CITIGROUP: phá giá tiền tệ sẽ giúp việt nam thoát khủng hoàng

CITIGROUP: phá giá tiền tệ sẽ giúp việt nam thoát khủng hoàng

Devaluing dong may help stabilise economy
30-MAY-2008 Intellasia | Saigon Times Daily page 1
May 30, 2008 - 7:00:00 AM






Deterioration in Vietnam''s inflation and trade crises continued to accelerate in May. The State Bank of Vietnam (SBV) has consistently weakened the dong reference rate, but severe foreign currency liquidity shortage has sent the interbank market to trade dong at nearly 7% or over 1000 points above the official band. This heavy discount is exacerbating balance of payment pressures. As a result, the likelihood has meaningfully increased for the SBV to allow the official exchange rate to weaken more significantly, perhaps with a one-time revaluation. Tightening measures, including further rate hikes, are also likely in the near term.

On shore liquidity for foreign currencies have dried significantly from already tight conditions. The SBV has shut off supplies to preserve forex reserves for refined petroleum imports and other contingencies. The local currency has reached around 17,300 dong to the dollar mid-day yesterday, compared to the official ceiling of 16,221 dong. Potential for further depreciation is shutting out investors considering FDI disbursements, depriving Vietnam of much needed capital inflows.

Vietnam''s trade deficit widened to US$14.4 billion year to date in May. The estimated monthly deficit of US$3.3 billion was the largest on record. Even if the deficit can quickly narrow, the shortfall could easily account for 25% of estimated 2008 GDP. Meanwhile, registered FDI inflows amounted to a stunning US$15.2 billion through May, though only US$2 billion was disbursed by April (May data still not available). This highlights the need to ensure continued inflows that were perhaps already scheduled by old contracts. If the SBV''s purpose were to preserve forex reserves, eliminating exchange rate uncertainty would help to maintain inflows.

Exchange rate instability may also be boosting inflation. CPI rose 25.2% year-on-year in May, with a 42.4% hike in food prices, while non-food inflation accelerated from 12.6% to 13.6%. Imported inflation likely played a role in this broad pickup in pricing momentum. In May, imports grew 70.4% according to preliminary figures. This is surprising given that steel imports likely faded, as some importers exported their excess inventories. Nonetheless, import volumes did not meaningfully respond to the near 7% weakening in market US$/dong, probably reflecting expectations for further loss of dong purchasing power and the possible use of imports as a channel of capital exit. Under these conditions, cutting import volumes is necessary to ease both trade and inflation pressures.

A more stable foreign exchange environment is crucial to managing current crises. The SBV should allow the dong to quickly reach a level that markets can accept as at least a near term equilibrium. This can be done through a one-time devaluation and widening the trading band. Meanwhile, monetary policy needs to be more effective, with further rate hikes and relaxing of the lending rate cap. The likely resulting reduction in investment, employment, incomes and consumer demand are necessary conditions to diffuse inflationary pressures.

This information is given by Citigroup.