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.
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