Devalued dong offers leg up to Vietnam's exporters

“The trade deficit was recorded at US$3 billion for the first four months of the year and inflation is currently around 1%. It is possible that the central bank has taken this opportunity to adjust the forex rate to partially support exports and the balance of trade in the future,” commented Ngo Dang Khoa, head of trading at HSBC (Vietnam), on the State Bank’s (SBV) move on the dong’s devaluation.

According to Khoa, the dollar’s rally against most major currencies and the country’s trade deficit in the first four months of the year had raised expectations on the SBV’s forex rate adjustment during the last couple of months.

Economist Nguyen Tri Hieu also stressed that the devaluation of the dong would benefit exports.

“Devaluing the dong by 1% could make Vietnam’s exported products more competitive, while importers would have to be watchful on their import orders,” said Hieu.

Government data shows the country’s exports have only risen some 8%, a record low for the first four months period in the last five years, and the trade deficit has been recorded at US$3billion in the first four months of the year. Vietnam therefore needs the boost in the forex rate to enhance its export competitiveness and economic growth.

“Rasing the forex rate could bolster exports up as the value of exports has only crept up 8% in the four months through April, a much lower growth rate compared to the same period last year,” noted BIDV’s deputy general director Can Van Luc.

However, according to Luc, while Vietnam exports a great deal of commodities, it also relies heavily on imports. In particular, the imported materials used in making export goods currently accounts for up to 70% of total materials. As such, if the country wants to strengthen its exports, it will also boost its imports as a matter of course.

“While the dong depreciation has a positive impact on exports, it will also hurt imports. Due to this two-way interaction, the strengthened forex rate will not have too much of an impact on the overall balance of trade,” added Luc.

Meanwhile, Singapore-based ANZ economist for ASEAN & Pacific Eugenia Victorino said: “We expect the latest one per cent devaluation in the US$/VND rate to have a limited impact on exports and imports in the short-term”.

According to Victorinio, the planned forex adjustment had been communicated by the central bank, thus allowing market participants to anticipate the move. In the longer-term, import growth should be eased, which in turn would allow the total trade to remain sustainable and in a narrow band of deficit.

“In the medium-term, we expect import growth to ease as imports are now relatively more expensive. However, the sustained rise of disbursed foreign direct investment (FDI) implies that imports will likely remain strong as Vietnam builds up its productive capacity. The robust demand for exports requires imports as inputs,” Victorino told VIR.

Despite the two per cent devaluation of the dong from the beginning of the year, the depreciation in the spot rate has been less than 1.4%, according to Victorino. Therefore, even with the currency adjustments, the dong is still trading in line with its regional peers.

This year, Vietnam will strive to achieve a 10% increase in exports in order to support its economic growth target of 6.2%, raised from last year’s rate of 5.98%. The impact of the dong devaluation in exports might not be huge, but the export sector still has reason to be happy, as Vietnamese-made products become relatively less experience and can successfully compete with its regional competitors.