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The ups and downs of devaluing the dong

Update: May, 18/2015 - 08:06

The currency can trade by 1 per cent on either side of the reference rate, which the central bank sets daily. — Photo vietbao

by Thien Ly

On May 7 the State Bank of Viet Nam decided to weaken the dong by 1 per cent, reducing its daily reference rate against the US dollar from VND21,458 to VND21,673, the second devaluation this year.

The currency can trade by 1 per cent on either side of the reference rate, which the central bank sets daily.

The devaluation was followed almost immediately by commercial banks trading the greenback by as much as VND70 per dollar higher at VND21,740. They included the Joint Stock Commercial Bank for Foreign Trade of Viet Nam (Vietcombank) and the Viet Nam Technological and Commercial Joint Stock Bank (Techcombank).

The selling and buying rates in the flea were VND21,750 and VND21,700 per dollar.

The SBV said the depreciation was aimed at helping achieve the socio-economic development targets set by the Party, National Assembly and the Government and deal with the negative impacts of the international market.

The decision has been welcomed by the market and described as a "tonic" for the country's exports.

In the first four months of the year there was a strong decrease in export by most sectors.

For instance, fisheries exports were worth an estimated US$1.9 billion, a year-on-year fall of 15 per cent. Exports of wood and wood products had decreased by 6 per cent in the first quarter.

According to the Ministry of Industry and Trade, one of the main reasons for the falling exports was the policy of keeping the dong unchanged despite the dollar's relentless rise against the euro and yen.

Some 90 per cent of Vietnamese companies sign export contracts in dollars.

Besides, some of Viet Nam's major competitors like Thailand, India, and Brazil are allowing their currencies to depreciate.

The central bank hopes a weaker dong will boost exports and discourage imports, helping ease the trade deficit, which is estimated at $3.3 billion so far this year.

While the benefits are undeniable, economists also point out certain disadvantages the devaluation will cause.

They fear a stronger greenback will attract savings, meaning banks have to hike deposit interest rates on the dong and in turn lending rates, affecting enterprises seeking to borrow again after a bruising few years marked by raging inflation, ultra-high lending rates, banks' refusal to lend, and a drying up of consumer demand.

Analysts estimate that each percentage appreciation by the dollar will cause deposit interest rates to go up by 0.3-0.33 percentage points and lending rates by 0.35-0.4 percentage points.

The weaker dong will also result in the import of inflation, which could rise by at least 0.2 per cent because of the devaluation, since many domestic firms produce with imported inputs, they point out.

The stronger dollar is also expected to cause more difficulties for companies borrowing abroad like Hoang Anh Gia Lai (HAG) and Petro Viet Nam Transport Corporation (PVT).

As of last year HAG's dollar-denominated debts had accounted for 26 per cent of its obligations. Most of the company's borrowings were for investment in overseas projects like property in Myanmar and rubber and oil palm plantations in Laos and Cambodia.

But most of these projects are still under development.

In December PVT borrowed $121 million and the depreciation will cost it well over $1 million.

Gemadept Corporation had net foreign-currency debts of $46.7 million, and following the two recent devaluations by a cumulative 2 per cent, the company's net profits took a hit of VND16 billion.

VN trade balance negative again

Viet Nam's balance of trade is back in the red after a US$1 billion surplus last year.

In the first four months the deficit has been around $3 billion compared to less than a billion a year earlier, and it is expected to rise to $10 billion for the year, higher than the targeted $8.25 billion.

Analysts have attributed the country's big trade deficit return to many reasons.

The economy has shown signs of recovery, sparking off increased demand for consumption, production, and investment and thus higher imports of machinery, equipment, accessories, raw materials, fuel and goods by companies.

At the same time exports have risen at the slowest pace in some previous years.

According to the Ministry of Industry and Trade, in the January-April period, while imports grew year-on-year by 19.9 per cent, exports rose by only 8.2 per cent.

Forestry, fisheries and agricultural products are among the country's biggest export earners, and this year their exports have fallen by 6 per cent.

Exports of seafood fell by a whopping 15 per cent, coffee by 38.2 per cent, and rice by 5 per cent.

Coal shipments were down by 65.7 per cent and crude oil, whose prices have plummeted, by 44.5 per cent.

In the last four years Viet Nam has always had a trade surplus with Japan, but there has been an estimated $500 million deficit this year.

Analysts said the large trade deficit is affecting the country's balance of payments, foreign exchange reserves and the exchange rate.

Since the beginning of this year the street value of the dollar has shot up a few times. This is one of the reasons that forced the central bank to devalue the dong twice within a span of just five months, albeit by only 1 per cent each time.

To reduce the trade deficit, analysts said exporters should focus on major markets like the US, EU, ASEAN, mainland China, Japan, South Korea, Hong Kong, Germany, the Netherlands, and Thailand.

It is also necessary for Vietnamese firms to join the Trans-Pacific Partnership (TPP) to push up exports to the US and EU and reduce imports from China and Thailand.

Vietnamese exporters should also adopt more technical measures like those related to food hygiene and safety, and supporting industries should be developed to improve value addition of exports, they said. — VNS

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