By Patricia Lui
July 7 (Bloomberg) -- South Korea, India and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second-biggest U.S. securities firm.
The three central banks have ``repeatedly'' been buying and selling currencies, said Morgan Stanley, as the won, rupee and dong have slipped at least 5 percent in 2008, threatening to accelerate inflation by increasing import costs. Korea, the world's sixth-biggest holder of foreign-exchange reserves, pledged today ``stern action'' to stabilize the won.
``Their intervention will ultimately fail,'' wrote Stewart Newnham, a Hong Kong-based research analyst at Morgan Stanley. ``The best they can hope for, in our view, is to engineer an orderly decline through a `smoothing operation'. And maybe Vietnam cannot even achieve that.''
The won has dropped 10.5 percent this year, Asia's second biggest loser after the Thai baht, to 1,041.75 against the dollar according to Seoul Money Brokerage Services Ltd. India's rupee has lost 8.7 percent to 43.1 per dollar and the dong has slipped 5 percent to 16,847 per dollar.
``By far, the strongest pressure is on the Vietnamese dong'' due to its limited foreign-exchange reserves, wrote Newnham. Morgan Stanley forecasts Vietnam's reserves at $27 billion, compared to India's $302 billion, the world's fourth biggest and South Korea's $258 billion.
Newnham forecasts Vietnam will be forced to ``realign'' the dong. Traders are pricing in an 18 percent fall in the coming year to 20,500, according to offshore 12-month non-deliverable forwards.
`Not Sufficiently Tight'
Accelerating inflation has pushed so-called ``real rates,'' which are interest rates accounted for inflation, towards zero or negative levels because ``interest rate stances are not sufficiently tight,'' wrote Newnham. He confirmed the report by telephone.
Korea's benchmark rate is at 5 percent and Vietnam's at 14 percent, compared to inflation of 5.5 percent and 26.8 percent respectively. India's policy rate is at 8.5 percent, compared to its wholesale price index at 11.63 percent.
``Their interest-rate and exchange-rate policies are not internally consistent for currency intervention to be regarded as credible,'' Newnham said in his note.
Banks in the three countries are ``showing signs of discomfort and this could feed through into foreign exchange weakness,'' Newnham wrote, citing high loan-to-deposit ratios, a shortage of dollars onshore and property loans.
To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net
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