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18 Aug 2010

International Economy

3rd Dong Devaluation: Trade Deficit and Falling Confidence in Vietnam (Business Brief No. 2909)

Vietnam devalued their Vietnamese Dong (VND) by 2 percent on August 18, 2010, being their third devaluation in 10 months. This was mainly aimed at coping with a rising trade deficit in July, which has pressured the country's current account balance and already weakening VND, creating greater difficulty for the Vietnamese authorities toward maintaining monetary stability given their limited foreign exchange reserves. Another reason was that they want to control the exchange rate spread between the market-clearing and official rates amid a widened differential versus the USD that started in July.
KResearch holds the view that many factors are challenging sustainable growth in the Vietnamese economy, e.g., instability in their external trade stemming from a trade deficit, which has been pressured further by a projection that imports will continue rising over exports, resulting in a larger current account deficit.
These factors had a detrimental impact on the VND value, reduced the country's foreign exchange reserves significantly, and affected price stability, wherein it is projected that inflation will remain high, though subsiding somewhat during the last 3 months. This has subverted confidence within their domestic economy and among foreign investors. However, the Vietnamese economy is expected to continue growing over the remainder of this year, sustained by exports, but at a moderate growth rate more in line with other economies that haven't fully recovered yet. The weakened VND is, however, helping to boost exports. Their economy is being aided by government policies encouraging economic growth that are helping the construction and service sectors to grow significantly.

As for the effect on Thailand, we see an outlook that Vietnam's economic growth will continue, and with it, Thailand's exports to Vietnam should grow, too, over the remainder of 2010, following a 36-percent growth rate seen in 1H10. This latest VND devaluation will help boost their export price competitiveness in global markets beyond the comparative price advantage they already have over Thai goods. Particularly important product categories where Thailand is in competition with Vietnam in the global marketplace including rice, rubber, value-added seafood products, garments/textiles and footwear. From now on, Thai goods are projected to compete more strenuously with Vietnamese counterparts in international trade amid a strengthening Baht trend expected throughout this year.

International Economy