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Dong devaluation looking less likely

Update: October, 29/2013 - 08:54
A customer counts money at a local bank's transaction counter. ANZ affirms that there is less pressure for the central bank to devalue the domestic currency. — Photo vietstock.vn

HA NOI (VNS)— A healthier level of foreign currency reserves eased pressure on the State Bank of Viet Nam (SBV) to devalue the dong, according to an ANZ economics update released late last week.

Prime Minister Nguyen Tan Dung announced in early October that the dong could be further devalued by up to 2 per cent before the end of this year, as it was believed to be overvalued against the US dollar.

This followed a devaluation in June, when SBV raised the inter-bank average exchange rate by 1 per cent to VND21,036 per dollar.

ANZ said the central bank hadn't published official data, but unofficial estimates of foreign reserves now stand at US$32 billion.

The estimate followed a recent Government report to the National Assembly that stated import cover (measured as the period of time that foreign reserves could cover the cost of imports) had increased to 12 weeks. This was a marked improvement on the 6-6.5 week window in 2012.

Despite the upbeat sentiment, ANZ reiterated its belief that further devaluation would still happen.

"We maintain our expectation for a gradual depreciation towards VND21,500/US$ by mid-2014," the bank said.

ANZ believed SBV would keep its benchmark refinancing rate on hold at 7 per cent until the first half of next year, noting that more than 25 per cent of loans were still priced at over 13 per cent per annum, notwithstanding the cumulative effects of an 800 basis point reduction in interest rates since 2012.

"The structural problem of non-performing loans is expected to put a lid on growth, despite recent developments at the Viet Nam Asset Management Company (VAMC)," it said.

ANZ also said "we remain cautious towards the rapid increase in public debt over the last decade," after the NA approved increasing the State budget deficit target to 5.3 per cent for both 2013 and 2014 and the Government proposed supplementary State bond issuance worth billions of dollars over the next three years.

It noted that a recent joint report by the Ministry of Planning and Investment and the UNDP estimated the ratio of two to five year Government-issued bonds to Government-guaranteed bonds stood at 88.7 per cent. — VNS

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