Vietnam Dong Slumps to Record Low as Adviser Warns of ‘Shock’

Vietnam’s currency dropped for a fourth straight day to a record low after an adviser to the Prime Minister said the country risks a foreign-currency liquidity ‘shock.’

The warning came after the central bank yesterday devalued the currency for a third time in the past year to boost exports and shore up the nation’s trade deficit that has nearly doubled in the seven months through July. The currency has slumped 5.2 percent in 2010, the worst performance among 16 currencies in Asia monitored by Bloomberg. Forwards contracts signal traders are betting on an 8.5 percent drop in the coming year.

“The most significant macro financial risk that Vietnam may face is monetary risk,” Le Xuan Nghia, vice chairman of Vietnam’s National Financial Supervision Commission, said in Hanoi yesterday. “The current-account deficit is still high, while the exchange-rate mechanism is less flexible. If the country isn’t careful, it may have to cope with a shock of foreign-currency liquidity.”

The dong fell 0.9 percent, adding to yesterday’s 1.1 percent loss, to trade at 19,490 per dollar as of 2:35 p.m. in Hanoi, according to data compiled by Bloomberg. That was its weakest level since data began in 1993. The central bank kept the reference rate at 18,932 today, unchanged from yesterday.

Dong Forwards

Twelve-month non-deliverable dong forwards rose for the first time in four days, gaining 1 percent to 21,290.

In the so-called black market, the dong weakened to 19,510 as of 2:25 p.m., from 19,445 yesterday at money changers in Ho Chi Minh City, according to a telephone-information service run by the state-owned Vietnam Posts & Telecommunications.

Vietnam’s benchmark VN Index dropped 0.7 percent to close at 452.23, following a 1.7 percent slide yesterday. The index has dropped 8.4 percent this month, the most among 93 indexes tracked by Bloomberg globally.

The currency devaluation points to continued “challenges” and it’s too soon to turn positive on the world’s worst-performing stock market this month, Credit Suisse Group AG wrote in a report.

Trade Deficit

“Cyclically, Vietnam has yet to find the right balance between growth and macro stability,” Credit Suisse analysts Dan Fineman and Siriporn Sothikul wrote in a report. “Structurally, the lack of an independent central bank weakens confidence in the currency and leaves the country prone to overheated imports and inflation.”

Vietnam’s trade deficit widened to $1.15 billion in July from a revised $742 million in June. The gap was $7.4 billion in the first seven months of the year, almost twice the figure for the same period last year.

The State Bank of Vietnam said late on Aug. 17 that it would set the currency’s reference rate 2 percent lower, starting yesterday. It devalued the dong by about 3.3 percent in February and by 5 percent in November.

“Demand for foreign currency to use for payments is quite large from August to October,” said Lai Tat Ha, head of currency trading at Hanoi-based Vietnam Technological & Commercial Joint-Stock Bank. “The State Bank’s adjustment of the exchange rate has also affected sentiment, further boosting the dong-dollar rate.”

Benchmark government bonds were steady, with the yield on the five-year note at 10.65 percent from 10.64 percent yesterday, according to a daily fixing price from banks compiled by Bloomberg.

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