World Bank sees confidence in Vietnam dong returning

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Confidence in the Vietnamese dong is returning after a year of pressure and widespread expectations of devaluation, and the unofficial rate may continue to strengthen, the World Bank said on Wednesday.

With dong deposit rates becoming more attractive, local investors may shift their portfolios out of gold and foreign-currency assets, it said.

"Confidence in the dong is gradually returning," the World Bank said in a report entitled "Taking Stock" prepared for a mid-year donors' meeting.

"Dollar sales should contribute to bringing the parallel exchange rate deeper into the official floatation band, perhaps even crossing the central exchange rate in a not-too-distant future."

Dollar depreciation relative to the dong "should gradually dispel the fears of further devaluation of the dong and make the re-composition of portfolios towards dong-denominated assets even more attractive."

Vietnamese authorities have devalued the dong four times in the past two years and the unofficial rate has traded during that period almost exclusively outside the weak end of the central bank-mandated currency band.

The ban now brackets legal trading to within 3 percent on either side of a daily reference rate.

After the last devaluation in February and a move by the central bank to free lending rates from a cap, the unofficial exchange rate has strengthened to within the trading band.

The dong has firmed more than 5 percent since peaking near 20,000 per dollar on the unofficial market. On Wednesday, the unofficial rate was on par with official interbank quotes at 18,960 per dollar. The midpoint reference rate has been 18,544 since the February 11 devaluation.

More broadly, the World Bank report said Vietnam had navigated the economic crisis "relatively well".

Still, misgivings and misunderstanding about economic policy remained a problem and took a toll on the economy, in large part because of inadequate communication by the government, it said.

"Under these circumstances, it is not surprising that Vietnam did not benefit from the resurgence of international capital inflows experienced elsewhere," said the report.

Confidence in the dong might have been restored sooner with better communication about policies and transparency with respect to Vietnam's international reserves, which were depleted somewhat due to stimulus measures in 2009 but are considered a state secret, it said.

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