The central bank Thursday fixed the dong’s rate 3 percent down against the dollar to boost exports, as the country’s economy expanded at its slowest pace in nine years and the trade deficit widened.
The State Bank of Vietnam fixed the daily reference rate at 16,989 dong to the dollar from 16,494 Wednesday.
Policy makers have retained the currency trading band at 3 percent a day, said Nguyen Quang Huy, head of the bank’s foreign-exchange department.
Gross domestic product grew 6.2 percent in 2008, after expanding by a record 8.5 percent last year, the government said in a statement Wednesday.
Export growth slowed in the last three months as stagnating global economies cut back on the import of Vietnamese garments and coffee as currencies in neighboring markets weakened.
Vietnam’s currency has fallen 5.5 percent this year against the dollar compared with an 18 percent slide in the Indian rupee, 14 percent decline for the Indonesian rupiah and a 13 percent slump in the Philippine peso.
The move is necessary since the government is trying to boost exports, said Do Ngoc Quynh, chairman of the Vietnam Bond Forum in Hanoi and head of currency and debt trading at the Bank for Investment and Development of Vietnam, the nation’s second-biggest lender by assets.
“Other currencies in the region have declined considerably against the dollar, but the dong hasn’t dropped that much.”
The currency has tumbled 35 percent since the end of 1994.
“The State Bank of Vietnam will take necessary action to maintain the dong at this rate,” the bank said in a statement on its website.
Following the central bank’s decision, local banks started adjusting their foreign exchange rates.
The dong was quoted at 17,260/17,400 per dollar on Vietcombank’s website Thursday afternoon, up from 16,985/16,989 Wednesday.
The dong traded at 17,200 to 17,300 a dollar at Vietinbank, or Vietnam Bank for Industry and Trade.
At moneychangers’ in Hanoi, or the so-called black market, the currency traded at between 17,230 and 17,520, local newswire VnExpress reported.
Commercial banks said their dollar supply has fallen since moneychangers offer higher rates for the greenback.
Nguyen Phuoc Thanh, general director of Vietcombank, the country’s largest lender, said dollar banks’ inflows have tumbled since export earnings are down as are remittances, foreign portfolio investment and tourism arrivals.
He admitted that the dollar is being traded at much higher prices on the black market than at banks, who are unable to attract sellers despite fixing the buying price at the allowed ceiling rate.
Meanwhile, the plunge in global prices has boosted imports, according to Thanh.
Nguyen Duc Vinh, chief executive officer of the Hanoi-based Technological and Commercial Joint Stock Bank, or Techcombank, said after the banks’ recent cuts in lending rates and extension of loans, more import contracts are being signed, keeping demand for the dollar high.
A HCMC-based footwear company said it had failed to buy US$50,000 to pay for imported consignments despite continuously contacting banks for the past week.
While commercial banks do not have enough dollars for selling to businesses, they have a surplus of dollars set aside for lending after some of their customers failed to prove they could raise dollars for repayment.
Bui Thi Mai, general director of the Hanoi Building Bank, or Habubank, said, as a result, though banks are unable to find customers for dollar loans, they remain cautious.
“If there is an assurance that the exchange will be stable at a certain level, businesses and banks can calculate their risks and the dollar supply will increase since speculation will reduce,” she explained.
Trade deficit widens, inflation slows
Vietnam’s trade deficit widened to a record $17 billion in 2008, from $14.1 billion last year, according to preliminary figures provided by the government Thursday.
The current account deficit may grow to $12.1 billion, or 12.3 percent of GDP, next year from an estimated 11.7 percent this year, according to a Credit Suisse Group research report dated December 17.
“The dong is facing downward pressure due to the current-account deficit,” said Yuichi Izumi, an economist at Nomura Securities Co. in Tokyo. “The State Bank wants to guide the dong lower to support exports.”
A slowdown in the rise of consumer prices may have provided more room for the central bank to weaken the dong.
Consumer prices are estimated to fall 0.68 percent this month from November, only the third decline since March 2007, on the back of lower food and fuel prices, according to figures released by the General Statistics Office Thursday.
Consumer prices rose 19.9 percent in December from a year earlier. The annual inflation rate was 24.2 percent in November after reaching 28.3 percent in August, the highest since at least 1992.
Overall, food and beverage prices, which account for nearly 43 percent of the goods basket used to calculate the consumer price index, fell 0.13 percent in December, with grain prices declining 2.36 percent.
Prices in the category including transportation fell 6.77 percent from November, according to the statistics office report.
Plummeting world oil prices have led to a sharp cut in retail prices for gasoline.
The government has cut petrol prices twice this month, adding to a series of reductions since August that have left the most commonly used grade of gasoline 42 percent cheaper from its peak last July.
Prices in the category including construction materials declined 2.36 percent month-on-month, the office said.
Domestic steel companies are facing difficulties due to slowing demand, with the government using higher import tariffs to allow producers to clear stockpiles, the Vietnam Steel Association said last week.
Property projects are short on working capital, economist Scott Robertson of the HCMC-based Dragon Capital wrote in a note last week.
Slowing inflation has allowed the central bank to cut its benchmark interest rate by 5.5 percent since October to 8.5 percent now.
“The government’s cooling measures were perhaps too successful,” Joseph Lau, a Hong Kong -based economist at Credit Suisse Group AG, wrote in a note dated December 17. “Domestic demand is reportedly waning.”
But consumer prices are expected to increase in January, when demand surges during the Lunar New Year festival (Tet) late next month, economist Le Dang Doanh told Thanh Nien Daily Thursday.
The consumer price index (CPI) is estimated to have risen 22.97 percent this year, down from the government’s initial forecast of 24 percent.
“Decelerating inflation is a good sign, but the economy still shows worrying signs, as the trade deficit is high and government revenues are down due to decreasing prices of some major export items like rice, rubber and crude oil,” he said.
The government may keep the inflation rate down to a single-digit level in 2009, but it has to assign top priority to combating an economic slowdown, Doanh said.
“With commodity prices falling, headline inflation is expected to drop to single digits by end-2009, although core inflation (excluding raw food and energy) could fall more gradually,” Ben Bingham, Senior Resident Representative of the International Monetary Fund, said in a statement December 18.
Reported by Thanh Nien staff (With inputs from Bloomberg)