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Bank warns of looming dong dilemma   2008-05-30 - Bloomberg

Vietnam is heading for a “currency crisis,” similar to that of Thailand’s baht in 1997 because the central bank kept the dong too strong as inflation soared and the trade deficit widened, Morgan Stanley said Thursday.




Twelve-month non-deliverable forwards show traders are betting the currency will drop 39 percent against the dollar in the next year.

Vietnam’s current-account deficit, foreign-exchange reserves and inflation are at levels “misaligned” with the dong, Stewart Newnham, a Hong Kong-based analyst at the US investment bank, wrote in a research note.

“There is a run on the dong,” Newnham said in the note.

“Many of the classic fundamental conditions are in place, including an overvalued currency, a dangerously unbalanced economy and low forex reserves.”

The dong was at VND16,230 per dollar in Hanoi on Wednesday, down 1.3 percent this year.

The State Bank of Vietnam sets a daily reference rate and the currency is allowed to trade 1 percent either side of it.

The 12-month non-deliverable forward contract has slipped 22 percent this week to VND22,550 per dollar.

Nguyen Van Giau, Governor of the State Bank of Vietnam, declined to comment Thursday on the Morgan Stanley report.

The central bank said it has the ability to ensure an orderly exchange rate, Nguyen Quang Huy, director of the banking-management department, said in a statement on the bank’s Web site.

Demand for US dollar was accelerating, caused by the highest inflation in Vietnam since 1992, Huy said.

The latest inflation data, released earlier this week, showed prices jumped 25.2 percent in May from a year earlier.

The government planned to continue carrying out a “stable exchange rate policy” within a trading band, Huy said, reiterating existing policy.

Asian financial crisis

Even so, Newnham says the dong may be facing a similar experience to the baht in 1997 when Thailand’s currency was devalued 45 percent against the dollar as speculators betted it was overvalued.

The devaluation touched off an unprecedented financial crisis in the region as funds fled on risk aversion.

Vietnam’s non-performing loans are likely to rise as property prices fall, said Newnham.

The nation’s benchmark Ho Chi Minh stock index has slumped 55 percent this year.

“The dong could face similar downside risks,” said Newnham.

“A devaluation episode could trigger a contagion throughout the region.”

However, at least one locally based financial expert disagreed with Morgan Stanley’s dire warning.

“It is a bit alarmist to say that Vietnam is in a currency crisis,” said Lawrence Wolfe, director of business development of Ho Chi Minh City-based Dong A Securities Co.

“I would say we are probably in a dangerous situation right now.”

Wolfe said Vietnam’s economy still had many positive factors, including strong foreign direct investment, increasing oil and gas exports and a stable government.

“Vietnam still enjoys strong support from donor nations,” he said.

“I think those donor nations, the International Monetary Fund and the World Bank, can step in to help if the government needs them to prevent a crisis.

“To revive investor confidence, it could be a rather long road. The first thing is they have to defeat inflation.”


Lawrence Wolfe, director of business development at Ho Chi Minh City-based Dong A Securities Co., comments on Morgan Stanley’s grim predictions for the Vietnamese currency.

“I disagree with the blame that the central bank kept the dong too strong while inflation was soaring and the deficit was getting wider. It is not a fair statement to blame the state bank.

“For the whole of last year, starting from late 2006 to earlier this year, the dong was getting stronger not because the state bank was making it get stronger. It was demand for dong from overseas investors.

“There were many times during the year the dong was trading below the floor of the band. There was excess demand and a shortage of dong. We were in a situation a few months ago when there was no dong to sell to investors who wanted to buy it.

“It was very surprising to see inflation actually increased so much in May.

“The trade deficit is also a concern, but I think Vietnam’s trade deficit isn’t as bad as some might think because the deficit came from imported machinery, steel and raw materials.

“The dong will get weaker against the US dollar because the trade deficit has increased the demand for dollars.

“But is very difficult to say about the outlook. Offshore non-deliverable forwards are not an official exchange rate here in Vietnam. The exchange rate is still controlled by the state bank.

“Non-deliverable forwards are an indicator of the current sentiment. The government is still able to manage the exchange rate here.

“They have built up foreign-currency reserves of over US$24 billion. It is a reasonable amount.”

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