Vietnam Devalues Currency by 8.5% as Inflation Looms
One of Asia's most inflation-plagued economies, Vietnam, devalued its currency 8.5% Friday to help arrest mounting economic problems.
But analysts say Hanoi's Communist policy makers instead risk triggering a new and potentially uncontrollable round of price rises.
Inflation is ringing alarm bells across numerous emerging economies amid rising food and fuel costs, and Vietnam is one of the main trouble spots. Years of loose interest rate policies and state-subsidized lending have ramped up its economic growth to China-like levels in a relatively underdeveloped country that analysts say is ill-equipped to handle it.
That is driving up prices for many basic commodities and sparking a series of currency devaluations that have erased one-fifth of the value of Vietnam's dong since mid-2008. Consumer prices jumped more than 12% in January compared with a year earlier and could rise further this month once the full impact of the Lunar New Year and Friday's devaluation is felt.
But Vietnam's economic planners have shown little inclination to get tough on inflation, despite anti-inflationary talk at the ruling Communist Party's twice-a-decade Congress last month. Devaluing the currency to pump up exports risks exacerbating the problem.
Rather than risk choking off the supply of new jobs for a young and growing work force by raising interest rates, Vietnam is instead continuing to focus on growth—it's aiming at 7.5% gross domestic product growth—while treating inflation as a secondary issue, economists say. This year, and for the next five years, the Communist Party's policy-making Central Committee is targeting inflation at 7% annually—the same as 2010, when inflation actually surpassed 11%.
Still, Vietnam risks making a bad inflation problem worse. Without higher interest rates or other measures to help contain price rises, economists fear that inflation will accelerate further after Friday's move because it leads to higher costs for key imported goods, especially refined oil products.
Friday's move "will adversely impact inflation," says Prakriti Sofat, a regional economist with Barclays Capital in Singapore. She estimates that one percentage point decline of the Vietnamese dong versus the dollar adds about 0.15 percentage points to inflation.
This suggests Friday's devaluation could add 1.28 percentage points to the current rate, although Ms. Sofat notes that some of the impact has already leaked into the consumer price index because of the widespread use black-market foreign exchange rates, where the dong has long traded at lower levels. Barclays now expects inflation to hit 13.5% by March and exceed 15% by June.
Vietnam is almost entirely out of step with the rest of Asia, where concern about rising fuel and energy prices is nudging many central banks to push up rates after a rapid recovery from the global economic slump. China increased interest rates for the third time in four months Tuesday. Thailand's finance minister, Korn Chatikavanij, said in a recent interview that rapid prices were one of his main concerns, following a series of rate increases.
Many countries also have allowed their currencies to gradually appreciate to help absorb the impact of inflation—a move that makes it cheaper to import items such as food and fuel. Malaysia's ringgit is trading at around 13-year highs against the U.S.
dollar and the Thai, Philippine and Singapore currencies have all seen sharp rises over the past two years.
Vietnam, on the other hand, is regarded by some policy makers in the region as a cautionary tale of what can happen if monetary brakes aren't applied quickly enough.
"The underlying economic concerns are yet to be addressed, meaning that depreciation pressures may persist," says Sherman Chan, an economist with HSBC in Hong Kong. Those problems include a large trade deficit and inefficient state enterprises that dominate much of the economy.
With inflation rising sharply in recent months, ordinary Vietnamese have switched investments from dong to U.S. dollars or gold, the price for which is around 5% higher in Vietnam than on the international market because of the perceived stability of the precious metal. This has helped add to the downward pressure on the dong, to the extent that some companies, including Ford Motor Co., have said they have sometimes struggled to secure enough foreign currency to pay for imports.
Friday's devaluation, which pushed down the official rate for the dong to 20,693 dong to the U.S. dollar from 18,932 dong, was aimed at narrowing the gap between the official rate and the black market rate for the dollar, which was at about 21,320 dong prior to the devaluation. In theory this should make it easier for firms to get hold of foreign currencies.
The country's central bank, the State Bank of Vietnam, said in a statement that the move would help boost exports and rein in Vietnam's trade deficit, which has also weighed on the currency. Weaker currencies make a nation's exports more competitive abroad.
The move is also likely aimed at Vietnam's dwindling currency reserves. State media have reported that Vietnam's international reserves had fallen to "more than $10 billion" by the end of 2010 compared with $16 billion at the end of 2009 and $26 billion in 2008.
The cost of insuring against another default or restructuring of Vietnam's debts jumped higher after Friday's devaluation. The spread on Vietnam's five-year credit default swaps widened 20 basis points from 385 to 395 basis points on Thursday.
Economists say Vietnam needs to act more aggressively to address the critical flaws in its economy—especially in its inefficient but politically sensitive state enterprises—if it's to escape a deeper crisis. Many commentators blame much of the current inflationary pressure on billions of dollars in cheap loans handed out to state-owned enterprises, which then used some of the funds to launch failed projects or speculate in real estate or the country's financial markets. Others branched out into industries they didn't fully understand or were caught short by the extent of the 2008's global economic slump.
State-run shipbuilder Vinashin, formally known as Vietnam Shipbuilding Industry Group, came to the brink of bankruptcy last summer after amassing $4.4 billion in debts and prompting Moody's Investors Service and Standard & Poor's to downgrade Vietnam's sovereign debt. In December, the situation worsened when Vinashin defaulted on a $60 million loan repayment on a $600 million syndicated loan.
"In my view, (Vietnam's policies) would be more effective if they implement some kind of state-owned sector reform," said Ms. Chan at HSBC.
One of Asia's most inflation-plagued economies, Vietnam, devalued its currency 8.5% Friday to help arrest mounting economic problems.
But analysts say Hanoi's Communist policy makers instead risk triggering a new and potentially uncontrollable round of price rises.
Inflation is ringing alarm bells across numerous emerging economies amid rising food and fuel costs, and Vietnam is one of the main trouble spots. Years of loose interest rate policies and state-subsidized lending have ramped up its economic growth to China-like levels in a relatively underdeveloped country that analysts say is ill-equipped to handle it.
That is driving up prices for many basic commodities and sparking a series of currency devaluations that have erased one-fifth of the value of Vietnam's dong since mid-2008. Consumer prices jumped more than 12% in January compared with a year earlier and could rise further this month once the full impact of the Lunar New Year and Friday's devaluation is felt.
But Vietnam's economic planners have shown little inclination to get tough on inflation, despite anti-inflationary talk at the ruling Communist Party's twice-a-decade Congress last month. Devaluing the currency to pump up exports risks exacerbating the problem.
Rather than risk choking off the supply of new jobs for a young and growing work force by raising interest rates, Vietnam is instead continuing to focus on growth—it's aiming at 7.5% gross domestic product growth—while treating inflation as a secondary issue, economists say. This year, and for the next five years, the Communist Party's policy-making Central Committee is targeting inflation at 7% annually—the same as 2010, when inflation actually surpassed 11%.
Still, Vietnam risks making a bad inflation problem worse. Without higher interest rates or other measures to help contain price rises, economists fear that inflation will accelerate further after Friday's move because it leads to higher costs for key imported goods, especially refined oil products.
Friday's move "will adversely impact inflation," says Prakriti Sofat, a regional economist with Barclays Capital in Singapore. She estimates that one percentage point decline of the Vietnamese dong versus the dollar adds about 0.15 percentage points to inflation.
This suggests Friday's devaluation could add 1.28 percentage points to the current rate, although Ms. Sofat notes that some of the impact has already leaked into the consumer price index because of the widespread use black-market foreign exchange rates, where the dong has long traded at lower levels. Barclays now expects inflation to hit 13.5% by March and exceed 15% by June.
Vietnam is almost entirely out of step with the rest of Asia, where concern about rising fuel and energy prices is nudging many central banks to push up rates after a rapid recovery from the global economic slump. China increased interest rates for the third time in four months Tuesday. Thailand's finance minister, Korn Chatikavanij, said in a recent interview that rapid prices were one of his main concerns, following a series of rate increases.
Many countries also have allowed their currencies to gradually appreciate to help absorb the impact of inflation—a move that makes it cheaper to import items such as food and fuel. Malaysia's ringgit is trading at around 13-year highs against the U.S.
dollar and the Thai, Philippine and Singapore currencies have all seen sharp rises over the past two years.
Vietnam, on the other hand, is regarded by some policy makers in the region as a cautionary tale of what can happen if monetary brakes aren't applied quickly enough.
"The underlying economic concerns are yet to be addressed, meaning that depreciation pressures may persist," says Sherman Chan, an economist with HSBC in Hong Kong. Those problems include a large trade deficit and inefficient state enterprises that dominate much of the economy.
With inflation rising sharply in recent months, ordinary Vietnamese have switched investments from dong to U.S. dollars or gold, the price for which is around 5% higher in Vietnam than on the international market because of the perceived stability of the precious metal. This has helped add to the downward pressure on the dong, to the extent that some companies, including Ford Motor Co., have said they have sometimes struggled to secure enough foreign currency to pay for imports.
Friday's devaluation, which pushed down the official rate for the dong to 20,693 dong to the U.S. dollar from 18,932 dong, was aimed at narrowing the gap between the official rate and the black market rate for the dollar, which was at about 21,320 dong prior to the devaluation. In theory this should make it easier for firms to get hold of foreign currencies.
The country's central bank, the State Bank of Vietnam, said in a statement that the move would help boost exports and rein in Vietnam's trade deficit, which has also weighed on the currency. Weaker currencies make a nation's exports more competitive abroad.
The move is also likely aimed at Vietnam's dwindling currency reserves. State media have reported that Vietnam's international reserves had fallen to "more than $10 billion" by the end of 2010 compared with $16 billion at the end of 2009 and $26 billion in 2008.
The cost of insuring against another default or restructuring of Vietnam's debts jumped higher after Friday's devaluation. The spread on Vietnam's five-year credit default swaps widened 20 basis points from 385 to 395 basis points on Thursday.
Economists say Vietnam needs to act more aggressively to address the critical flaws in its economy—especially in its inefficient but politically sensitive state enterprises—if it's to escape a deeper crisis. Many commentators blame much of the current inflationary pressure on billions of dollars in cheap loans handed out to state-owned enterprises, which then used some of the funds to launch failed projects or speculate in real estate or the country's financial markets. Others branched out into industries they didn't fully understand or were caught short by the extent of the 2008's global economic slump.
State-run shipbuilder Vinashin, formally known as Vietnam Shipbuilding Industry Group, came to the brink of bankruptcy last summer after amassing $4.4 billion in debts and prompting Moody's Investors Service and Standard & Poor's to downgrade Vietnam's sovereign debt. In December, the situation worsened when Vinashin defaulted on a $60 million loan repayment on a $600 million syndicated loan.
"In my view, (Vietnam's policies) would be more effective if they implement some kind of state-owned sector reform," said Ms. Chan at HSBC.