Economists have hailed the State Bank of Vietnam’s decision to depreciate the dong, saying the move will help cool down the forex market and decrease the trade deficit, which has been growing since early this year.
The central bank Thursday devalued the currency for the second time this year, reducing its reference rate by 1 percent to 21,673 dong to a dollar. The currency is allowed to trade up to 1 percent on either side against the dollar.
ANZ said the devaluation did not come as a surprise, pointing out it had highlighted the possibility last month.
It said in a statement, “Indeed, the spot rate had been trading closely to the top side of the +/-1 percent band this week.
“We maintain that pressure on the dong has emanated from the deterioration in the trade balance, even though FDI inflows have remained robust.”
Vietnam recorded a US$3 billion trade deficit in the first four months, compared with a surplus of $2 billion in the same period last year.
Economist Nguyen Tri Hieu said it was a reasonable decision amid rising demand for the greenback for imports.
The government also has greater demand for the dollar for its economic development goals and paying overseas loans, he said.
In a historic move, the government has issued international bonds worth a total of US$1 billion specifically for Vietcombank, the country's top lender by market value, he said.
Keeping the rate unchanged would raise pressure on foreign currency reserves while the devaluation would make it easier for the central bank and commercial banks to buy dollars from businesses and individuals, he explained.
The country now has reserves of around $35 billion, according to the central bank.
The depreciation would also help boost exports, Hieu said.
Over 20 central banks around the world, following the lead of the European Central Bank and the Bank of Japan, have weakened their currencies against the dollar to boost economic growth and employment by seeking export led-growth, he said. “If the dong is not devaluated, the country’s exports cannot compete in the US, Vietnam’s biggest export market.”
January-April exports rose 8.2 percent to an estimated $50.1 billion, while imports surged 19.9 percent.
The government has projected export growth of 10 percent this year compared to 13.7 percent last year.
HSBC said in a statement: “While we had been expecting further dong weakness this year, the move happened slightly earlier than we had thought.
“With the exchange rate closing in on the topside of the band for the past few weeks, especially in the last few days, the decision today should not be a complete surprise.”
After the adjustment, the dong fell to 21,650/21,730 per dollar on the interbank market, from 21,620/21,670 the previous day.
The total forex transactions at banks were estimated at $700 million by 2 p.m. Thursday, central bank deputy governor Nguyen Thi Hong said.
Overseas loan burden
Hieu said the dong depreciation, while having a positive impact on the economy, would also worsen Vietnam’s external borrowings situation.
Besides, currency volatility generally makes it harder to issue bonds overseas in a country’s own currency, and usually entails higher coupon rates.
But HSBC did not think so. External debt sustainability is not a major concern for Vietnam as most of its debt can be rolled over, it explained. While a weaker dong poses a bigger burden on interest payments, the amount is still rather small, it said.
For example, in 2013 Vietnam paid only $500 million in interest expense payments on its government external debt. Government domestic payments, however, topped $2.3 billion.
Vietnam's external debt had risen to close to $70 billion by end-2013. However, most of the government's external debts are concessional in nature and almost half of it carries interest of less than 1 percent.
“In contrast, we believe that a weakening of the dong will help Vietnam grow, relieving some of its domestic debt burden,” it said, noting that the domestic debt burden, both public and private, is rising.
Concerns of importers
Macroeconomic factors such as rising trade deficit and overseas loan repayment burden later this year could raise pressure on the currency, and the dong may be devalued by a total of 3 percent this year, Hieu said.
Last December central bank Governor Nguyen Van Binh had said the dong would depreciate by less than 2 percent in 2015.
But ANZ has said the dong could fall to 22,050 to the dollar by year-end, taking the annual spot depreciation to 3.1 percent, compared to 1.4 percent in 2014.
If the dong continues to depreciate, the cost to produce steel will rise, Do Duy Thai, general director of Viet Steel Company, said. Eighty percent of the inputs for steel production is imported.
Even without the dong depreciation, local steel producers are already struggling and sales fell 30 percent year-on-year in the first quarter, he said.
"Higher dollar prices will create difficulty after difficulty for our firm.”
A travel company executive said the exchange rate fluctuation would greatly affect her company’s business plans and cut into its profits since it would have to hike rates meaning fewer customers.