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Vietnam’s currency slides further after devaluation

The State Bank of Vietnam announced the devaluation on Wednesday after a two-day cabinet meeting where Prime Minister Nguyen Tan Dung said the economy grew 6.23 percent in 2008, its slowest rate in nine years, and warned that 2009 would be worse.

At 1025 GMT the dong was quoted at 17,447/17,497, having hit a low of 17,495.

That was the weakest ever for the dong officially although it has been at weaker levels in the black market, which had the currency quoted around 17,450/17,550 on Friday.

The central bank set the mid-point on Friday at 16,987, and the currency is officially allowed to trade within a 3 percent band on either side of that rate.

The dong had been stuck at the low end of its band for weeks before the devaluation.

“This step is part of the central bank’s road map to further devalue the dong in the future. Many forecast by the end of 2009 the dong may be down to 19,000 dong per dollar,” Nguyen Thanh Hung, investment analyst at Sacombank Securities Company Ltd.

“This is kind of thing that the central bank must do to help exporters who have been hard hit by the global economic slowdown. While in terms of imports, this can help limit massive waves of Chinese goods flooding into Vietnam.”

Traders said liquidity was low in the dollar/dong interbank market amid shortage of dollars, with one from a major Vietnamese bank estimating volume to be $10-20 million, or about 5-10 percent of what it would be in more normal times.

The dollar has gained about 9 percent against the dong so far this year. Several other currencies in the Asian, like the Korean won, which has slipped 27 percent and the Indonesian rupiah, which has shed 16 percent.

“We see probably a little more catching up for the dong in terms of the exchange rate given the need to reflect the underlying fundamentals,” said Emmanuel Ng, currency strategist at OCBC Bank in Singapore.

Soaring inflation and a widening trade deficit sparked an overheating crisis earlier this year in Vietnam that the government snuffed out with three interest rate hikes and strict measures to curb credit growth. Dollar supply dried up.

Since the global credit crunch started turning into a worldwide economic slowdown, Hanoi has taken a policy u-turn.

The central bank has slashed rates five times since late October, unwinding most of the earlier tightening, and lowered banks’ compulsory reserve ratio, effectively flooding the financial system with money.

Prime Minister Dung has said promoting exports was a priority, and the government has announced plans for a $6 billion economic stimulus package. Additionally, prices of commodities, like oil and rice which are huge sources of foreign exchange for Vietnam, have slumped.

One year non-deliverable forwards see the dong falling to somewhere around 19,000-20,000 per dollar.

“A modest devaluation was inevitable,” said Richard Segal, emerging markets strategist at UBA Capital in London.

“It will help to maintain competitiveness, but will not have a noticeable near term impact. The authorities may have to act again before too long, and probably by a similar magnitude.”