The dong begins to float more freely

November saw the State Bank of Viet Nam announce a slew of measures in a proactive attempt to ward off possible economic imbalances, according to a fund management company.

The Viet Nam Asset Management Ltd (VAM), which primarily invests in equity and offers advisory services in Viet Nam, said in a monthly market update that the measures included an adjustment of the exchange rate for the dong (November 26) combined with a reduction in the forex trading band from 5 per cent to 3 per cent.

A 1 per cent base-rate hike to 8 per cent on December 1, and potential mandatory purchases of the greenback from State-owned Enterprises and other exporters are also important moves.

The depreciation signals that the central bank is moving towards a more free-floating currency regime since the new rate should theoretically bring the dollar in line with black market rates, easing demand concerns.

The move would also help ease potential balance of payment issues as the trade deficit in the first 11 months of this year is estimated to be around US$10.3 billion. The interest rate hike is an effort to ease credit growth, which stood at 33 per cent in the year through October, three per cent higher than the Government’s full year target of 30 per cent.

High credit growth and increasing commodity prices pushed year-on-year inflation up from 3 per cent to 4.4 per cent in November, and the Government is likely to be wary of another bout of runaway inflation like last year.

The third measure is expected to help improve dollar liquidity and alleviate forex concerns.

On a positive note, macroeconomic indicators demonstrate Viet Nam is still in a strong recovery phase. Year-to-date retail sales and industrial production growth rates were 7.3 per cent and 18.5 per cent up compared to the same period last year.

Exports improved slightly from – 13.8 per cent year-to-date growth in October to – 11.6 per cent in November though the trade deficit for November is once again estimated to be high at nearly $2 billion. The HCM City stock market was expectedly down for the month finishing at 504.12, or 14.1 per cent below the previous month’s close.

The main reasons for the fall were the Government’s announcement at the beginning of the month it would crack down on the improper use of subsidised bank credit to invest in the equity market and the SBV’s new measures at the month end.

The looming debt crisis in Dubai that has spooked global investors was another factor.

In the current environment, companies with hard currency revenues and a local cost base, such as aquaculture exporters, would do well.

On the other hand, importers and manufacturers with imported inputs would have difficulty maintaining their margin following the dong’s depreciation. Besides, the recent interest rate hike has caused apprehension about further tightening, especially with inflation creeping up.

The targeted 30 per cent cap in credit growth is another concern not only for banks but also for the private sector, which often faces funding problems when there is a tightening.

“We are cautious about companies with high leverage [credit] as they would be the first casualties in a rising interest rate environment,” the report said.

VNN/VNS

Tags: Vietnam finance news