Dong devaluation has a new door been opened?

17-Sep-2019 Intellasia | BizLIVE | 6:02 AM Print This Post

A new possibility has been opened to help Vietnam reduce the dong value while still minimising the risks of being listed as a currency manipulator.

In the past month, the strong depreciation of the Chinese yuan against the US dollar has caused a series of Asian currencies to fall, including the Korean won, Indonesian rupiah, Singaporean dollar and Malaysian ringgit.

However, the dong did not suffer much from the devaluation of the Chinese yuan.

Accordingly, although the State Bank of Vietnam (SBV) wants to weaken the dong to narrow the gap with other regional currencies by adjusting the central reference exchange rate but the dong has only declined by 0.1 percent against the US dollar since the beginning of the year while the reference exchange rate has increased by 1.4 percent.

As assessed by the analysis team at VNDirect Securities Company, this reflects two main trends including the continuous increase in Foreign Direct Investment (FDI) and the fairly stable trade surplus thanks to the trade and investment shift in the context of the US-China trade tension.

VNDirect said that the further escalation of the US-China trade war will increase the pressure on the Chinese yuan, so the SBV will need to make more efforts to reduce the dong value because the strong domestic currency may reduce the competitiveness of export in the current period.

New possibility opened

The analysis team also stated that the risk of being listed as a currency manipulator will limit the SBV’s ability to intervene in the monetary market by raising foreign exchange reserves.

This can lead to changes in other indicators related to Gross Domestic Product (GDP) such as public debts to GDP, budget deficit to GDP, credit to GDP, etc.

Although the change in GDP calculation method does not represent the internal change in the macroeconomic picture, it can help Vietnam reduce the risk of being listed as a currency manipulator by the US, according to VNDirect’s analysis team.

Because, one of the criteria for the US to determine a country as a currency manipulator is the net foreign currency purchase reaching two percent of GDP. The current net purchase of foreign currencies of Vietnam stood at 1.7 percent of GDP in 2018.

Therefore, adjusting the size of GDP can be a move to reduce the risk of encountering the above criteria and help Vietnam expand its room to make monetary intervention and avoid undesirable fluctuations on the monetary market.

In the short term, a number of measures have been taken. Specifically, in the last two weeks of August 2019, the SBV injected a large amount of dong (55.112 trillion dong, equivalent to 2.3 billion US dollars) via the Open Market Operation (OMO) to cool down interbank interest rates.

In the end of August 2019, the operator also warned that banks will be penalised if offering high deposit rates in dong due to concerns that an interest rate race could destabilise the monetary market.

Most recently, interest rate tool has been used as an option to influence the exchange rate when the agency has just announced the decision to simultaneously reduce operating interest rates.

Specifically, refinancing interest rate will be cut from 6.25 percent to six percent per annum, rediscount interest rate will be lowered from 4.25 percent to four percent per annum, and overnight interest rate in interbank electronic payment and lending to offset the capital shortage in clearing of the SBV of banks will be reduced from 7.25 percent to seven percent per annum.

At the same time, the SBV also lowers the offer interest rate of valuable papers through OMO channel from 4.75 percent to 4.5 percent per annum.

Basically, the interest rate decline will reduce the attractiveness of local currency thereby affecting the exchange rate.

This is also the first time the SBV uses this tool since July 2017.


Category: Finance, Vietnam

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