Wednesday, September 2, 2009

Vietnam to devalue Currency 4% by end of year

Vietnam will probably devalue its currency 4 percent by the end of the year, as the government prioritizes boosting exports to help growth ahead of fighting inflation, ANZ predicted.

The dong is currently trading at about 17,825 per dollar, down from 17,486 at the end of 2008, according to prices compiled by Bloomberg. The exchange rate will probably drop to 18,500 by year-end, wrote Tamara Henderson, a strategist at Australia & New Zealand Banking Group Ltd., in a research note Tuesday.

“The government’s priority at the moment is to get growth back on track and deal with inflationary pressures if and when they emerge,” Singapore-based Henderson said in a telephone interview Tuesday.

Vietnam is targeting economic growth of at least 5 percent this year, up from a 3.9 percent first-half expansion, and plans to revive exports after they declined 14 percent year-on-year through August.

The State Bank of Vietnam let the currency weaken 8.5 percent last year by widening the trading band, and lowering the reference rate.

Year-on-year inflation slowed to 2 percent through August, the lowest rate since 2002. A year-long deceleration in inflation is “almost certainly” over, with price pressures rising, ANZ said.

‘Long wait’

“Concerns about inflation have already started to weigh on the dong,” Henderson wrote in the note. Further weakening of the dong should support exports during the “long wait” for US and European consumer demand to pick up, she said.

“Devaluing the currency will also make imports more expensive, which can help address trade imbalances,” Henderson said by telephone. Any devaluation will probably take place toward the end of the year, she said. By the end of 2010, the currency is likely to trade at about 19,300 per dollar, according to ANZ.

Vietnam recorded a trade deficit of US$5.1 billion in the year through August, according to estimates from the General Statistics Office in Hanoi. The shortfall has “deteriorated sharply” from a surplus in the first quarter, ANZ said.

Foreign investment, both through projects and through the country’s stock markets, is “lackluster,” Henderson wrote.

“Without an imminent improvement in global demand conditions, Vietnam’s external position will quickly deteriorate,” she wrote.
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