Vietnam is not actively participating in a currency war : ANZ

The State Bank of Vietnam (SBV) this morning raised its reference rate between dong and dollar by 1 per cent to 21,890 a dollar, the third adjustment to-date this year. At the same time, the trading band was widened yet again to +/-3 per cent thus allowing the currency to now trade within a VND21,233 - VND22,547 range.

Today’s adjustment will further ease the pressure on the central bank to intervene in the currency market depleting the foreign reserves currently at $37 billion.

The double policy move by the SBV today closely followed the band widening last week to 2 per cent from 1 per cent, in the wake of China’s yuan devaluation. Even in the absence of further policy adjustments in the rest of the year, the dong could depreciate by a maximum of 5.1 per cent this year versus annual depreciation of around 1.3 per cent in the previous two years.

Eugenia Fabon Victorino, economist of ANZ in ASEAN & Pacific, and Irene Cheung, senior FX strategist of ANZ in Asia, wrote in the joint notice that the Vietnamese dong has been one of the more resilient currencies amidst the EM Asia currency downdraft of recent months. Some re-alignment of the currency therefore seems warranted from a macro-balance perspective.

“The policy action today is positive in its promptness in response to China’s devaluation. The timing was not a surprise to us but it did come through as more aggressive than what we had expected. We also think that in a pre-emptive move, the central bank may have taken into account a possible interest rate hike by the US Fed in September,” they wrote in the notice.

The latest exchange rate adjustment comes at a time when the current account is moving into a deficit in 2015.

“We have been expecting a deterioration of the current account, likely posting a deficit of 0.5 per cent of GDP in 2015, and widening to 1 per cent of GDP in 2016,” Victorino and Cheung wrote in the notice.

The latest trade balance reported a year to date deficit of $3.4 billion as of July. However, the two ANZ’S economists note that the year to date surge in imports has been driven by capital equipment, which should support Vietnam’s ongoing transformation of its production possibility frontier.

Clearly, the economic target of maintaining 12 weeks of import cover is being actively pursued. According to SBV statements earlier this month, official foreign reserves stood at $37 billion.

“Based on current import figures, we estimate that import cover is 11.7 weeks, marginally below the government’s target. With the new law of allowing 100 per cent foreign ownership in selected industries by September 2015, we continue to expect Vietnam to attract robust foreign direct investment flows and allow the overall balance of payment to remain at a sustainable level,” wrote Victorino and Cheung.

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