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| Standard Chartered advises exchange rate caution |
| 30-APR-2008 Intellasia | Vietnam News page 16 |
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| 30 Apr, 2008 - 7:10:00 AM |
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Vietnam should ensure the exchange rate for the dong is balanced against the need to reduce its burgeoning trade deficit, warns Standard Chartered Bank in its latest report.
"We expect the US$/dong to move sideways in coming months until the trade deficit situation improves," the bank's senior Southeast Asian researcher, Tai Hui, writes in the report.
The economist forecasts a US$/dong surge to 16,500, or a 2.35% depreciation of the dong, by the end of this year.
Depreciation of the dong could be expected to make imports more expensive and so prevent a balance of payments crisis amid the priority effort to defeat inflation. But an Economic Management Institute senior economist told Vietnam News that devaluation of the d6ng was unlikely to reduce the import bill.
Vietnam had to buy refined petroleum, fertiliser, construction materials, and spare parts to maintain and develop its economy, he said. As a developing country, it could not reduce its demand for these imports.
Vietnam's first-quarter trade deficit grew by an astonishing 66% to US$7.4 billion against the three months of last year. Oil, steel and capital goods were responsible for the jump. The growth in exports was 23.3%.
Standard Chartered warns that any sharp reversal in capital inflow could make Vietnam -with its modest foreign exchange reserves of about US$20-25 billion -vulnerable to an external payment crisis.
Any weakening of the dong will be similar to China's action to help reduce its trade deficit of late 1993 and early 1994, the report says.
"This is an extreme measure and would cause significant volatility in the economy," says Tai Hui.
Catch-22
The trade deficit is a catch 22 for the Vietnam government. A weakened dong might narrow the widening trade deficit and prevent an external payment crisis with ally sharp reversal of capital inflows.
But a strong d6ng is needed to curb the price of imports and control inflation.
Year-an-year inflation was at 21.42% for April against a year-on-year increase of 19.39% for March.
The Standard Chartered report argues that while exchange-rate policy is used as the first defence against inflation in many countries, in Vietnam the central bank uses it to signal intent rather than to control commercial lending rates.
The bank believes that the exchange rate is no longer an exclusive tool to fight inflation.
It says further hikes in the base interest rate and bank reserve requirements, an open market with strict investment management, higher agricultural output and stabilised prices for primary commodities such as food, petroleum, medicines, steel and fertiliser was likely to be more effective.
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