Vietnam: A Devaluation Of The Dong?
In case you hadn’t heard, speculation is mounting that the Vietnamese authorities might devalue the dong currency in the near future to boost the country’s exports.
Frankly, I am not that surprised, since Vietnam is one of the few Asian countries that have actually increased their export dependency on the US over the past 20 years – the reason being a significant warming of political relations in the mid-1990s as the bitterness of the Vietnamese-American war faded. Also, given that Vietnam has sought to pursue the Japanese-Chinese-South Korean-Taiwanese development-through-exports model to achieve its goal of becoming an advanced nation, it cannot allow exports to come unstuck as a result of the global recession. According to Asian Development Bank figures, exports amounted to the equivalent of 76.8% of GDP in 2007. Net exports generated minus 13.4% of GDP, due to Vietnam’s massive trade deficit, but this provides an even bigger incentive to boost exports and reduce imports.
If the government does devalue the currency, then this would not be such a radical step. The State Bank of Vietnam (SBV) has generally pursued a policy of steering the dong 1% lower against the US dollar in recent years. The exception was 2007, when the dong actually rose very slightly as upward pressure prevailed on the currency. In fact, this led to a new conventional wisdom of sorts taking hold that the dong would have to appreciate over the long term, due to upward pressure created by strong growth, rising foreign direct and portfolio investment, remittances from overseas Vietnamese, and development aid. Also, there were expectations that the SBV would have to steer the currency higher to fight double-digit inflation.
However, just as the dong reached a three-year high of VND15,815/US$ at the end of March 2008, the authorities devalued the unit by 2%, thereby turning the conventional wisdom on its head. This, and the fact that growth started slowing, inflation careered out of control, and the trade deficit widened sharply, led some economists to start predicting a currency collapse. One-year non-deliverable forwards (NDFs) started pricing in a 30% depreciation.
Since then, the currency has continued to fall, although not by anywhere near what the NDFs were anticipating (it is down about 6% against the dollar). Still, devaluation remains a real possibility. Vietnam’s policymakers are among the least transparent in Asia, and although they are generally committed to free market reforms, it seems that decades of socialism have not been purged from their thinking. Also, bear in mind that in late 1997-late 1998, during the Asia crisis, the government devalued the dong three times, by a total of 16%. A repeat of such a move would be risky, since it could reignite inflation and increase the cost of external debt payments. However, a smaller devaluation cannot be ruled out.