Dong devalued by 7%

Vietnam effectively devalued its currency by 7% on August 7, when the State Bank of Vietnam lowered the official rate to VND12,998 dong per US dollar from VND11,815. At the same time, the bank narrowed the band within which the dong can be traded to 7% from 10% on either side of the official rate. Because the dong was being traded at the bottom limit of the band prior to the rate adjustment, the move is essentially a devaluation of 7%. As soon as the bank made the announcement, traders started selling the dong at the bottom of the official trading band at VND13,908 to the dollar, while in some official exchange offices in Ho Chi Minh City, one US dollar was fetching VND14,030.

The State bank of Vietnam (SBV) has been grandually devaluing the dong by either tweaking the official rate or adjusting the trade band.

MAR 97	Trading band widened to 5% (±) from 1% (±)
OCT 97	Trading band widened to 10% (±) from 1%(±)
FEB 98	SBV sets new rate for 1USD to VND11,800 from VND11,175
6 AUG 98	Trading band narrowed to 7% (±) from 10%(±)
7 AUG 98	SBV sets new rate for 1USD to VND12,998 from VND11,815

Observers said the move means the dong will now start to fetch something closer to its real value and will bring it in line with other falling currencies in the region. They also said the dong needs to fall further to reflect the state of the economy, but most agreed the devaluation should make Vietnamese goods more competitive internationally. "The devaluation will help Vietnam's declining exports," commented Robert Glofcheski, a senior economist at the United Nations in Hanoi. "But that will take time."

Economists say while the dong's high value was previously pricing Vietnamese goods out of the market, it is only half of the problem. More serious is the slump in demand from Southeast Asian countries, which used to buy as much as 30% of the country's exports. In the first six months of this year, Vietnam earned $1.05bn from exports to ASEAN countries, a 31% drop compared to the same period last year. Many buyers, particularly of agricultural commodities, are being squeezed on one side by the falling values of their own currencies and by the artificially high value of Vietnamese products on the other. They've had little choice but to cut back their businesses, cancelling orders and leaving Vietnam with a glut of produce which none of the usual customers can afford to buy.

"In general, [the devaluation] will help the agricultural sector," said Mr Glofcheski. The surge in demand for agricultural produce in the region following the economic crises earlier this year has provided Vietnam with a potentially very profitable market, particularly for rice. The devaluation makes Vietnam's rice more affordable and now the country's exporters are set to reap their reward.

The same holds true for manufacturers and exporters of industrial goods and materials, although much of Vietnam's industry, which depends heavily on imported raw materials, will suffer as imports become more expensive.

The devaluation should also encourage foreign investment by cutting some of the costs inside the country, although wages and rents are all still denominated in US dollars.

Economists and bankers point to the action of traders following the State Bank's announcement as proof the dong still has some way to go to reach its true value.

"The fact that the dong falls to the bottom of the official trading band almost immediately after every adjustment by the State Bank shows it should be devalued more," commented one banker.

Observers say the government needs to be careful, as devaluation is a double-edged sword. It may improve life for exporters, they say, but it increases the debt burden for companies which borrow in US dollars as well as the country's external debt service.

On balance, however, most exporters and bankers believe further devaluation will improve the business environment and most say they are waiting for the dong to fall a little further.

"If it is devalued a little bit more it will help a little bit more," Mr Glofcheski ended.