Vietnam moving toward forex crisis, may devalue dong
Vietnam is veering toward a currency and banking crisis that could force a massive devaluation of the dong and trigger a rerun of East Asia’s 1997 financial meltdown, an analyst at investment bank Morgan Stanley has warned.
Vietnam’s economy has been flashing many of the classic devaluation warning signs for some time, but terrible inflation and trade data earlier this week prompted the forwards market to abruptly price in a speculative attack on the overvalued dong, Hong Kong-based analyst Stewart Newnham wrote in a report published Wednesday.
“A devaluation episode could trigger a contagion throughout the region, in our view. We think the contagion will not travel so much via trade links, but through the market, targeting similar macro-weakening, inflation-prone currencies,” he said.
Vietnam’s economy, with its high and unsustainable current-account deficit, is similar to Thailand’s in 1997, Newnham said. Thailand’s economic excesses in the 1990s ended in a 55% devaluation of the baht and a regional financial crisis.
A senior official at the central bank said he wasn’t aware of the Morgan Stanley report and declined further comment.
Many economists agree that Vietnam’s economy is teetering on the brink of a meltdown but are reluctant to predict that it will spread throughout the region.
“I hear lots of talk like that,” said ING economist Prakash Sakpal. “I wouldn’t want to speculate on that. Nobody wants a crisis.”
But the country is already experiencing a balance-of-payments crisis and the forwards market suggests downside risk for the dong, Sakpal said.
The latest quotes for dong nondeliverable forwards, or NDFs, imply market participants expect a 40% devaluation of the dong against the US dollar within 12 months.
The dong is managed in a band that allows it to fall or rise 1% around a central bank-set official rate against the US dollar.
NDFs are a popular instrument for corporations wanting to hedge exposure to foreign currencies that aren’t internationally traded.
Commenting on Vietnam’s economic problems in a recent report, Merrill Lynch & Co said most Asian nations have stronger economies than Vietnam and current accounts that are in surplus.
Many countries also have the buffer of large foreign-exchange reserves though “rising inflation and oil prices take the region one small step in Vietnam’s direction,” Merrill said.
Vietnam’s economy is widely acknowledged to have overheated after several years of breakneck growth, which had made it a darling of investors and won the Communist Party-controlled government international plaudits for its embrace of free-market policies.
Inflation hit 25.2% in May despite government attempts to contain spiraling prices, and state media have reported that the trade deficit ballooned to a record US$14.4 billion in the first five months of this year. The stock market, closed for the past three days because of computer glitches, has fallen more than 53% this year.
Describing Vietnam’s economy as “dangerously unbalanced,” Newnham said the State Bank of Vietnam, the country’s central bank, may not have sufficient foreign-exchange reserves to withstand a sustained run on the dong.
The country’s economic problems are complicated by an overextended banking system that is highly exposed to a property market already showing signs of downturn, he said.
“There is therefore an increasing risk that a systemic banking crisis could exacerbate the currency crisis.
“At the same time, inflation is spiralling out of control. This indicates that the dong’s purchasing power as well as its external value are simultaneously being eroded.
“In situations like this, it is usual to observe that the two values feed off each other, with higher inflation increasing after a devaluation event, which then fuels further depreciation.”
Category: Finance