Thai companies are expected to experience a limited impact from yesterday’s further devaluation of the dong, which is aimed at easing Vietnam’s current-account deficit rather than boosting the country’s export competitiveness.
Bank of Thailand Deputy Governor Bandid Nijathaworn said any increase in Vietnamese manufacturers’ export competitiveness from the devaluation would be offset by higher inflation.
Vietnamese production costs are higher than those in Thailand, given January’s inflation rate of 7.62 per cent against 4.1 per cent in the Kingdom.
“The January inflation figure indicates that their production costs are higher than Thailand’s,” he said.
Responding to exporters’ requests for the Bank of Thailand to intervene to weaken the baht against the US dollar, he said that before making any move, the bank had to take many issues into consideration, particularly economic stability and inflation.
“In any action we take, we need to balance inflation and economic recovery. The economy is picking up and we need to see if the recovery is sustainable,” Bandid said.
Vietnam yesterday surprised the market with its second devaluation in three months amid widespread concerns over a high trade deficit and inflation.
The average interbank rate yesterday was 18,544 dong per US dollar, against 17,941 the previous day, a fall of 3.4 per cent, the State Bank of Vietnam said.
The country’s central bank said the decision had been taken to balance supply and demand, as well as to increase flows in the foreign-exchange market “while contributing to controlling the trade deficit and stabilising the macroeconomy”.
In November, Vietnam effectively devalued the dong by 5.4 per cent and reduced the trading band from 5 per cent.
Sethaput Suthiwart-Narueput, executive vice president and chief economist of Siam Commercial Bank, foresees a limited impact from the latest move due to the small overlapping export interests of Vietnam and Thailand.
For example, although both countries are key players in the textile industry, Thailand operates at the upper end and the weaker dong will not damage the Kingdom’s exports, he said.
“Foreign-exchange rates alone cannot determine competitiveness. We need to take into account Thai inflation, as well as the inflation rates in other countries. A currency can be weakened, but the benefit could then be offset by high inflation,” he added.
In the year to date, the dong has not appreciated against the US dollar, while the baht has gained 0.5 per cent. This week alone, the dong has depreciated 0.8 per cent against the greenback.
Bangkok Bank managing director Singh Tangtatsawad expects only a minor impact from the dong’s devaluation on the bank’s export clients, who are all fundamentally strong.
However, he said exporters as a whole needed to improve their production and service efficiency, particularly product quality, as they could no longer focus on price competitiveness alone.
Against the background of yesterday’s black-market rate of 19,500 dong per US dollar in Vietnam and the country’s trade deficit of US$12 billion (Bt398 billion) last year, Singapore-based DBS Group Research said further weakening towards 19,640 per greenback could be expected during the rest of the year.
Dong impact limited
Devaluation unlikely to hurt the baht
- Published: 12/02/2010 at 12:00 AM
- Newspaper section: Business
Vietnam’s decision to devalue the dong for the second time in three months is unlikely to have a major impact on the local baht, according to local analysts.
But exporters say the 3.4% devaluation against the US dollar, coming off a 5% devaluation three months ago, will only put further price pressure on Thai goods in the global market.
The State Bank of Vietnam (SBV) yesterday set its average interbank rate at 18,544 dong to the US dollar, compared with 17,941 the previous day.
The bank said the decision was taken to balance supply and demand, and increase flows in the foreign exchange market “while contributing to controlling the trade deficit and stabilising the macroeconomy”.
Vietnam’s trade deficit reached $12.2 billion last year.
The central bank maintained the 3% daily trading band for buying and selling US dollars by commercial banks.
Because the band remains unchanged, there was no official devaluation, a banker said, but in practice the new interbank rate means the dong loses value, “so we can say it’s a devaluation”.
In its order yesterday, the SBV also capped the interest rates for corporate dollar savings accounts at 1%, less than what lenders had been offering.
Devaluation, coupled with lower interest rates, aims to encourage businesses to sell dollars to banks, said the banker, who declined to be named.
“This (interbank) rate might be maintained in the next few months in order for the state to control the trade deficit,” she said.
Singapore-based DBS Group Research said yesterday’s move should not be seen as a surprise and was likely to be followed by more devaluation during the year.
“Under the circumstances, we remain comfortable with our end-2010 target of 19,640 [dong per US dollar],” DBS said.
The latest devaluation came during a period of high demand for cash before a week-long Lunar New Year holiday known as Tet.
In the Thai market, the baht was relatively stable, trading at 33.15/18 to the US dollar against 33.13/18 on Wednesday. The baht has appreciated by 2.5% against the dollar over the past six months, in line with regional currencies. Over the past month, the baht has weakened slightly, as investors have moved out of emerging markets and risky assets over concern about the global economic recovery.
Bandid Nijathaworn, a deputy governor of the Bank of Thailand, said the devaluation of the dong would not necessarily lead to an advantage for Vietnamese exporters considering the country’s higher inflation rate.
Consumer prices in Vietnam rose 7.62% year-on-year in January, compared with a 4.1% increase in Thailand’s consumer price index.
Pornsilp Patcharintanakul, deputy secretary-general of the Thai Chamber of Commerce, said Thai agricultural exports, particularly rice and seafood, would be most affected by the dong devaluation.
Thai exports are also facing more competitive pressure from other countries with relatively cheaper currencies, including China, India, Indonesia and Malaysia.
“[Thailand’s] export competitiveness has eroded as the baht has strengthened even as the Chinese yuan is pegged [to the dollar],” Mr Pornsilp said.
“The gap widened last year. The baht appreciated by 4% [to the dollar] last year, while the dong weakened by 5%.”
But Mr Pornsilp said he understood that the Bank of Thailand had only a limited capacity to intervene in the currency markets.
“The central bank has a burden to mop up liquidity from its foreign exchange transactions to help stem inflation. We hope the central bank is doing its best,” he said.
Thailand’s foreign reserves stood at $142.4 billion at the end of last month, compared with $111 billion at the end of 2008. Reserves have risen steadily as a result of central bank measures to ease baht appreciation due to trade surpluses and capital inflows.
Thanavath Phonvichai, director of the Economic and Business Forecasting Centre of the University of the Thai Chamber of Commerce (UTCC), said the dong devaluation would inevitably affect Thai exporters in a number of product categories.
He said the devaluation was not unexpected, given Vietnam’s fundamental economic troubles.
According to the UTCC, low-priced goods would be most heavily affected, especially Thai rice, fishery products, garments and shoes.
Thailand’s exports to China, the US, Japan, and the EU, the markets where Vietnam also have significant market shares, would feel the pinch from the lower dong, the study says.