Vietnam devalues for third time this year

At the same time, the trading band was widened yet again to +/-3%, thus allowing the currency to now trade within a 21,233-22,547 range. This adjustment will further ease the pressure on the central bank to intervene in the currency market depleting the foreign reserves currently at US%37 billion.

The “double” policy move by the SBV on August 19 closely followed the band widening last week to 2% from 1%, in the wake of China’s yuan devaluation. Even in the absence of further policy adjustments in the rest of the year, the Vietnam Dong could depreciate by a maximum of 5.1% this year (4.5% year-to-date) vs annual depreciation of around 1.3% in the previous two years.

From an economic perspective, the Vietnamese Dong has been one of the more resilient currencies amidst the EM Asia currency downdraft of recent months.  Some re-alignment of the currency therefore seems warranted from a macro-balance perspective. Vietnam is not actively participating in a currency war or a race-to-the-bottom as some headlines may suggest.

Macro view

The latest USD/VND adjustment comes at a time when the current account is moving into a deficit in 2015. We have been expecting a deterioration of the current account, likely posting a deficit of 0.5% of GDP in 2015, and widening to 1% of GDP in 2016. The latest trade balance reported a ytd deficit of US$3.4 billion as of July. However, we note that the ytd surge in imports has been driven by capital equipment, which should support Vietnam’s ongoing transformation of its production possibility frontier.

The deterioration in current account needs not be painful if necessary adjustments to the exchange rate, like what we have seen today, are allowed to reflect the new reality in external payments.

Clearly, the economic target of maintaining 12 weeks of import cover is being actively pursued. According to SBV statements earlier this month, official foreign reserves stand at US$37 billion. Based on current import figures, we estimate that import cover is 11.7 weeks, marginally below the government’s target.

With the new law of allowing 100% foreign ownership in selected industries by September 2015, we continue to expect Vietnam to attract robust FDI flows and allow the overall balance of payment to remain at a sustainable level.

VND view

The policy action on August 19 is positive in its promptness in response to China’s devaluation. The timing was not a surprise to us but it did come through as more aggressive than what we had expected. We also think that as a pre-emptive move, the central bank may have taken into account a possible interest rate hike by the US Fed in September.

USD/VND is now trading at 22,408, 0.6% below the new upper bound of the daily band. We are in the process of reviewing our USD/Asia (including USD/VND) forecasts. At this point, we think that today’s moves will provide room for the VND to weaken further without putting pressure on the central bank to intervene. Whether this is sufficient room till year end remains to be seen.

Further policy action cannot be ruled out entirely, especially in the event of further sharp weakness of the CNY.

The move suggests to us that the SBV is proactive and will act if such a need arises.