In Bid to Protect Exports, Vietnam Devalues Dong for the Third Time this Year
HCMC – For the third time this year, the country’s central bank, the State Bank of Vietnam (SBV) has devalued Vietnam’s currency, the dong. The recent move comes as the country seeks a way to maintain its export competitiveness, particularly after the recent devaluations of the Chinese yuan and continuing worries about a U.S. Federal Reserve rate increase.
The new reference rate for the dong currently stands at 21,890 and the central bank has also widened the trading band to three percent on either side of the present rate, after already doubling the range on the 12th of August. It is possible that further depreciation and other corrective measures may be taken by the SBV in the near future.
In a statement issued today by the SBV, the bank explained that “The dong will have enough room to fluctuate more flexibly to cope with negative impacts from international and domestic markets, not only from now until the rest of the year but also [into the] early months of 2016.”
Vietnam’s government is hopeful that the devaluation will help boost exports from the country, which have been suffering in recent months. In the first seven months of this year, the country’s export growth slowed to 9.5 percent. Additionally, in July, Vietnam saw a US$300 million trade deficit.
Analysts paint a less than rosy picture for the future value of the dong. For example, in a recent press release, global banking giant HSBC stated that it was not optimistic about the strength of the dong through the end of 2015 and on into 2016, setting its year-end targets to 22,800 and 23,000 respectively.
ANZ, another bank operating in the region, also expects further depreciation, stating “Even in the absence of further policy adjustments in the rest of the year, the [dong] could depreciate by a maximum of 5.1 percent this year (4.5 percent year-to-date) vs. annual depreciation of around 1.3 percent in the previous two years.”
However, analysts also admit that the dong has been among the most resilient Emerging Asia currencies and that a currency devaluation does make a certain level of sense give the current macro-economic climate.
Despite its recent declines, Vietnam’s currency is not the weakest in Southeast Asia. Malaysia and Indonesia have seen a 14.7 percent and 10.5 percent drop respectively in their currencies. These currency moves in the region have also not helped Vietnam’s exports to remain competitive.
In addition to its currency manipulation, Vietnam is also hoping that its range of free trade agreements (FTA), such as the recently signed EU-Vietnam FTA, will help to grow exports in the future and make the country a more attractive investment destination. Vietnam has a range of FTA in place, and even more currently in the negotiation phase, such as the Trans-Pacific Partnership. However, many investors are still unaware of the potential benefits of these trade deals for their businesses. Therefore, it remains to be seen if this current combination of currency manipulation and free trade agreements will help increase Vietnam’s global and regional competitiveness.
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