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The Vietnam News

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Bankers see Vietnam dong devaluation

HANOI - Pressure has eased on Vietnam's dong currency, but many bankers expect dollar liquidity to tighten in the next few months, forcing the government to devalue the local currency by the end of the second quarter.

Out of six foreign and local bankers in Vietnam polled by Reuters, four expected an incremental downward adjustment of the non-convertible dong in the second quarter itself. Their forecasts for the timing ranged from end-April until June.
The other two bankers expected Hanoi to adjust the dong earlier. They predicted the move soon after the Tet Lunar New Year holiday that falls in mid-February.

Bankers said pressure on the local unit had eased recently, partly on seasonal factors, but would soon build again because of the depressed outlook this year for foreign direct investment inflows and exports.
The interbank market was dead, they added.

``We anticipate pressure to build on the dong after Tet but the earliest we see a downward adjustment is late April or May, possibly by around five percent,'' Stewart Hall, head of treasury at Standard Chartered Bank in Vietnam, told Reuters.
Hanoi fears the social impact a major devaluation could have and has adopted a policy in recent years of incremental adjustments to try to maintain export competitiveness.
However, with expectations of adjustments never far from view, many companies and individuals hold on to their dollars and deprive the foreign exchange market of liquidity. As pressure has built up, Hanoi has generally been forced to yield.

The dong has lost 20 percent of its value against the dollar in three downward adjustments over the past 18 months.
On Monday the pivotal interbank dong rate was set at 12,975 to the dollar. The government allows the dong to trade seven percent either side of the pivot rate, although the unit has stayed glued to the bottom of that band, at around 13,900, since the last downward adjustment in August.

Hall said recent dollar liquidity had been adequate because of a combination of factors, such as last year's controversial decision to make all local firms and many foreign companies immediately convert dong into dollars.
He said Vietnamese living abroad had also remitted large amounts of money to families back home ahead of Tet while imports were sluggish because retailers had stocked up before a new 10 percent value-added tax took effect on January 1.
Bankers said the dong's value on the blackmarket was near the interbank rate.
However, they said if China devalued its yuan currency then Hanoi would have no choice but to follow suit. Vietnam competes with China on a number of manufactured exports.

``If China devalued then Vietnam would have to adjust more than a token five percent. It would have to be way up in the double digits,'' said one banker.
China's central bank governor said last week that Beijing would only devalue the yuan in the event of a major balance of payments crisis.
One of the bankers predicting a dong devaluation soon after Tet said underlying pressure on the unit was always present.

``Don't be lulled into a false sense of security because there is a good supply of hard currency in the market. The underlying pressure on the dong is always there,'' he said.
Economists link that pressure to a lack of trust in the nascent banking system and the level of the dong. Until people felt confident about the stability of banks, many dollars would stay stashed under mattresses, they said.

Reuters - February 01, 1999.