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Vietnam urged to remain cautious about depreciating VND
Ngoc Thuy 17:12, 2018/07/26
Exchange rate management should be considered as part of a broader policy to increase the resilience of the economy and stabilize macroeconomic condition.
Vietnam should refrain from devaluating its currency, the dong, at this moment in the context of high volatility of the world's major currencies, according to the Central Institute for Economic Management (CIEM).
 
Illustration photo.
Illustration photo.
Caution is a must

Previously, the growing trade tension between China and the US has led some to suggest depreciating the VND. 

"People favoring the weakening the USD/VND rate just look at Chinese yuan (CNY)'s devaluation as a separate fact, but do not take into account trade activities and forex markets," stated the CIEM's quarterly economic report. 

Nguyen Anh Duong, head of CIEM's Macroeconomic Policy Department, said it is an inappropiate approach to depend solely on currency depreciation to cushion negative impacts on trade. 

Moreover, uncertainties surrounding trade stem from internal problems of the Chinese and the US economies, which could not be solved in the short term, Duong added. 

"We cannot use monetary measures to deal with problems of the real economy for long-term gains, while it is the supply side that should provide an answer," he continued. 

In most cases, the exchange rate was excessively adjusted before coming back to normal. Therefore, exchange rate adjustment in response to CNY's volatility could pose potential risks to monetary policies and exchange rate management. 

Under this circumstance, investors often overreact, while USD-denominated assets are considered the safest, placing more pressure on the VND to depreciate. 

"In Vietnam, recommendations on adjusting exchange rate should take investors' sentiment into consideration," Duong added. 

The benchmark USD/VND exchange rate, which is set daily by the Vietnamese central bank, tended to rise in the second quarter, by 0.25%, 0.36% and 0.24% in April, May and June compared to their respective previous month, respectively. Overall, in the April - June period, the rate increased by 0.85% compared to the end of the first quarter and went up 1% over the end of 2017. 

Since the end of May, the gap between the USD selling price in the free market and of the inter-bank exchange rate has been widening, reaching a peak of VND210. 

Meanwhile, the spread between the inter-bank exchange rate and the central rate remains insignificant and 3% lower than the ceiling rate. 

According to the report, adjustments to the benchmark exchange rate have provided flexibility to exchange rates in the foreign currency market. 

Theory is not everything

Devaluating the domestic currency is often seen as measure to make a country's exports more competitive. However, in Vietnam's case, "this poses a real challenge," said Nguyen Dinh Cung, director of CIEM. 

Since 1994, China has been successful in making its exports competitive. China's real effective exchange rate (REER) increased by 101.4% from 1994 to May 2015, indicating Chinese goods being cheaper compared to others, while the CNY appreciated by 42.2% against the USD in the same period. 

Notably, the VND depreciated by 49.9% against the USD during this period, while Vietnamese goods were 27% more expensive than others, according to CIEM.

At present, Vietnamese export products are heavily dependent on Chinese input materials, thus, a devaluation of the CNY will benefit Vietnamese enterprises. 

As goods prices in the world market are increasing, depreciating the VND by 2 - 3% may cause Vietnam to face a situation of imported inflation in parallel with downside risks to economic growth.
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