Dong devaluation may miss mark

The State Bank on August 18, 2010 devalued the dong reference rate by 2.1 per cent from VND18,932 per dollar to VND18,544 due to trade deficit concerns. That means, with the trading band of 3 per cent, the spot rate can move to VND19,500 from VND19,100 per dollar.

The move is said to allow exporters to increase earnings, as the consumer price index has been moving in a stable manner in recent months.

Standard Chartered Bank forecasted that the dong’s devaluation against dollar would continue in the medium-term and should be around VND19,900 by the end of this year, VND20,000 at the end of next year’s first quarter and VND20,400 at the end of the following quarter.

By supporting exporters, the government expects economic growth will be 6.7 per cent this year.

However, analysts are pessimistic. “In theory, devaluing will  enhance the competitiveness of local products in the international market. But, Vietnam has a big trade deficit and inflation troubles so the devaluation may not a lucid decision at this time,” said Le Xuan Ba, director of Central Institute for Economic Management (CIEM).

At present, manufacturers in Vietnam import most materials and equipment for production.

Ministry of Planning and Investment (MPI) statistics show that export turnover during the past eight months was estimated at $44.5 billion, a 19.7 per cent jump year-on-year. Meanwhile, total import turnover was estimated at $52.7 billion, a 24.4 per cent rise. The trade deficit at the same time was $8.15 billion, equivalent to 18.3 per cent of export turnover.

The main imported products were machinery, equipment and input materials. “Imported consumer products accounted for only 8 per cent of total import turnover,” the MPI reported.

“The added value of Vietnam’s export products is very low. Therefore, exporters will not get more benefits from a weakened dong as they have to pay more money to buy most of input materials at higher prices,” said Le Dang Doanh, former head of CIEM.

For instance, the garment, textile and footwear sectors exported $8.6 billion since January-August, but also had to pay $5.41 billion for import input materials. The real earnings was just $3.24 billion.

“The garment, textile and footwear sectors offer clear evidence for  Vietnam’s economy, in which manufacturers just import input materials for contract production or assembly to export.

A weakened dong will not address the fundamental weakness in the economy,” Doanh said. The fundamental weakness was a lack of supporting industries to supply equipment and input materials for exporters, he said.

In turn, the dong’s devaluation could worsen the trade deficit and current account deficit of the economy, said Hansjorg Herr, professor for economics at Berlin School of Economics and Law, who is studying Vietnam’s economy. The MPI forecasted the current account deficit this year to be around $10.6 billion.

“The only way to support export and economic growth is devalue the dong in line with pushing the development of supporting industries to reduce dependence on import materials,” said Herr.