Vietnam Devalues Its Currency as Equities Approach Bear Market

By Bloomberg News - Aug 18, 2010

Vietnam devalued its currency for the third time since November, moving to reverse a slump in exports that helped to drive stocks close to a bear market.

The dong dropped 1.1 percent to 19,320 per dollar as of 11:22 a.m. in Hanoi, after touching a record-low 19,425 as the central bank lowered thereference rate by 2 percent. The Ho Chi Minh City Stock Exchange’s VN Index dropped 1.7 percent to 455.49, extending its decline from the May peak to 17 percent, near the 20 percent that would indicate a bear market.

A weaker currency may boost exports and demonstrates the government’s focus on boosting economic growth over further easing inflation, said Prakriti Sofat, a Singapore-based economist at Barclays Capital. Prime Minister Nguyen Tan Dung said in June the economy may expand as much as 7 percent this year, beating the 6.5 percent target, from 5.3 percent in 2009.

“The main reason for the central bank’s move is to balance onshore foreign-exchange demand-and-supply and to support exporters,” Sofat said. “Vietnam largely exports low value- added goods and typically competes on prices.”

Vietnam’s trade deficit widened in July from the previous month on falling exports. The shortfall reached $1.15 billion from a revised $742 million in June. For the seven months through July, the gap was $7.4 billion, almost twice the figure for the same period last year.

Seafood Companies

“A weaker currency should in theory improve Vietnam’s balance of trade,” said Kevin Snowball, chief executive of Ho Chi Minh City-based fund manager PXP Vietnam Asset Management Ltd. “For the markets, the immediate beneficiaries of this should be companies with earnings in foreign currencies, including seafood companies.”

The Ho Chi Minh City Stock Exchange’s VN Index, Southeast Asia’s worst-performing benchmark gauge this year, has tumbled 61 percent from the record 1,170.67 in March 2007 as the global financial crisis prompted a retreat from developing nations. Declining prices drove stocks on the VN Index to 10.1 times reported earnings, the cheapest in Asia apart from Pakistan.

Barclays Capital is maintaining a year-end forecast for the dong to trade at 19,500, the upper end of the 3 percent band either side of the 18,932 per dollar reference rate, Sofat said in a phone interview today. The currency may weaken to 20,000 per dollar during the first half of next year, Australia & New Zealand Banking Group Ltd. said today.

‘Remains Challenging’

“The outlook for exports remains challenging,” wrote Tamara Henderson, the Singapore-based head of foreign exchange research at ANZ, which also cited the risk that Fitch Ratings’ downgrade last month of Vietnam’s debt rating may hurt future inflows of external financing.

Central bank governor Nguyen Van Giau on Feb. 11 depreciated the dong by lowering the reference rate 3.4 percent to 18,544, following the previous devaluation in November 2009.

“The central bank still has a bias to support growth, especially as credit and loans growth have been relatively weak,” Sofat said. “The central bank has been encouraging local banks to reduce lending rates and now the weaker dong will help support exporters.”

The economy expanded 6.4 percent in the three months through June, compared with 5.83 percent in the first quarter. Inflation cooled for a fourth month in July, to 8.19 percent, the General Statistics Office in Hanoi reported July 24.

‘Price Pressures’

“The weaker currency will likely add to imported price pressures,” Sofat wrote separately in a research note yesterday.

Vietnam is preparing a “sustainable” development strategy for 2011 to 2020 that will lead to average annual gross domestic product growth of 7 percent to 8 percent a year for the period, Prime Minister Dung said in Hanoi today.

Vietnam’s exports rose 17.5 percent in the first seven months of the year from the same period in 2009, according to data from the General Statistics Office in Hanoi on July 27. Imports expanded 25.5 percent.

A weaker dong may also help reduce the gap between the exchange rate at banks and in the black market, according to a research note today from VinaSecurities Joint-Stock Co.

“‘It has an important signaling effect, that the State Bank of Vietnam has taken concrete steps to stabilize the exchange rate,” the note said.

--Patricia Lui in Singapore, Jason Folkmanis in Ho Chi Minh City. Editors: Reinie Booysen, Margo Towie

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net