The dollar’s rise to nearly 25,000 dong increases Vietnam’s foreign debt burden

While a weaker dong may help exporters, the higher cost of imports is likely to feed inflation.
By RFA Vietnamese
2022.10.20
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The dollar’s rise to nearly 25,000 dong increases Vietnam’s foreign debt burden CAPTION: A Vietnamese dong banknote over an image of the Vietnamese flag.
Reuters

UPDATED AT 8:42 A.M. EDT ON 10-20-2022

The U.S. dollar’s rise against its Asian counterparts is making it harder for the region to repay dollar denominated debt and Vietnam is no exception.

The State Bank of Vietnam announced a ceiling rate of VND24,846 for one U.S. dollar on Oct.19.

Wednesday morning saw the U.S. dollar (USD) rise sharply against the Vietnamese dong (VND) compared with the previous session, according to the Economic and Urban newspaper.

At 9:20 a.m., Vietcombank listed the buying price of dollars at VND24,240 and the selling price at VND24,550. That is an increase of VND90 for buying and VND320 for selling compared with the previous listed levels.

On the free currency market in Hanoi the dollar’s buy and sell rates were around VND24,662 for buying and VND24,722 for selling.

Nguyen Quang A, co-founder and former member of the board of directors of Vietnam Prosperity Bank, said the dollar’s rise against the dong will have a significant impact on the country’s public debt repayment obligations.

“Vietnam's foreign debt payable in USD, in terms of dong, will increase and this will increase the burden on repaying the principal and interest on the national debt.”

The Ministry of Finance sent a report to the Prime Minister in March saying the government will have to repay more than VND1,000 trillion (U.S.$ 40.7 billion) of public debt from 2022 to 2024.

The ministry said that by the end of this year, public debt will account for about 45-46% of gross domestic product (GDP), government debt will be about 41-42% of GDP and the country's external debt will be about 40-41% of GDP. The target of Vietnam’s direct debt repayment obligations compared to State budget revenue is expected to be about 22-23%.

 “The increase in the USD/VND exchange rate will make the public debt in VND larger and to make up for the shortfall, the Vietnamese government will issue more cash. In fact, there are already signs of an increase in cash issuance," said National Economics University lecturer Chu Hong Quy, adding that when the dong depreciates, issuing more Vietnamese currency will hurt the entire population.

Since the beginning of this month Vietnam’s State Bank has pumped nearly VND120 trillion (U.S.$4.9 billion) into the market, reducing the annual interest rate to 5% in recent days, according to the VietNamNet online news site.

However, according to Nguyen Quang A, the recent increase in the exchange rate band between the dollar and the dong by the State Bank of Vietnam from 3% to 5% and the current increase in the value of foreign currencies will have a limited impact.

“Vietnam relies heavily on exports, so overall [the weak dong] doesn't have too much of an impact on the Vietnamese economy,” he said.

On the other hand, the lecturer said imported goods will cost more and may be harder to sell and Vietnamese traveling abroad will find their money won’t go as far as it used to.

Some say the dong’s depreciation against the dollar may not give much of a boost to exporters.

The Dau Tu Newspaper reported that Vietnam’s main exports of seafood, textiles, and agricultural products go mainly to Europe, Asia and South America, not the U.S. Also, with inflation rates rising around the world people’s purchasing power has decreased, giving them less to spend on imported goods.

Nguyen Pham Muoi, a former reporter for Wall Street Journal publisher Dow Jones, said Vietnam is controlling the exchange rate and inflation well and the State Bank of Vietnam is doing what is needed to protect the Vietnamese dong and macroeconomic stability. He forecast that the exchange rate will not increase sharply in the near future.

Muoi said holding dollars is not profitable considering commercial banks are offering up to 7.5% annual interest rates for local currency savings, more than matching inflation.

Hanoi-based businessman Do The Dang said that the dong’s depreciation against foreign currencies may be more to do with the arrest and investigation of some key figures of the Van Thinh Phat Group. Rumors about the group’s links to Saigon Joint Stock Commercial Bank (SCB), and the massive run on the bank’s deposits led the State Bank to put SCB under special control to limit the impact of withdrawals and protect the banking system.

After SCB customers rushed to withdraw their savings from SCB, the State Bank injected more than VND25 trillion (U.S.$1 billion) into the money supply.

Dang said, any continuing concerns about SCB or other commercial banks will push the dollar even higher and raise consumer prices.

“The increase in the USD/VND exchange rate will have a great impact on living standards when prices of goods and services increase accordingly. I believe the USD price will continue to increase when the Vietnamese banking system is in a strong crisis,” Dang said, adding that his family has switched to holding U.S. dollars instead of dong.

An employee of the Hanoi-based Izumo Trading Company, which specializes in import, export and transportation, told reporters the company charges freight rates in dollars so customers are not happy about the recent rise in prices.

This story has been updated to correct the dollar conversion rate in paragraph eight.

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