Vietnam must work to address expectations its currency will depreciate further, according to the International Monetary Fund’s representative in the country.
The Southeast Asian nation faces an “embedded expectation of a declining trend in the dong,” Benedict Bingham, the IMF’s senior resident representative in Hanoi, said in prepared comments for a presentation. It was delivered at a seminar in Ho Chi Minh City on Sept. 21 organized by a National Assembly committee, and posted on the IMF’s website this week.
Vietnam’s central bank devalued the dong last month for the third time in the past year, citing the need to curb the trade deficit. Further pressure on the currency “would be negative” for financial stability, Fitch Ratings said in July when it lowered the nation’s debt rating.
The state of the country’s foreign-exchange market has “undermined confidence in the dong” in part because it has “increased transaction costs and uncertainty for Vietnamese businesses,” Bingham said. The currency market has also “impaired Vietnam’s standing among international investors,” he said.
The State Bank of Vietnam weakened the dong’s reference exchange rate by 2 percent on Aug. 18 to 18,932 per dollar. The currency can fluctuate 3 percent on either side of the figure. It was trading at 19,490 at 12:58 p.m. in Hanoi, compared with 17,886 in November 2009 before the first of the three devaluations.
Concerns about an overheating economy, the balance of payments and a high inflation rate will probably “keep the currency under stress,” Capital Economics Ltd. analysts said in a research note sent yesterday, predicting an exchange rate of 20,400 per dollar by the end of 2011.
The Vietnamese have shifted from dong to U.S. dollar assets or into gold because of expectations of dong devaluations, the IMF said in a report this month.
Vietnam’s financial system has faced excessive volatility, Bingham said. A lack of transparency has hurt confidence in the country’s macroeconomic management, partly due to a reluctance to adjust the central bank’s benchmark interest rate, he said. The benchmark was left unchanged at 8 percent for the ninth consecutive month in September.