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Vietnam dong devaluation in 2009?

12.19.08 | admin | In currency, Vietnamese

Over six months ago Morgan Stanley warned of a currency crisis in Vietnam. But the valuation of the Vietnam dong would have been similar in magnitude of the severe devaluation of the Thai baht in 1997 which sparked the Asian financial crisis. In the months following Morgan Stanley’s warning we have seen a global financial crisis but only slow, gradual devaluation of the Vietnam dong after a one time 2% drop back in June.

At the time we hear were spooked and helped spread the Morgan Stanley rumor of imminent dong devaluation. But as nothing happened and now Morgan Stanley is talking of a “large realignment” of the exchange rate in 2009 are they really to be believed?

At the time one of the factors was the 12-month nondeliverable forwards which predicted a 39% drop against the dollar. However, that figure may not be an accurate predictor because of the small size of that market which allows a small number of players to have a large influence on the price.

Another factor was the high double-digit rate of inflation in Vietnam. However, as the world falls into recession demand and the price of oil has dropped sharply and as oil was largely imported and was a large component of consumer spending inflation has dropped sharply. In fact, consumer prices are now falling and oil continues to fall.

On the other hand, Vietnam still has a high current account deficit and there is still the problem of loan repayments due to the stalled real estate market. And as the countries that Vietnam exports to, the United States, Japan, and Europe, are now in recession Vietnam has to try harder to compete with its exports possibly by devaluing its currency to make its products cheaper. China, which has long kept the Chinese yuan artificially cheap, could devalue its currency which could force Vietnam to follow suit in order to remain competitive.

While Vietnam wants to remain competitive Hanoi also wants to prevent the negative social ramifications of sudden and steep currency devaluations. Vietnamese companies like coffee exporters who took out loans in US dollars because they were much cheaper than loans in Vietnamese dong might not be able to repay those loans if the price of dollars were to suddenly go up. So Hanoi favors slow, incremental devaluation. However, the State Bank of Vietnam widened the dong’s trading band from 2% to 3%. Just over six months ago they had increased it from 1% to 2%. This allows for larger one time increases in the drop of the dong’s value.

As interest rates have been cut in the US and around the world they have also been cut in Vietnam. Whereas before a rate of nearly 20% could be had on Vietnam dong deposits the rate now is from 10 to 12% and hovering around 4% for US dollar deposits for 12 months. So while the rate for dong deposits is still three times higher as a percentage than for dollar deposits it’s only an 8% difference and it looks possible that the dong could devalue 8% against the dollar in 2009 and there is always risk that it could devalue even more.

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