Vietnam Devalues the Dong to Combat ‘Impact of International Markets’

Vietnam devalued its dong currency on Thursday for the second time this year in a move that analysts said will benefit the country’s exporters, but also will drive up the cost of imports and lead to inflation in the one-party communist nation, where recent growth has done little to benefit the domestic economy.

On Thursday, the State Bank of Vietnam announced that it had lowered the average rate for the dong by one percent from 21,458 per U.S. dollar to 21,673, with a margin of 1 percent in trading, to “fulfill socio-economic targets and to cope with the negative impacts of international markets.”

The move marked the second devaluation of the dong this year, after the currency was weakened by one percent in January, and was widely expected after export-reliant Vietnam posted a trade deficit of U.S. $3 billion in the first four months of 2015, compared to a surplus of U.S. $2 billion a year earlier.

In December, State Bank governor Nguyen Van Binh announced that Vietnam would lower the dong by no more than 2 percent in 2015, but Hanoi-based economist Ngo Tri Long told RFA's Vietnamese Service that he expected a further devaluation before the year was through.

“For the time being, while the U.S. dollar increases against some other currencies, Vietnam’s economy remains dismal, with much difficulty in production,” Long said.

He noted that ANZ Bank expects the currency to slip to 22,050 per dollar by the end of 2015, bringing the annual depreciation to 3.1 percent from 1.4 percent a year ago.

“The State Bank deems altering exchange rates to be one of the policies used to stabilize the micro-economy. But, in reality, the experts in this field agree that a two-percent devaluation is not logical; some even expect the devaluation will reach four percent, not only 3.1 percent,” he said.

HSBC called the devaluation of the dong a preemptive measure to bridge Vietnam’s soaring trade deficit and to slightly curb the decrease of the country’s balance sheet.

The lender said the move was also necessary after Vietnam’s State Bank recently lost a significant amount of foreign reserves as it tried to meet an increasing demand for the U.S. dollar in the country due to an imports hike and capital drain.

Imports and exports

Vietnam's January-April exports rose 8.2 percent to an estimated U.S. $50.1 billion, while imports surged 19.9 percent, and the devaluation was viewed very differently by importers and exporters.

Me Le Ba Lich, chairman of Vietnam’s Animal Feed Association, slammed the second devaluation, citing country’s annual import of U.S. $4-5 billion in animal feed.

“The increase of the U.S. dollar will benefit exporters, but not importers—such as those of animal feed,” he said.

“It will affect the profits of people raising livestock. They have to import materials in U.S. dollars, so the goods will be more expensive, resulting in higher prices for finished products such as meat, eggs and milk … in Vietnam.”

Do Ha Nam, the chairman of an organization representing the top 20 Vietnamese coffee exporters, saw the devaluation of the dong as a benefit to both exporters and farmers.

“In fact, the exporters have been waiting for the decision, even though a one-percent devaluation is not very much—but it provides an incentive to some extent [for buyers],” he said.

“It seems that other countries exporting similar commodities as Vietnam have made large devaluations of their currencies to compete with Vietnam’s prices. This problem has made Vietnam’s basic export quantities decrease due to competitive prices since the beginning of the year.”

Nam said farmers would also benefit from being able to slightly raise their prices.

“If exporters still assure a profit for farmers, they would ask for the benefit margin, and it would surely go to the farmers,” he said.

Inflation

While those in Vietnam’s banking circles and business paid close attention to the devaluation, Long said that the general public—which showed the least interest in the move—would be the ones most affected by it.

“Local prices reflect purchasing power inside and outside of the country. Outside purchasing power is determined by the exchange rate, while inside the country it is the prices,” he said.

“These two issues have close relationship … when the dong loses its value, it will surely impact inflation in Vietnam, which often sees an import surplus. Import prices increase, adding to cost and making local prices higher. When prices increase and the income of laborers does not, their lives are affected.”

Vietnam’s GDP growth reached an estimated 5.98 percent in 2014—its highest rate in three years—on the back of rising exports, while inflation slowed to 4.09 percent, according to official figures.

But success in the export market has done little for the country’s domestic economy, which has been weighed down by problems in the banking sector and inefficient state-owned companies.

With the dong strong against the dollar, Vietnam’s government has decided to pursue a policy of devaluing it slowly at acceptable rates.

But economists warn that maintaining a stable exchange rate by administrative order will distort the currency market, affecting exports and requiring the use of foreign reserves to curb the rate.

Reported by Tien Nguyen for RFA’s Vietnamese Service. Translated by Gia Minh. Written in English by Joshua Lipes.