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Standard Chartered advises exchange-rate caution
Vietnam should ensure the exchange rate for the dong is balanced against the need to reduce its burgeoning trade deficit, warns Standard Chartered Bank in its latest report.
"We expect the USD/VND to move sideways in coming months until the trade deficit situation improves," the bank’s senior Southeast Asian researcher, Tai Hui, writes in the report.
The economist forecasts a USD/VND surge to 16,500, or a 2.35 per cent depreciation of the dong, by the end of this year.
Depreciation of the dong could be expected to make imports more expensive and so prevent a balance of payments crisis amid the priority effort to defeat inflation.
But an Economic Management Institute senior economist told Viet Nam News that devaluation of the dong was unlikely to reduce the import bill.
Viet Nam had to buy refined petroleum, fertiliser, construction materials, and spare parts to maintain and develop its economy, he said.
As a developing country, it could not reduce its demand for these imports.
Viet Nam’s first-quarter trade deficit grew by an astonishing 66 per cent to US$7.4 billion against the three months of last year.
Oil, steel and capital goods were responsible for the jump.
The growth in exports was 23.3 per cent.
Standard Chartered warns that any sharp reversal in capital inflow could make Viet Nam – with its modest foreign exchange reserves of about $20-25 billion – vulnerable to an external payment crisis.
Any weakening of the dong will be similar to China’s action to help reduce its trade deficit of late 1993 and early 1994, the report says.
"This is an extreme measure and would cause significant volatility in the economy," says Tai Hui.
Catch-22
The trade deficit is a catch 22 for the Viet Nam Government.
A weakened dong might narrow the widening trade deficit and prevent an external payment crisis with any sharp reversal of capital inflows.
But a strong dong is needed to curb the price of imports and control inflation.
Year-on-year inflation was at 21.42 per cent for April against a year-on-year increase of 19.39 per cent for March.
The Standard Chartered report argues that while exchange-rate policy is used as the first defence against inflation in many countries, in Viet Nam the central bank uses it to signal intent rather than to control commercial lending rates.
The bank believes that the exchange rate is no longer an exclusive tool to fight inflation.
It says further hikes in the base interest rate and bank reserve requirements; an open market with strict investment management; higher agricultural output and stabilised prices for primary commodities such as food, petroleum, medicines, steel and fertiliser was likely to be more effective.
VNN
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