Vietnam’s currency devaluation, meant to help arrest mounting economic problems, instead risks triggering a new and potentially uncontrollable round of price rises in one of the world’s inflationary hot spots, analysts say
Years of loose interest-rate policies and state-subsidized lending have ramped up Vietnam’s economic growth to China-like levels in a relatively underdeveloped country that analysts say is ill-equipped to handle it, driving up prices for many basic commodities. As in other emerging economies, inflation in Vietnam is ringing alarm bells amid rising food and fuel costs; consumer prices in January were up more than 12% from a year earlier.
Vietnam’s currency devaluation, meant to help arrest mounting economic problems, instead risks triggering a new and potentially uncontrollable round of price rises in one of the world’s inflationary hot spots, analysts say
Years of loose interest-rate policies and state-subsidized lending have ramped up Vietnam’s economic growth to China-like levels in a relatively underdeveloped country that analysts say is ill-equipped to handle it, driving up prices for many basic commodities. As in other emerging economies, inflation in Vietnam is ringing alarm bells amid rising food and fuel costs; consumer prices in January were up more than 12% from a year earlier.
But Vietnam’s Communist policy makers have shown little inclination to get tough, despite anti-inflationary talk at the ruling Communist Party’s twice-a-decade Congress last month. Devaluing the currency to pump up exports — Friday’s 8.5% move was the latest in a series that has erased one-fifth of the value of Vietnam’s dong since mid-2008 — risks exacerbating the problem.
Rather than risk choking off the supply of new jobs for a young and growing work force by raising interest rates, Vietnam is instead continuing to focus on growth — it’s aiming at a 7.5% rise in gross domestic product — while treating inflation as a secondary issue, economists say. This year, and for the next five years, the Communist Party’s policy-making Central Committee is targeting inflation at 7% annually — the same as 2010, when the rate actually exceeded 11%.
Now Vietnam risks making a bad inflation problem worse. Without higher interest rates or other measures to help contain price rises, economists fear that inflation will accelerate further after the latest devaluation because it leads to higher costs for key imported goods, especially refined oil products.
Friday’s move “will adversely impact inflation,” says Prakriti Sofat, a regional economist with Barclays Capital in Singapore. She estimates that each percentage-point decline in the value of the dong versus the dollar adds about 0.15 percentage point to inflation.
This suggests Friday’s devaluation could add 1.28 percentage points to the current rate, although Ms. Sofat notes that some of the impact has already leaked into the consumer price index because of the widespread use of black-market foreign-exchange rates, which have long had the dong at lower levels. Barclays now expects inflation to hit 13.5% by March and exceed 15% by June.
Vietnam is almost entirely out of step with the rest of Asia, where concern about rising food and energy prices is nudging many central banks to push up rates after a rapid recovery from the global economic slump. China increased interest rates for the third time in four months Tuesday. Thailand’s finance minister, Korn Chatikavanij, said in a recent interview that rapid price rises were one of his main concerns, following a series of rate increases.
Many countries also have allowed their currencies to gradually appreciate — blunting inflation by making imported items such as food and fuel cheaper. Malaysia’s ringgit is trading at around a 13-year high to the U.S. dollar and the Thai, Philippine and Singapore currencies have all shown sharp rises over the past two years.
Vietnam, by contrast, is regarded by some policy makers in the region as a cautionary tale of what can happen if monetary brakes aren’t applied quickly enough.
“The underlying economic concerns are yet to be addressed, meaning that depreciation pressures may persist,” says Sherman Chan, an economist with HSBC in Hong Kong. Those problems include a large trade deficit and inefficient state enterprises that dominate much of the economy.
With inflation rising sharply in recent months, ordinary Vietnamese have switched investments from dong to U.S. dollars or gold, the price for which is around 5% higher in Vietnam than on the international market because of the perceived stability of the precious metal. This has helped add to the downward pressure on the dong, to the extent that some companies, including Ford Motor Co., have said they have sometimes struggled to secure enough foreign currency to pay for imports.
Friday’s devaluation, which pushed down the official rate for the dong to 20,693 dong to the U.S. dollar from 18,932 dong, was aimed at narrowing the gap between the official rate and the black market rate, which was at about 21,320 dong to the dollar prior to the devaluation. In theory this should make it easier for firms to get hold of foreign currencies.
The country’s central bank, the State Bank of Vietnam, said in a statement that the move would help boost exports and rein in Vietnam’s trade deficit, which has also weighed on the currency. Weaker currencies make a nation’s exports more competitive abroad.
The move is also likely aimed at Vietnam’s dwindling currency reserves. State media have reported that Vietnam’s international reserves had fallen to “more than $10 billion” by the end of 2010 compared with $16 billion at the end of 2009 and $26 billion in 2008.
Economists say Vietnam needs to act more aggressively to address the critical flaws in its economy — especially in its inefficient but politically sensitive state enterprises — if it’s to escape a deeper crisis. Many commentators blame much of the current inflationary pressure on billions of dollars in cheap loans handed out to state-owned enterprises, which then used some of the funds to launch projects that ended up failing or to speculate in real estate or the country’s financial markets. Others branched out into industries they didn’t fully understand or were caught short by the extent of the 2008’s global economic slump.
“In my view, (Vietnam’s policies) would be more effective if they implement some kind of state-owned sector reform,” said Ms. Chan at HSBC.
Credit: By James Hookway