Friday, December 11, 2009
Impact of Vietnamese Dong Devaluation
Devaluation of Vietnamese dong likely to hurt Thai exporters
Despite devaluing its currency by 5.2 per cent late last month, Vietnam is still not out of the woods, because it has not yet resolved its macro-economic problems resulting from low foreign exchange reserves, high inflation and rising trade deficits.
This means a further devaluation of the Vietnamese dong by another 10-15 per cent is likely in the coming months as authorities attempt to stabilise the macro-economy and convince the markets of their determination to tackle problems.
As far as Thailand is concerned, the devaluation of the dong would negatively affect Thai exports and tourism sector because Vietnam prices would go even lower.
Thai rice and other farm products such as tapioca, textiles and leather goods as well as marine and rubber products are among the export items facing fierce competition from the neighbouring country whose goods have become cheaper.
A study shows that the baht's appreciation against the Vietnamese dong was as high as 11 per cent from June 2008 to November this year.
The price of Thai rice is now as much as US$100 (Bt3,310) more expensive per tonne compared to Vietnamese rice.
As a result, some Thai exports will be undercut by Vietnamese products in the world market.
If the dong is further devalued by another 10-15 per cent, there will be a bigger impact on Thai exports in 2010, the global economic outlook for which remains uncertain at this stage.
In fact, the global market recovery only started this August marked by a pick-up in demand in the US, a major outlet for shipments from both Thailand and Vietnam.
In addition, there is the risk of competitive devaluation in the region as most Asian economies, like Vietnam, are export driven.
Regarding Vietnam, the dong has been devalued three times since the middle of last year largely due to Vietnam's falling foreign exchange reserves, which totalled just $16 billion at last count, compared to Thailand's foreign exchange reserves of over $130 billion.
Vietnam's central bank had to jack up its policy interest rate to 8 per cent from 7 per cent recently to offset the inflationary impact of the latest currency devaluation of 5.2 per cent.
Vietnam's November inflation rebounded to 4.4 per cent, while its trade deficit was nearly $2 billion in November alone.
At present, the country's fiscal deficit was rising to nearly 10 per cent of GDP this year.
As a result of worrisome macro-economic data, the black-market exchange rate implies a further weakening of at least 10 per cent by the end of next year.
In fact, the current structural weakness has resulted from the interaction between the balance of payments, sustained fiscal deficits and local liquidity conditions, while authorities struggle to manage exchange rate expectations.
During 2000-2007, Vietnam witnessed a massive capital inflow as its GDP grew at a compound rate of 7.5 per cent, while inflation also accelerated from 2007, peaking at the 28 per cent annualised rate in August 2008.
The Vietnamese experience shows that booming portfolio inflows have serious inflationary implications if sustained for too long.
In addition, the tangled mess of managed, pegged and floating exchange rates across Asia is creating intolerable policy stresses as excess liquidity from US and European monetary stimulus floods the region.