By Beth Thomas
Nov. 26 (Bloomberg) -- Vietnam, struggling to control accelerating inflation and a widening trade deficit, will keep weakening the dong after devaluing the currency for the first time since December, black-market rates and forwards show.
The central bank permitted the currency to decline 3.3 percent today, bringing its losses in the past year to 8.3 percent. The unofficial rate offered at gold shops in Ho Chi Minh City is 4.9 percent weaker than the spot-market price of 18,488 per dollar. Contracts based on the exchange rate in 12 months signal a 12.6 percent depreciation.
Inflation reached a six-month high of 4.35 percent in November and the nation’s balance of payments worsened as exports dropped and rising commodity prices swelled the cost of imports. The dong has slumped 24 percent in the past decade and the government risks “damaged credibility” by allowing further losses, according to Standard Chartered Plc.
“Whenever you devalue a currency, there is general expectation for more,” said Thomas Harr, a foreign-exchange strategist in Singapore at Standard Chartered, which predicts a decline to 19,000 by the end of next year. “The key challenge is the widening trade deficit and slowing inflows from foreign direct investment, remittances and equity inflows.”
The State Bank of Vietnam decided to lower the reference rate 5 percent to 17,961 against the dollar, close to yesterday’s spot rate. That was the first such move since Dec. 25. The dong’s decline was limited as policy makers also narrowed its trading range to 3 percent from the daily rate, from a 5 percent band adopted March 23.
Support for Exports
The currency, which is not fully convertible, traded at 19,450 at gold shops in the nation’s financial center, according to a state-run telephone information service. Twelve-month non- deliverable forwards, in which assets are bought and sold at current prices for future delivery, have lost 6.7 percent this month to 21,175. The contracts are settled in dollars.
A weaker dong may help to increase overseas shipments, said Dominic Scriven, a director of Ho Chi Minh City-based fund managers Dragon Capital, which has $1.6 billion under investment.
“Government attempts to address market concerns ought to be seen positively,” he said. “The move on the currency can only strengthen Vietnam’s export competitiveness.”
The devaluation “may have some impact” on the competitiveness of Thailand’s goods, the country’s Finance Minister Korn Chatikavanij said today in Bangkok.
Gold Hoarding
The trade deficit widened to $1.75 billion in November, according to preliminary figures from the General Statistics Office in Hanoi released today, compared with a revised $1.6 billion last month. Exports fell 11.4 percent in January- November, compared with the same period last year.
Vietnam’s currency is caught in a “vicious circle” between the government’s desire to boost exports and its concern that a devaluation could push more locals into holding dollars, Morgan Stanley said this month.
The dong is the second worst-performer among currencies of Asia’s 17 biggest economies in the past year, after the Kazakhstan tenge, as Vietnamese hoarded gold to protect their savings from further devaluation. The metal’s price climbed as high as 28.84 million dong ($1,560) per tael yesterday, from 18.4 million dong at the start of the year at jewelry shops in Ho Chi Minh City. One tael is about 1.2 ounces of gold.
“I just bought a load of gold to save my money since it looks like prices will go higher,” said 46-year-old Nguyen Thi Hoa, who runs a coffee shop in Hanoi’s Old Quarter. “The dong has lost its value.”
Investment Outflows
Outflows of investment are overwhelming inflows. The deficit in Vietnam’s financial account rose to $5 billion in the first half, compared with $1.6 billion for all of 2008, according to the International Monetary Fund.
The benchmark VN Index of stocks dropped 4.1 percent to 482.60 and the regulator told brokerages to halt lending for stocks. Direct foreign investment commitments fell 73 percent in the first 10 months and the central bank is forecasting a drop of as much as 20 percent in remittances from overseas Vietnamese.
“We used to have exposure to the currency but we’ve gotten out already,” said Michael Hasenstab, who oversees $45 billion in assets for San Mateo, California-based Franklin Templeton Investments. “There are questions about the economy.”
Imports and inflation have gathered pace as the government provided subsidized loans to meet its 5.2 percent economic growth target for 2009, compared with 6.2 percent expansion last year. Credit growth in the first 10 months reached 33 percent, exceeding policy makers’ 30 percent full-year target.
‘Unlikely’ to be Last
To help restore confidence, central bank Governor Nguyen Van Giau increased the benchmark interest rate yesterday by one percentage point to 8 percent.
The central bank response to the triple threat of inflation, the trade deficit and the slumping dong “is most unlikely to be the last,” Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore, wrote in a research note yesterday. He predicted an 11 percent benchmark rate by the end of 2010.
“Funding costs for corporates are on their way up so this may lead to some downward revisions in earnings outlooks,” said Mark Canizares, the head of equities at Ho Chi Minh City-based Manulife Vietnam Fund Management, which has about $280 million in assets under management.
To contact the reporter on this story: Beth Thomas in Hanoi at bthomas1@bloomberg.net.
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