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The State Bank to Vietnam devaluated the Vietnamese Dong by 7.2% ( Feb 11, 2011 )
Early this morning on its website, the State Bank of Vietnam (SBV) announced that the Vietnamese Dong (VND) mid-point reference rate will be adjusted to 20,693 from 18,932, and the trading band will be lowered to+/- 1% from +/-3%, effective from today, 11 February 2011. Accordingly, the upper ceiling rate will be adjusted to 20,900 from 19,500 which means that VND will be officially allowed to devaluate by 7.2%...
The SBV’s move aims to stabilize the FX market, which has been quite volatile for the past several months, and to help improve the trade deficit. The devaluation had been signaled by the SBV and widely anticipated by the market, hence is well priced in. Not much reaction was seen in the market today as the VN-Index closed almost flat.
Thought the size is larger than expected, we think the devaluation has certain positive impacts on the macroeconomic environment and the market. First, the exchange rate in the black market has mostly traded at around 7% - 8% higher than the official upper ceiling rate for the last several months creating liquidity issue in the FX market. It also led to increasing local residents’ hoarding of dollars and gold as a “safe” way to store their assets in view of a sooner-or-later devaluation of VND. The devaluation will help take off these pressures in the FX market, with which FX transactions at banks will be more transparent and market-driven. As a result, the country will have a more flexible and sustainable FX regime in the long run.
Second, a higher VND/USD exchange rate will likely improve Vietnam’s trade deficit. Though January trade deficit stood at US$1 billion, down from US$1.3 billion in December last year, the government’s full-year target for 2011 is still high at around US$14 billion. With desired benefits for exports sector from the new exchange rate, we hope the trade deficit this year will not get expanded further than targeted and will stay in the controlable range. Third, the remarkable gap between the official and unofficial exchange rates in the past months have discouraged foreign investors to convert their FII capipal from USD into VND to invest in Vietnam market. The action by SBV will significantly clear away this concern and hopefully help Vietnam market to attract more FII inflows in the coming time.
Having said that, we concur with other observers that currency devaluation alone is not enough to stabilize Vietnam’s economy. In order to break the continuing cycle of devaluations, we think the government needs to send clearer signals for its preference for stability over growth for the time being. Now, it has to focus all its efforts on top priority issues, namely curbing inflation and boosting confidence in the currency by firmly implementing tighter fiscal and monetary policies in addition to the currency devaluation. If these measures are to be strictly and effectively applied, we think improvement in other major issues of balance of payments and FX reserves will likely be seen by year end.