Vietnam Dong still faces concern it will weaken, IMF says

There is still concern the Vietnamese dong may weaken, even after the stabilization of the country’s foreign-exchange market and an increase in reserves, the International Monetary Fund said today.

The Vietnamese currency has benefited recently from a tighter monetary policy as well as from administrative measures to curb trading in gold and foreign exchange outside the banking system, the IMF said in a report. Still, “expectations the dong will again come under pressure remain entrenched” in part due to concern over whether the government is willing to maintain its current policy stance, the Washington-based lender said.

“In many quarters, the current stability of the dong is still seen as just a temporary phenomenon,” Benedict Bingham, the IMF’s senior resident representative in Vietnam, said at a conference in the central Vietnamese town of Ha Tinh.

The dong weakened 0.1 percent to 20,555 per dollar as of 3:02 p.m. in Hanoi. The currency was devalued by a record 7 percent in February, the fourth one-off reduction in 15 months. Since then, it has strengthened 1.6 percent against the dollar.

The central bank must address concerns over whether it will be able to sustain its current monetary policy course, while the government faces questions over whether it is “truly committed” to reducing its fiscal deficit, and on its strategy for dealing with “vulnerabilities in the corporate and banking sector,” Bingham said.

Answering Questions

“Until these three questions are answered, risk premia on Vietnamese assets and particularly dong assets will remain high,” he said.

Vietnam’s foreign-exchange reserves increased by $900 million in May to $13.5 billion, the IMF said in the report. The reserves now cover about 1.4 months of imports, according to Bingham, the same ratio as at the end of last year. The government should aim to build reserves to finance at least 2.5 months of imports, the World Bank said today in a report released at the meeting.

The government is targeting foreign exchange reserves next year to cover about 12 weeks of imports, up from about eight weeks now, said Deputy Minister of Planning & Investment Cao Viet Sinh, who estimated Vietnam’s foreign reserves currently at $13.5 billion to $14 billion. Deputy Prime Minister Nguyen Sinh Hung told the meeting that the country had increased foreign- exchange reserves by almost $2 billion in “the past few months.”

The country aims to increase the reserves figure to 16 weeks worth of imports “in a few years,” said Sinh, speaking to journalists today in Ha Tinh.

The 16-week target is “high” and “has to be long term,” Sinh said. “We need to have a time frame to buy” foreign currency, he said.

Reserve Replenishment

The dong is now trading “comfortably within the official exchange rate band,” and enough appreciation pressure is being generated to allow the State Bank of Vietnam to start replenishing its foreign-exchange reserves, the Washington-based lender said.

The exchange rate will be kept at a “stable, reasonable” level this year, Deputy Prime Minister Hung said.

“The stability in the foreign-exchange market has helped ease offshore risk premia, with Vietnam’s sovereign spreads and credit-default swaps narrowing by around 100 basis points from a peak of over 400 basis points in February,” the IMF said.

Still, Vietnam’s central bank will probably have to further increase its policy rates, Bingham said. The bank’s repurchase rate has increased to 15 percent now from 10 percent at the beginning of the year, while the bank’s refinancing rate has climbed to 14 percent from 9 percent. Vietnam’s inflation rate in May reached 19.78 percent, the highest since 2008.

“The process of stabilizing the economy will take time,” Bingham said. It will “not be a three-month exercise.” – Bloomberg

Tags: Vietnam banking industry, vietnam dong, Vietnam finance, Vietnam financial