Vietnam's Dong may fall 10% by year end

Vietnam's dong may fall 10 percent by year-end as the government seeks a gradual depreciation to avoid a ``currency crisis'' and a sudden devaluation, according to Calyon, the investment banking arm of Credit Agricole SA.

Accelerating inflation, a widening trade deficit and a near 60 percent slide in local stocks this year have seen the currency decline for three straight months, the longest losing streak since August. The dong, which is allowed to trade within 1 percent on either side of a daily fixing rate, will weaken 29 percent in the next 12 months according to trading of non- deliverable forwards.

``The dong depreciation pressure remains strong,'' Calyon strategists including Sebastien Barbe wrote in a research note yesterday which he confirmed in a telephone interview today. ``We expect the dong to soften further to about 18,000 versus the dollar by the end of 2008.''

The dong gained 0.2 percent today to 16,242.50 versus the dollar as of 9:50 a.m. in Hanoi, according to data compiled by Bloomberg. The currency has weakened 1.5 percent in 2008. Offshore 12-month non-deliverable forwards trade at 23,000, Bloomberg data show.

The trade deficit, inflation and slowing fund inflows will weigh on the currency this year, Barbe wrote. The dong will fall to 16,500 per dollar by the end of June, 17,500 by end-September and 18,000 by year-end he said.

The government will seek to avoid a sudden devaluation of 30 to 40 percent as this will worsen inflation, widen the trade deficit by increasing the cost of imports and ``jeopardize portfolio investments and foreign direct investments,'' Barbe said in the note.

Wider Band

``If they want to implement a 10 percent depreciation in a few weeks, they could do it within the current 1 percent band,'' Barbe said in the interview. ``But if they want to signal to the market that they want more flexibility and they want depreciation, they could widen the band to 2 percent.''

The State Bank of Vietnam said in April it planned to widen the dong's daily trading band to 2 percent from 1 percent, without giving any date for the change.

Vietnam's authorities have to ability to avoid a sudden currency devaluation due to the nation's foreign-exchange reserves, ``resilient foreign direct investments, limited short- term external debts and robust export sector,'' Barbe said.

The government will raise interest rates to slow the economy and opt for a ``a controlled but significant depreciation of the dong to avoid a full fledge currency crisis,'' the note said.

Consumer prices rose 25.2 percent last month, the most since 1992, the Hanoi-based General Statistics Office said May 27. The trade deficit more than tripled in the first five months of the year to $14.42 billion from $4.25 billion in the same period a year earlier, the government said May 26.

The government this week cut its economic growth forecast for 2008 to 7 percent from 9 percent, and said curbing inflation was its top priority.

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