Vietnam’s dong devaluation unlikely to ease trade gap, ANZ says

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A dong devaluation probably won’t immediately narrow Vietnam’s trade deficit because there isn’t enough money coming into the country, Australia & New Zealand Banking Group Ltd. said.

The currency weakened to 18,900 against the dollar as of 12:35 p.m. on Friday in Hanoi after the central bank lowered the daily reference rate 3.3 percent to 18,544 on Thursday. The State Bank of Vietnam lets the dong move 3 percent on either side of that rate. The dong traded at 19,100 earlier Friday, the weakest ever.

Vietnam depreciated the dong for the second time since November to control the deficit and stabilize the economy, said Nguyen Van Giau, governor of the central bank. The State Bank also introduced a cap on interest rates for corporate dollar deposits of 1 percent. A weaker dong may boost the local currency value of exports while making imports more expensive.

“These measures are unlikely to resolve Vietnam’s near- term balance-of-payments challenge,” Paul Gruenwald, chief Asia economist for ANZ in Singapore, wrote in a research note Thursday. “The external flows needed to finance the current level of the trade deficit are not forthcoming in the current global environment.”

Vietnam recorded a $12.25 billion shortfall in 2009, followed by a $1.3 billion gap last month. Imports jumped 87 percent in January from the same time a year earlier.

“They need to get the trade balance to a level that’s sustainable,” Gruenwald said Friday by telephone from Singapore. “They need to get the monthly deficit down close to $1 billion in the first half of the year, and to do that they need to slow credit investment and imports.”

Interest rates

Raising interest rates would slow the pace of economic growth and reduce imports, and be more effective in narrowing the deficit than devaluing the dong, according to Gruenwald.

“What they really need to do is moderate growth,” he said by telephone. “The way to do that is through interest rates. They’re not using their most effective instrument.”

The State Bank said on Nov. 25 it would raise the benchmark interest rate to a one-year high of 8 percent from Dec. 1. HSBC Holdings Plc predicts the rate will increase to 12 percent, the highest in Asia, by the fourth quarter.

With the Vietnamese markets closed for the Lunar New Year holidays until Feb. 22, the central bank’s moves may not immediately stop the dong from weakening, Wellian Wiranto, a Singapore-based economist at HSBC, and Daniel Hui, a strategist in Hong Kong, wrote in a research note yesterday.

The dong’s exchange rate “will eventually drift back up to test the ceiling in the near-term, at least until more substantial adjustments to domestic monetary conditions are made,” Wiranto and Hui wrote.

The devaluation of the dong was in response to pressure in Vietnam’s foreign-exchange markets, ANZ’s Gruenwald said.

“The demand for foreign currency continues to outpace its supply,” he wrote. “The hope is that the supply of dollars in the market will rise, thus alleviating pressure on the currency to weaken.”

Source: Bloomberg

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