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CNBC: Vietnam’s Once-Hated Dong is Making a Comeback

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CNBC: Vietnam’s Once-Hated Dong is Making a Comeback
Posted: June 24, 2011

VietFinanceNews.com – For years, the Vietnamese’s preferred way to conduct transactions would be to accept payments in U.S. dollars and return change in Dong — evidence of their innate distrust in the domestic currency.

That distrust was further exacerbated by the government’s move in mid-February to depreciate the dong by 8.5 percent against the dollar, to prevent a shortfall in foreign currency reserves. The move came despite skyrocketing inflation, which accelerated to 20.82 percent in June, its fastest annual pace since November 2008, according to figures released on Friday.

The distrust in the dong has led many locals to store an estimated $45 billion worth of their wealth in physical gold, which accounts for almost half the country’s gross domestic product (GDP), according to Mark Matthews, head of research, Asia at private bank Julius Baer. If you add U.S. dollar deposits, 70-75 percent of GDP is stored in non-dong assets, Matthews said.

But, things are turning around, according to Barclays Capital.

“If you look at bank balance sheets, you can see that dong deposits have been growing and accelerated, whereas dollar deposit has been coming down — it has actually been negative on month,” said the British bank’s regional economist, Prakriti Sofat.

She noted that the change in sentiment was largely due to the fact that the central bank capped the interest rate that individuals get on dollar deposits at 2 percent and institutions at 0.5 percent, while dong deposits enjoyed a return of 14 percent. And with the dollar-dong rate holding relatively steady post-depreciation, many retail and institutional investors have shifted out of the dollar and into the dong.

Also providing support for the currency, is Vietnam’s move to clamp down on gold trading.

“Normally, gold used to create a lot of bid for the dollar and that has now been controlled by the government, so that sort of distortionary effect on dollar-dong has also been removed,” Sofat explained.

Despite these positive developments, the economist conceded that there is still a lot that needs to be done for confidence to be built. But Sofat is optimistic, as she believes the central bank and the government are on the right track.

“What this would mean then is that for the year 2011, arrears in the balance of payment will be much, much smaller. And the country should be able to build foreign exchange reserves,“ she said. (CNBC)

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