Vietnam Faces `Currency Crisis,’ Morgan Stanley Says

 

It seems the unrelenting worldwide inflationary pressure is creating an economic crisis in Vietnam. Property prices are falling. There is a strong demand for US$ there, as people are expecting the Dong to devalue sharply. 

 

Will other Asian countries experience the same kind of situation too ? I think it is time that Asian countries, particularly China and Japan be involved in giving assistance to stabilise the economy. There is already a commitment made by Asean plus 3 countries (i.e. Asean, China, Japan and South Korea ) to provide a US$80 billion fund to be used as emergency amongst the countries in case of  economic crisis ).

 

 

By Patricia Lui

 

May 28 (Bloomberg) — Vietnam is heading for a “currency crisis,” similar to that of Thailand’s baht in 1997, because the central bank has kept the dong too strong as inflation soars and the trade deficit widens, said Morgan Stanley.

 

Twelve-month non-deliverable forwards show traders are betting the currency will drop 39 percent against the dollar in the next year. Vietnam’s current-account deficit, foreign- exchange reserves and inflation are at levels “misaligned” with the dong, wrote Stewart Newnham, a Hong Kong-based analyst at the bank, in a research note today.

 

“There is a run on the dong,” wrote Newnham. “Many of the classic fundamental conditions are in place including an overvalued currency, a dangerously unbalanced economy and low foreign-exchange reserves.”

 

The dong was at 16,229 per dollar as of 5:40 p.m. in Hanoi, down 1.3 percent this year. The State Bank of Vietnam sets a daily reference rate, and the currency is allowed to trade 1 percent either side of it. The 12-month non-deliverable forward contract has slipped 22 percent this week to 22,550 per dollar.

 

Nguyen Van Giau, the governor of the State Bank of Vietnam, declined to comment today on the Morgan Stanley report when contacted by Bloomberg.

 

The central bank said yesterday it has the ability to ensure an orderly exchange rate, Nguyen Quang Huy, director of the banking-management department, said in a statement on the bank’s Web site. Demand for U.S. dollar is accelerating, caused by Vietnam’s highest inflation since 1992, Huy said.

 

The government plans to continue carrying out a “stable exchange rate policy” within a trading band, Huy said, reiterating existing policy.

 

Asian Financial Crisis

 

Even so, Newnham says the dong may be devalued similar to the baht in 1997 when Thailand’s currency was devalued 45 percent against the dollar as speculators betted it was overvalued. The devaluation touched off an unprecedented financial crisis in the region as funds fled on risk aversion.

 

Vietnam’s non-performing loans are likely to rise as property prices fall, said Newnham. The nation’s benchmark Ho Chi Minh stock index has slumped 55 percent this year.

 

“The dong could face similar downside risks,” said Newnham. “A devaluation episode could trigger a contagion throughout the region.”

 

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net

 

Last Updated: May 28, 2008 06:45 EDT

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About kchew

an occasional culturalist
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