Vietnam’s central bank looks set to devalue the dong again after busting through its goal of limiting depreciation to 2 percent this year as China’s yuan weakened.
The State Bank of Vietnam doubled the amount the exchange rate can move either side of a daily fixing to 2 percent on Wednesday. The dong fell 0.9 percent against the dollar that day and 0.3 percent on Thursday, bringing losses to 3.2 percent for 2015. The yield on local-currency five-year sovereign bonds rose six basis points to 6.55 percent over the two days, as the step promised to boost the economy while stoking inflation.
“The stage is set for them to move,” said Fiachra MacCana, managing director at Ho Chi Minh Securities Corp. in the city. “Another 1 percent is very likely at some point before the end of the year, with a possibility of up to 2 percent.”
Prime Minister Nguyen Tan Dung is seeking to safeguard export growth, which slowed to 9.5 percent in the first seven months from 14 percent a year earlier. The central bank said at the end of last year it would aim for a gain or loss of no more than 2 percent in 2015.
The decline of the dong, which was little changed Friday, to 22,094 a dollar this year compares with drops of 13 percent for Malaysia’s ringgit and 10 percent for Indonesia’s rupiah. The Vietnamese monetary authority has devalued the dong twice in 2015 by weakening the reference rate in January and May by 1 percent each time. That followed cuts to the fixing of 1 percent each in 2014 and 2013.
Reviewing forecast
Australia & New Zealand Banking Group Ltd. has put its year-end dong forecast of 22,050 a dollar under review, according to a research note by analysts including Irene Cheung released Wednesday. A slightly larger devaluation, compared with recent years, may be needed to avoid depleting foreign-exchange reserves, ANZ said in the note.
The band widening is an efficient alternative to shifting the reference rate, according to Alan Pham, chief economist at VinaCapital Group, Vietnam’s biggest fund manager.
“The state bank is keen to keep its promise of not devaluing the dong by more than 2 percent this year,” he said. “Widening the band is an alternative,” said Pham, adding that the central bank could expand it again to 3 percent instead of a devaluation.
Vietnam’s U.S. currency bonds also slumped. The yield on sovereign dollar bonds due 2020 rose six basis points this week to 4.15 percent, data compiled by Bloomberg show, as the yuan fell 3 percent. A weaker dong will push up borrowing costs for a nation with a swelling budget deficit, and fiscal accounts that the World Bank describes as an emerging source of concern.
Funding costs
“The weaker yuan will certainly affect Vietnam’s U.S. dollar government bonds immediately,” said Barry Weisblatt, head of research at VPBank Securities Co. in Ho Chi Minh City. The instability “is creating a flight to safety that will drive up funding costs for all emerging-market governments. The effects on local-currency bonds should be more gradual,” he said, adding the five-year dong yield could rise as high as 6.8 percent.
The central bank will closely monitor movements in domestic and international markets as well as macroeconomic and monetary forecasts to manage policy appropriately, Deputy Governor Nguyen Thi Hong said in an interview published by the monetary authority on Thursday.
Vietnam, a net importer from China, will benefit from a weaker yuan on a bilateral basis, said Tamara Henderson, an economist with Bloomberg Intelligence in Singapore. It’s in third-party export markets that Chinese goods represent a threat, which explains the central bank’s action, she said.
Widening the band may boost market expectations for another dong devaluation, said Adam McCarty, the Hanoi-based chief economist at Mekong Economics.
“A devaluation would probably be good for Vietnam,” he said. “Time to bolster export competitiveness a bit.”