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Vietnam Business » Vietnam Financial News » Pundits foresee more weakness for the dong

Pundits foresee more weakness for the dong

The Wall Street Journal noted that since November 2009 the central bank of Vietnam has devalued the dong by 10 percent but the trade deficit had not been reduced. The Journal reported that in July, the nation imported $980 million more in goods than it exported, up from a $742 million deficit in June.

The world press has paid considerable attention to the State Bank of Vietnams latest adjustment of the dong/dollar interbank exchange rate. Most commentators predict that the two percent dong depreciation on August 17 will not be the last one for this year.

For the first seven months of 2010, imports exceeded exports by $7.26 billion,nearly double the $3.65 billion deficit recorded seen in the same period of 2009, and threatening to overrun the $12 billion target set by the Government last November.

The Journal quoted independent economist Bui Kien Thanh, who noted that a lot of Vietnams export items have a high proportion of import input materials. Garment and footwear exports, for example, have 70 percent imported content. For that reason, Thanh believes that the dong devaluation will not help much to reduce the trade deficit.

The Journal also quoted analysts Euben Paracuelles and Yougesh Khatri of Japanese Nomura Bank as saying that if the trade deficit continues to increase, Vietnam may have raise the dong/dollar exchange rate further before long.

Jonathan Pincus of the Fulbright Economic Teaching Programme in HCM City expressed similar views to the Financial Times. The dong is still overvalued, Pincus said, and the effect of the devaluation the trade deficit may be negligible, but the State Banks move was in the right direction.

Economist Le Dang Doanh, former head of the Central Institute for Economic Management, told the FT that he still could not "see any signs that companies will be able to buy dollars from banks more easily," he said. "Vietnam still cannot balance the dollar supply and demand. Thats going to require new dollar capital flows."

Some economists warn that the policy of attempting to boost exports and raise the growth rate by devaluing the local currency that Vietnam is pursuing may accelerate price inflation.

The Government aims to hold the inflation in 2010 to no more than eight percent. Inflation has been trending down, but was still in July running at 8.19 percent ahead of July 2009.
Prakriti Sofat, a Barclays Capital analyst, estimates that for every percent the dong is devalued against the dollar, the rate of inflation will increase by 0.15 percent. On the positive side, according to the expert, world goods prices have remained low and, he says, inflation rate is not serious in Vietnam. Unlike most pundits, Sofat does not expect another devaluation this year.

The Bloomberg wire commented that the dongs five percent slide since the beginning of the year is the largest depreciation among the 17 Asian currencies that Bloomberg tracks. Also, the 7.8 percent drop in the Vietnam stock market from August 7 to 19 was the sharpest decrease among the 93 "stock thermometers" the newswire watches worldwide.

The newswire quoted Credit Suisse as saying that the move by the State Bank of Vietnam to adjust the dong/dollar exchange rate has reflected the challenges Vietnams economy is facing, and that it is too early to become optimistic about Vietnams stock market

Pincus told FT that the dong devaluation is the latest manifestation of what he calls "Vietnams trilemma. Its nearly impossible, he believes, for the country to maintain a fixed exchange rate, an independent monetary policy and an open capital account at the same time.

Vietnam Business And Financial News Network. Source [english.vietnamnet.vn]

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