Asia
Asia view
Vietnam's incredible shrinking currency
Going, going, dong
Feb 14th 2011, 10:08 by R.C. | JAKARTA
IT’S only been a few weeks since the Vietnamese Communist Party’s 11th Congress declared that everything was fine and dandy with the rapidly developing nation—yet on Friday February 11th came yet another devaluation of the currency, signalling that the economic outlook is indeed as precarious as many of us had feared.
Not only was it the fourth devaluation since late 2009 (and the sixth since the summer of 2008), but it was a big one: a full 8.5%. This means that the incredibly shrinking dong is now worth only 20,693 to the American dollar, down from 18,932. How envious the Irish and Greeks must be—this used to be the good old-fashioned way to dodge doing anything serious about a misfiring economy, before the pesky euro came along.
Doubtless the latest devaluation will help the Vietnamese economy in the short term. It always does, by making exports cheaper and thus easier to sell abroad. But the devaluation will do nothing to resolve the deeper and relatively intractable problem of the Vietnamese economy, namely that pent-up consumer demand is sucking in imports (which will now be more expensive), while the country doesn’t make enough things of high-enough value for total exports to cover the increase. The result is a huge trade deficit, $12.4 billion last year.
Investors also fret about high and rising inflation (12.2% for January year-on-year) and precariously low currency reserves. All this adds to the pressure on the dong, with more and more Vietnamese selling the currency in favour of keeping gold and dollars at home.
These are all symptoms of an overheating economy. Yet to judge by the leadership’s pronouncements at the party congress, it is still fixated on meeting high targets for growth rather than pausing for breath and balancing the books.
None of this impresses bankers and outside investors very much. Vietnam has been a poster-child of South-East Asian development over the past decade. I was at a briefing a couple of weeks ago held by one of the big banks and heard their analysts talking up the prospects of Indonesia and the Philippines this year, rather than Vietnam.
In its latest newsletter one of the more bullish investors in Vietnam, Dragon Capital, tries to cheer us up a bit by professing to detect a “twist” in the devaluation, finding that “the new rate has actually prevailed in business transactions for the past 4 months…so the devaluation will not have a very drastic impact on macro outcomes”. Somehow, I don’t find that very reassuring. What’s the new, new rate now I wonder?
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"Vietnam has been a poster-child of South-East Asian development over the past decade".
RC, with due respect, I suspect you have never lived in Vietnam.
When I first started traveling to Vietnam in 1989/90, the Dong was at 11,000 to the dollar. Its travelled a long way down, to be now close to 21,000.
The reasons for the weakness of the Dong are not hard to find, if you've actually lived in the country. The bureaucracy sucks up resources like a giant leech, to be transferred mostly to their personal pockets. A lot of it reappears in the
form of illegally owned property which, needless to mention, is completely unproductive.
Until such time as the economy can be freed of the sponges and true competition is introduced, foreigners will continue to live in a fool's paradise. Vietnam might be able to produce motorcycles and shoes cheaply but for anything more than that, true structural reform is necessary. And I can't see it happening anytime soon, its much too profitable at the moment for the plutocrats.
Ho Chi Minh was - in my humble - the greatest politician of the 20th century, someone who remained uncorrupted by power.
The sledgehammer irony of his demand that no mausoleum should be built to honour him being on sale outside the Ho Chi Minh mausoleum, should be a warning about the current (and past) Vietnamese administrations. They are about as Communist as Mr Berlusconi and somehow even more corrupt.
Vietnam needs a huge dose of Uncle Ho right now, mind you, so does the rest of the world.
Did the author really wrote: "...the incredibly shrinking dong..."?
Who says that economic articles have to be dry and humorless
Is it possible the author didn't understand the alternate meaning of "..the incredibly shrinking dong..."?
Maybe they just need to get the currency out of the water for a while! As George Costanza would say "I was in the water!!!!"
If you're so smart, why don't you run a country or two. Please don't base your report on IMF or other "international bankers meeting" these people are really competent & credible sinced the financial fall out. Their version of a free market is to ask their national government for a bailout. If you live in America, the citizens are ready and willing to default on China reserve holding anytime, so what is your point of holding a foreign reserve? As for your "analyst" gathering please take your sweatshop, garbage wage business idea somewhere else, these analyst are as credible as the rating firm Moody.
I would have thought rather than talking about "Shrinking" Dong, it would have been more appealing to talk about "Inflating Dong"....
“How envious the Irish and Greeks must be—this used to be the good old-fashioned way to dodge doing anything serious about a misfiring economy, before the pesky euro came along”
——envious? Irish and Greeks should feel very lucky to have joined in the euro zone before crisis arriving. Or else, no one will help them including Germany and France.
——For small economies, the effects of devaluation are very limited. Risk ability is also weakly. I think that It is a tough decision and no choice for Vietnam. The concern is that this will trigger panic in the market and cause losses for investors and financial institutions.
——A series of incidents in recent weeks suggesting that ASAN is unreliable. Vietnam is a comparatively isolated economy. If Vietnam become second Irish or Greeks, what will happen? Large-scale riots just like Egypt? I don’t know. In the long run, Vietnam need keep a good relationship with their neighbors, Good neighbors are more important than unreliable organizations.
Vietnam appears to be playing a dangerous game. While it is taking advantage of “ASEAN + 1” FTA and other goodies from China and other neighbors, it also foolhardily tinkers with the idea of joining Japan and India for Uncle Sam’s containment of China in that part of the world.
For a smaller country, you can play one big nation against the other for better mileage, but you can’t have cake and eat it too.
@nkab wrote:
"Feb 15th 2011 2:47 GMT
Vietnam appears to be playing a dangerous game. While it is taking advantage of “ASEAN + 1” FTA and other goodies from China and other neighbors, it also foolhardily tinkers with the idea of joining Japan and India for Uncle Sam’s containment of China in that part of the world.
For a smaller country, you can play one big nation against the other for better mileage, but you can’t have cake and eat it too."
What is China going to do about it?
In fact, the inflation is extremely serious in Vietnam now. Average per capita income is very low, Vietnam State has just adjusted rate minimum of salary, however, it is quite modest. . Meanwhile, Ministries is submitting reports to increase the price of oil & gas, electricity, coal. It will lead to terrible consequence. I don't understand what is going on. We really lose belief in these policies of State
Regarding to exchange rate, now is 1USD/21,972VND. I think it can be reached 22,000 or 23,000VND within this year.At present, I don't want to save VND, only interested in Gold. Really disappointed!!!
VOA, RFA and NED have been working to change the regime in Vietnam for some time. No just American establishment dislike communism, but they also desire to pay back the forty years old defeat and have the last laugh.
A regime change in Vietnam may also be a neccessary test run before the Americans take on the bigger and more formidable China. Being far smaller and poorer than China, and facing serious economic difficulties, Vietnam is rite to have a revolution like what happened to USSR and what is happening in the middle east.
Keep your friends close and your enemies closer. American will soon become a fast friend of Vietnam. Remember Gorbachev and Mubarak? Frankly speaking, becoming ones like Gorbachev and Mubarak is not the worst alternative for the Vietnamese leadership.
"What is China going to do about it?" Frankly speaking there will not be concerted effort from China to counter the American design on Vietnam. The generous aid from USSR did not lift Vietnam from poverty, neither will be the one from the US or China.
33800 Dong = £1.
I suppose if they have had 35 years of socialism , that's to be expected. Imagine the mess we would have if Gordon Brown or James Callaghan were not kicked out by the electorate.