Further depreciation now on the cards?

According to Tai Hui, Standard Chartered’s Southeast Asia head of research, given the Vietnamese authorities’ growth bias, further devaluations were likely to support exporters.

“The timing of further moves will be politically driven but we believe a rise in commodity prices, which would in turn drive inflation and the trade deficit higher, could be a trigger,” said Hui.

In mid-August, the State Bank weakened the Vietnamese dong via mid-point exchange rate by 2.1 per cent, to VND18,932 per dollar, from VND18,544, effective from August 18.

Thus, the new trading range for the dong has been lifted to VND18,364-19,500 per dollar. Since the devaluation, dollar has been traded around the strong end of the band at VND19,500 per dollar.

At the moment, local banks are allowed to trade the greenback within 3 per cent either sides of the State Bank’s interbank mid-point exchange rate.

It should be noted that the State Bank last depreciated the currency in February, 2010 also by weakening the mid-point by 3.4 per cent, to VND18,544 per dollar. However, given the pre-emptive nature of the weakening, spot stayed below the top end of the band of VND19,100 per dollar from February-June 2010.

Prakriti Sofat, regional economist at Barclays Capital, said that the main reason for depreciating the currency was to balance foreign exchange supply and demand and at the margin support growth through exports.  “We believe currency weakness will support exporters. However, a weaker currency will likely add to imported price pressures. According to our estimates, a 1 per cent move in USD/VND exchange rate adds roughly 0.15 per cent to inflation,” added Sofat.

Hui admitted that the direction and magnitude of the move was largely in line with forecasts although the timing is ahead of expectation.