The devaluation of the dong this week will help improve Vietnam's trade balance, but it may fuel inflation concerns, experts say.
The State Bank of Vietnam on Wednesday set the daily reference rate two percent lower at 18,932 to a dollar, the third devaluation since November.
A weaker currency may boost exports and demonstrate the government's focus on economic growth over further easing inflation, said Prakriti Sofat, a Singapore-based economist at Barclays Capital.
"The main reason for the central bank's move is to balance onshore foreign exchange demand-andsupply and to support exporters," Sofat said. "Vietnam largely exports low value-added goods and typically competes on prices."
Vietnam's trade deficit widened in July from the previous month on falling exports, reaching US$1.15 billion from a revised $742 million in June. For the seven months through July, the gap was $7.4 billion, almost twice the figure for the same period last year.
"A weaker currency should in theory improve Vietnam's balance of trade," said Kevin Snowball, chief executive of Ho Chi Minh City -based fund manager PXP Vietnam Asset Management Ltd. "For the markets, the immediate beneficiaries of this should be companies with earnings in foreign currencies, including seafood companies."
The dong dropped for a fourth straight day to a record low on Thursday. It traded at 19,450 per dollar as of 8:56 a.m. on Thursday in Hanoi, compared with 19,500 in the so-called black market.
News website VnExpress on Tuesday cited a source from the State Bank of Vietnam as saying some banks are worried about difficulties in purchasing dollars, but the market was not strained at the moment.
"The State Bank of Vietnam adjusted [the reference rate] beforehand just to be proactive for future developments."
Le Duc Thuy, chairman of the National Financial Supervisory Commission said dollar loans had started to rise after February and most of them were of three or six months. "As a result, if dollar demand for loan repayment is going to put a strain on the market, it will only happen at the end of September or after that," he told VnExpress.
Trinh Vinh Quyen, an analyst at Hanoi-based Vietnam International Securities Co., said the central bank's move to devalue the dong makes sense "as there is usually a lot of demand for foreign currency during the third quarter so the government is trying to address the trade imbalance."
"Importers will suffer from lower profits because of higher input costs while they'll try to keep prices stable at first. However, they will gradually increase prices of their products, so concerns about inflation arise. Gasoline prices, for example, will be raised soon."
Analysts also said the downward adjustment this week may create more expectations of further devaluation, and exert continued pressure on the dong.
Barclays Capital is maintaining a year-end forecast for the dong to trade at 19,500 while Australia & New Zealand Banking Group Ltd. (ANZ) said the currency may weaken to 20,000 per dollar during the first half of next year.
"All-in-all, the 2 percent devaluation came sooner than we had expected but it was also smaller than we had expected," wrote Singapore-based Tamara Henderson, head of Asian foreign exchange research at ANZ.
According to ACB Securities, an arm of Ho Chi Minh City -based Asia Commercial Bank, the adjustment might benefit the economy in encouraging exports and increase the liquidity of US dollars in the banking system, but it could affect the equity market.
The expectations of further dong depreciations may encourage investment in the dollar rather than in the equity market, the company said on Wednesday.
Source: Thanh Nien, Bloomberg