Local and foreign economists have expected Vietnamese government to devalue the dong further by end-2010 to help ease external pressures.
Le Dang Doanh, former director of Vietnam’s Central Institute for Economic Management, said a 2.1% devaluation by the State Bank of Vietnam on Aug 18 was unlikely to be the last one this year.
“I don’t see any sign that companies will find it easier to buy dollars from banks,” Doanh said. “Vietnam has not balanced its demand for dollars. In order to balance it, Vietnam needs a new inflow of dollars, but none has appeared.”
Doanh added that demand for dollars was also driven higher by traders trying to arbitrage the large gap in interest rates on dollar-denominated and dong-denominated bank accounts.
Le Xuan Nghia, vice chairman of the National Financial Supervision Committee, told participants at a top level workshop that the dong is now overvalued. Nghia predicted the dong to lose its value more against the dollar, given relatively high inflation.
The SBV earlier said the devaluation aims to help the country facilitate exports and narrow trade gap to fuel the country’s economic growth. Vietnam’s trade deficit widened to US$7.26 billion in Jan-Jul, compared to US$3.65 billion in the same period last year.
Many economists, however, noted that stronger U.S. dollar is likely to result in higher prices for many imported input materials and commodities, creating more pressures on the country’s consumer price index (CPI) during the remainder of the year.
Economists at Standard Chartered said the latest devaluation may trigger expectations of additional devaluations to come, but the move will raise risk of imported inflation, leading to a tightened monetary policy despite the government’s desire to reduce borrowing costs to sustain economic growth.
Le Xuan Nghia noted that exchange rate will pose the biggest macro financial threat to Vietnam in the medium term, given high pressures arisen from huge current account deficit and low forex reserves.
Credit Suisse analysts Dan Fineman and Siriporn Sothikul, meanwhile, wrote in a report that Vietnam has yet to find the right balance between growth and macro stability.
“Structurally, the lack of an independent central bank weakens confidence in the currency and leaves the country prone to overheated imports and inflation,” they said.
Vietnamese government is trying to curb the country’s trade deficit at below 20% of its total export revenues and maintain the full-year CPI at a maximum 8% this year. (VnEconomy)
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