Dong devalued to calm forex instability

20:29 | 17/02/2011
While the jury is still out on whether last week’s currency depreciation will immediately benefit Vietnam’s economy, analysts say it will bring greater transparency to the market.

The State Bank last week executed a 9.3 per cent devaluation of the dong after keeping to an earlier pledge not to devalue the local currency before the Lunar New Year holiday. The authority set the VND/USD reference rate from February 11 at VND20,693 compared to VND18,932. It also narrowed the trading band from 3 per cent on either side of the reference rate to 1 per cent.

Nguyen Quang Huy, head of the State Bank’s Forex Management Department, said the moves would support the central bank to increase market liquidity, narrow the widening trade deficit, improve Vietnam’s international balance of payments and contribute to a more active monetary policy enforcement.

Sherman Chan, HSBC’s economist covering South East Asia, said the move was not a surprise given persistent depreciation pressures and a wide differential between the official and black market forex rates.

“However, the magnitude was larger than expected, perhaps reflecting improved decisiveness in policymaking. That said, more needs to be done to put Vietnam’s economy on a sustainable track,” said Chan.

The effective VND/USD rate, however, only depreciated by 0.1 per cent to VND20,915 on the interbank market following the devaluation and by 0.28 per cent on the black market to VND21,405 if changing money on the black market.

Marc Djandji, research director at Viet Capital Securities Company, said the devaluation’s biggest footprint was to harmonise the official rate with what had already become market practice.

 “What it does change, however, is that it should now be easier for foreign fund managers and companies engaged in international trading to exchange currencies without having to pay what has become known as the “Vietnam tax”, or the fact that when selling greenbacks, sellers can only do so at the official rate of VND19,500 per dollar. When buying, buyers do so at the effective rate of VND20,800 per dollar or VND19,500 plus roughly 7 per cent of bank fees,” said Djandji.

The devaluation was tipped since the beginning of 2011 when Government Office chief Nguyen Xuan Phuc announced there would be no devaluation before the Tet holiday.

Local financial experts said that high inflation combined with a high dollarisation of the Vietnamese economy had weakened the local currency as the population had hedged itself from devaluations by buying foreign currencies. Dollar-denominated deposits represent 26 per cent of total banking system deposits.

HSBC’s forex strategy team forecasted a further  5 per cent devaluation in 2011’s third quarter.

“It is a decisive and welcome step. Today’s devaluation was larger than most observers had expected and goes a long way to putting the balance of payments and the economy on a more sustainable footing. Following the National Congress in January, it is becoming now clearer that the backlog of reform is being worked through and we expect more reform measures to be unveiled in the coming months,” he said.

“In short, Vietnam is on the move again. Certainly, not as drastic a move as today, but further weakening of the local currency is still expected,” said Chan.

Chan said that the risk of import-led inflation, already high due to soaring global commodity prices, had increased.

“Local prices of key commodities will now become even more expensive. Therefore, we do not see inflation retreating back to single digits in the coming months,” said Chan.

Tai Hui, regional head of Research, Southeast Asia of Standard Chartered Bank in Singapore also said the devaluation “has already reached our original forecast of 20,800 for end of 2011 and hence we have now revised our end 2011 USD-VND forecast to 21,800, reflecting the possibility of further devaluation”.

By Van May

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