. Prime Minister Nguyen Tan Dung said in an interview last month that his administration had prepared evidence and was ready for legal action against the world’s second-largest economy over the placement of the rig.

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