Monday, February 21, 2011

Vietnam’s Incredible Shrinking Currency

Going, going, dong

IT’S only been a few weeks since the Vietnamese Communist Party’s 11th Congress declared that everything was fine and dandy with the rapidly developing nation—yet on Friday February 11th came yet another devaluation of the currency, signalling that the economic outlook is indeed as precarious as many of us had feared.

Not only was it the fourth devaluation since late 2009 (and the sixth since the summer of 2008), but it was a big one: a full 8.5%. This means that the incredibly shrinking dong is now worth only 20,693 to the American dollar, down from 18,932. How envious the Irish and Greeks must be—this used to be the good old-fashioned way to dodge doing anything serious about a misfiring economy, before the pesky euro came along.

Doubtless the latest devaluation will help the Vietnamese economy in the short term. It always does, by making exports cheaper and thus easier to sell abroad. But the devaluation will do nothing to resolve the deeper and relatively intractable problem of the Vietnamese economy, namely that pent-up consumer demand is sucking in imports (which will now be more expensive), while the country doesn’t make enough things of high-enough value for total exports to cover the increase. The result is a huge trade deficit, $12.4 billion last year.

Investors also fret about high and rising inflation (12.2% for January year-on-year) and precariously low currency reserves. All this adds to the pressure on the dong, with more and more Vietnamese selling the currency in favour of keeping gold and dollars at home.

These are all symptoms of an overheating economy. Yet to judge by the leadership’s pronouncements at the party congress, it is still fixated on meeting high targets for growth rather than pausing for breath and balancing the books.

None of this impresses bankers and outside investors very much. Vietnam has been a poster-child of South-East Asian development over the past decade. I was at a briefing a couple of weeks ago held by one of the big banks and heard their analysts talking up the prospects of Indonesia and the Philippines this year, rather than Vietnam.

In its latest newsletter one of the more bullish investors in Vietnam, Dragon Capital, tries to cheer us up a bit by professing to detect a “twist” in the devaluation, finding that “the new rate has actually prevailed in business transactions for the past 4 months…so the devaluation will not have a very drastic impact on macro outcomes”. Somehow, I don’t find that very reassuring. What’s the new, new rate now I wonder? The Economist

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