Grow first, ask questions later

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Vietnam should prioritize gross domestic product (GDP) growth above all else, Ashok Sud, chief executive of Standard Chartered Bank for Indochina, told Thanh Nien Weekly in an interview.

Thanh Nien Weekly: How do you assess Vietnam's devaluation of the dong? The dong has been devalued four times since the middle of 2008.

Ashok Sud: First, I strongly recommend that the exchange rate has to be based not on one currency but on a basket of currencies from the trading partners of Vietnam.

Secondly, the dong depreciated by 6.5 percent in 2009 and in 2010, it has already depreciated by 3.3 percent. So in aggregate, it has depreciated 10 percent from January, 2009 against the dollar. While other currencies in Asia have depreciated against the dollar, the depreciation of the dong can add to Vietnam's export competitiveness. And 50 percent of Vietnamese exports are commodities where Vietnam is already a low cost producer. On the other hand, by depreciating the dong, you are increasing inflation.

Thus, in my mind, the dong should be kept stable. The economic theory for depreciating a currency makes a difference between inflation rates. Supposing you are only exporting to America, American inflation is 2 percent, and Vietnamese is at 7 percent, then the difference is 5 percent, so you don't depreciate by the full amount of 5 percent, maybe three-fourths or two-thirds of the difference.

How does the dong devaluation affect the country's public debt?

The depreciation of the dong against the dollar does not affect public debt because the public debt is in dong. The Vietnamese Ministry of Finance issues VND bond, so they borrow in VND and the currency depreciation has zero effect.

What about other foreign debts in dollar?

First, the overall balance of payments in Vietnam is good and stable, and Vietnam as a country has a net inflow of over $4 billion compared to the reserves in 2009. However, some of the dollar inflows are still being kept as dollar deposits in banks and are not yet counted by the government as additions the to reserves.

Second, Vietnam is not vulnerable to large inflows and outflows of capital. Investment and dollar borrowings are over 80 percent of the overall dollar borrowings by the government and private sector in Vietnam from offshore sources. This is long term and therefore not susceptible to rapid outflow.

Also, foreign investment Vietnamese bonds and stocks is very small compared to a number of other countries and hence there is minimal risk of major outflows on that account as well.

We have also issued dollar-based bonds overseas.

That is only $1 billion. For a $100-billion economy, 1 percent added to the depreciation has little effect and can be negligible.

Vietnam has used administrative tools to interfere in the monetary market. So, people are worried about market distortion. What is your point of view?

Actually, it is not distorting the market. It is trying to bring the distorted market back to normal alignment. The most important thing in my view is that people in any country have to have faith in the local currency

 

The country has made the economy more de-dollarized, and has used interest rates to cool inflation so that the macroeconomic balances can be brought back to a sound sequence.

Firms still have difficulties accessing bank loans, what do you think about this?

If you don't have a good project, you will not get a loan. Loans are not like food that you must have. The government does not say you can be given loans. If your project is not worthwhile, you cannot get finance.

Financing and interest rates play into the overall cost of a project. The cost of interest rate is normally less than 3 or 4 percent of the overall cost. If you have a project of 100 million, the interest rate is normally 3 or 4 percent of it.

A project will not come when you have macro imbalances. With macro imbalances, nobody knows what is going on. The first thing foreign direct investment (FDI) wants is not low interest rates; FDI wants macro-economic stability.

In the current context, what target should Vietnam put priority on, developing the economy, or curbing inflation?

It should obviously be a balance. When you raise the interest rate and tighten monetary policy, you curb inflation, but you also make the GDP slightly less because people will invest less. That is like a see-saw. So it is important that inflation is addressed.

However, I think that growth is important. Vietnam has been growing and if I could choose, I would choose GDP growth first... If Vietnam does not have GDP growth, it is difficult to create jobs... So GDP growth is very important.

The other thing I must point out is that the economy is in transition, from an export-led economy to a domestic one. In the west, you have a big market that cannot die. But Vietnam has to turn the economy to local consumption, and you have a big population with which to do that.

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