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Dong to Weaken, Credit Suisse Says: Vietnam GDP Forecast Cut
The dong’s recent stability will likely be temporary and it will resume weakening by year-end, Credit Suisse Group AG said today as it cut its growth forecast for Vietnam.
The Southeast Asian country’s economy will expand 5.8 percent this year, compared with an earlier forecast of 6.2 percent, a Credit Suisse research note released today said. The dong will weaken 1.4 percent to 20,900 per dollar by year-end and reach 21,400 by the end of 2012, according to the prediction, which said the currency’s recent steadiness was driven more by administrative measures than monetary tightening.
“There are many reasons to believe that this is only a temporary phenomenon before another episode of instability,” wrote Santitarn Sathirathai, a Singapore-based economist at Credit Suisse. “A combination of higher inflation, slower growth, and signs of financial distress are likely to spark concerns among investors in the coming months.”
The dong, which was devalued in February for the fourth time since 2009, has traded between 20,346 and 20,760 per dollar this month, a range of less than 2 percent, according to data compiled by Bloomberg. Vietnam’s central bank said this month it would increase the reserve-requirement ratio on U.S. dollar deposits by a percentage point, while also cutting the interest rate cap on dollar deposits by individuals to 2 percent from 3 percent and for institutions to 0.5 percent from 1 percent.
The currency has benefited from a tighter monetary policy, and from the curbing of trading in gold and foreign exchange outside the banking system, the International Monetary Fund said last week.
Increasing dollar-reserve ratios and capping dollar-deposit rates have driven the relative calm in the Vietnamese currency, Sathirathai wrote. The currency’s stability may provide a “false sense of security,” he wrote.
Surging Inflation
Vietnam’s inflation rate reached 19.78 percent in May, the highest since 2008. The economy will probably expand by about 5.6 percent in the first half, Deputy Minister of Planning & Investment Cao Viet Sinh said last week. The government expects the pace of expansion to accelerate in the second half, and is forecasting full-year growth of 6 percent, down from an original target of 7 to 7.5 percent.
Credit Suisse expects “the negative impact on growth” from tightening measures to become more visible in the third quarter, with some companies “running into financial distress.”
“While a lack of quality data makes it difficult to gauge the extent to which banks and firms might be facing difficulties, news from local media suggests that several firms’ balance sheets are being squeezed,” wrote Sathirathai. “It is likely to be only a matter of time before we see this in the macro data.”
Entrenched Expectations
The dong still faces entrenched expectations that it may weaken, Benedict Bingham, the IMF’s senior resident representative in Vietnam, said at a conference last week. Those expectations are driven by concern over whether Vietnam will sustain its current monetary-policy stance, whether the government is committed to cutting its fiscal deficit, and over “vulnerabilities in the corporate and banking sector,” he said.
The recent measures discouraging the use of the dollar “will not prevent funds from leaving the country when the macro fundamentals are in question,” Sathirathai wrote. “It is too early to argue that the worst is behind us.”
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