Vietnam probably won't devalue again in 2010, ANZ says

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Vietnam probably won't devalue the dong again until next year, Australia & New Zealand Banking Group Ltd. predicted, after three moves by the nation's central bank to reduce the value of the currency in the past year.

The dong was devalued in August, when the reference rate for the currency was weakened by 2 percent to 18,932 per dollar, following such moves in February and in November 2009.

Vietnam faces an "embedded expectation" of a weakening dong, Benedict Bingham, the International Monetary Fund's Hanoi representative, has said. Recent wage increases in China as well as a stronger Chinese currency should underpin the dong for the rest of 2010 by making investment in Vietnam more attractive, Tamara Henderson, the Singapore-based head of Asia foreign- exchange research at ANZ, wrote in an Oct. 1 note.

"They have a little breathing space, particularly given that they recently devalued," Henderson said by phone today.

Vietnam may win more foreign investment and experience a pickup in exports following China's June 19 pledge to allow the yuan to trade more freely, PXP Vietnam Asset Management said at the time. The Chinese yuan has strengthened 2.1 percent against the dollar since then, while the dong has weakened 2.6 percent.

Exports climb

Vietnam's exports increased 23 percent from a year earlier in the nine months through September, according to preliminary figures released on Sept. 27 by the General Statistics Office in Hanoi. That marks an acceleration from the 16 percent growth reported for the first half of 2010.

"Lower inflation and improved competitiveness should keep devaluation pressures at bay into year-end," Henderson wrote.

The dong will probably be devalued again in the first half of 2011, she wrote, predicting that the currency will move to about 20,000 per dollar and citing Vietnam's "ballooning" trade deficit as contributing to the dong's weakening trend.

"Sizable" trade deficits have contributed to putting "downward pressure" on the dong, the Asian Development Bank said last week.

Vietnam's cumulative trade deficit in the nine months through September reached $8.58 billion, according to the General Statistics Office. For September alone, the gap widened to $1.05 billion from $395 million in August.

"˜Structural' deficit

The trade gap "needs to come down," Robert Prior- Wandesforde, a Singapore-based economist at Credit Suisse Group AG, wrote in a note dated Sept. 29. "The deficit partly reflects strong imports of capital goods, but also a penchant for consumer products."

Vietnam's trade deficit is "structural," with exports largely consisting of lower value-added items such as commodities, footwear and garments while imports are primarily industrial machinery needed to build the country's manufacturing base, Deutsche Asset Management (Asia) Ltd., which manages DWS Vietnam Fund Ltd., said on Sept. 27.

"It is common practice for emerging-market economies to devalue their currency to maintain competitiveness while running a trade deficit as they acquire capital for industry," Deutsche Asset Management (Asia) said in a monthly note. "A currency equilibrium point will be reached as the economy matures."

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