Vietnam devalues the currency
Published: 02/18/2010 by ptg
In an attempt to stabilize the foreign currency market, The State Bank of Vietnam, the country’s central bank, allowed the dong to slip by 3.4% against a broadly stronger dollar on Thursday, setting its interbank rate at 18,544 against a dollar versus the previous day’s rate of 17,941. This is the second devaluation that took place within the past three months where, in November 26, the central bank shaved off 5.4% from the currency’s figure.
According to the SBV, the amount of pressure put upon the dong is done to balance the supply and demand of foreign currencies, increase confidence in the foreign exchange market while helping control the deficit and stabilizing the macroeconomy. Such aim for foreign exchange stability is part of the country’s efforts to prevent an economic slowdown. Thanh Nien News reports a 12.2 billion dollars deficit in Vietnam’s trade during the previous year.
Last November’s devaluation was accompanied by a reduction of the trading band by 5%. As SBV allow banks to trade currency within a range of 3% on either side of the reference rate, bankers claim that the maintained daily trading band indicates no official devaluation. However, in practice, the new interbank rate still puts the dong in a position where it had lost value. As export businesses recently expressed difficulty obtaining dollars for transactions, the move might encourage corporates to sell their dollars to banks which would help increase its liquidity in Vietnam economy.
Financial analysts have welcomed the devaluation of dong amidst the tough economic conditions as they see it a positive move to steer the economy to recovery by supporting exports and stabilizing the foreign currency market before things get out of hand. The new interbank rate, thus, is expected to be maintained in the next few months or until the trade deficit is managed to avoid the same plunge of Vietnam’s trade during the 2009 global financial crisis.
In an effort to mobilize dollars, it can be recalled how during the later part of last year, Hanoi put pressure on businesses to sell their U.S. currencies to state banks announcing that no devaluation will take place, thus, keeping dollars further will no longer be of benefit. Hoarding is partly to blame on the drain of foreign exchange reserves on top of declining foreign investments and falling exports.
Singapore-based DBS Group Research believes that the government’s move to devaluate the country’s currency should not be seen as a surprise. In fact, even though the dollars acquired by the commercial banks have somewhat improved their position in terms of foreign currency, the dong is expected to depreciate further as the months will advance. Despite the circumstances, however, DBS remains confident the country will make it to its year-end target of 19,640 dongs per U.S. dollar. As claimed by a senior official in the Office of the Government, Phan Chi Thanh, the authorities will impose tighter monetary policies to ensure the dollars will circulate quickly in the economy. To the same end, the central bank has set interest rates on the dollar-denominated accounts to a maximum of 1%, slightly lower than what lenders are offering.
Though Vietnam’s economy grew by 5.32% in 2009, public data shows it was accompanied by a budget deficit amounting to 7% of gross domestic products. As consumer prices went up by 7.62% on January this year, relatively higher than the government’s anticipated 7%, there is also a growing concern over high inflation rates which dragged on from 2008. Yet, the 2009 official figures show that Vietnam had beaten its annual inflation target of 7% despite the soaring prices of goods during the year-end. Quite timely, the latest devaluation came at a period where there is a high demand for cash accompanying preparations for the Tet holiday.