Vietnam trade figures to aid currency, Citigroup says

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Vietnam's latest trade figures will probably help the nation's currency, which has been devalued twice since November, Citigroup Inc. said.

The trade deficit narrowed by 15 percent in February to US$800 million from a revised $945 million in January, according to Feb. 26 figures from the General Statistics Office in Hanoi. Preliminary numbers had put the January trade shortfall at $1.3 billion.

Concerns about the deficit have hurt the Vietnamese dong, Nomura Holdings Inc. said last month after the currency was devalued. The latest trade balance is the best for Vietnam in almost a year, with exports rising and imports falling on a seasonally adjusted basis, New York-based Citigroup said in a note dated Feb. 26.

"The narrowing trade deficit is likely to ease some pressure on the Vietnamese dong," wrote Johanna Chua, the Hong Kong-based head of Asian economic research for Citigroup. The figures may "buy time for policy makers to implement the tightening policy gradually."

Vietnam's central bank said on Feb. 25 that it plans to keep its benchmark interest rate at 8 percent in March. The rate was raised to 8 percent from 7 percent as of December.

Last month, Citigroup said Vietnam needed to take "significant" action on interest rates to buoy confidence in the dong. The currency traded Monday at about 19,050 per dollar, strengthening from 19,075 on Feb. 26.

ANZ's view

The trade gap narrowed in February "largely thanks to slowing imports," according to Chua. "Export growth has come back to positive territory."

The figures may have been distorted by seasonal factors around Vietnam's lunar new year holiday, Chua wrote. Accelerating inflation may also cut into any improvement in confidence in the dong, Citigroup said. Demand for dollars will be strong as long as inflation accelerates, said Australia & New Zealand Banking Group Ltd.

"The devaluation of the dong will have an inflationary impact going forward," Tamara Henderson, director of currency and rates strategy at ANZ in Singapore, wrote in a note dated Monday.

Inflation reached 8.46 percent in February, the highest figure since April 2009.

"˜Very savvy'

"Inflation is really the most important number for the dong, along with the level of interest rates," said Jonathan Pincus, an economist with the Vietnam program at the Harvard Kennedy School in Ho Chi Minh City. "If people are concerned about future inflation trends or if interest rates aren't attractive, they won't hold the dong."

The dong will probably weaken to 20,000 per dollar by the third quarter, based on Citigroup forecasts.

"Vietnamese businesses are very savvy about currency speculation," Pincus said. "They can smell trouble for the currency from a mile away, and they are still jumpy about the dong."

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