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| • EXCH RATES |
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Baht/$ 33.18/21
Bid/Ask
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GOLD |
13,650
- 100
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ASIA FOCUS
Runaway inflation is threatening to unravel a currency crisis, compiled by Post Reporters and Agencies
The bubble in Vietnam has been threatening to burst since Morgan Stanley issued a report late last month that it foresaw an economic crash, sooner or later, similar to what Thailand experienced in 1997.
That was the starting point for a series of revised projections by major brokers and investment banks, which eventually led to a slight devaluation of the Vietnamese dong.
Bloomberg reported that economists believe Hanoi may speed up the pace of the dong's decline to prevent the currency from becoming "excessively overvalued" because of soaring inflation, according to Goldman Sachs.
Deutsche Bank predicted the currency would weaken as much as 30% in the coming months, extending this year's 1.5% loss. Consumer prices have risen at the fastest pace in 16 years while the trade deficit has tripled in the four months through April on surging import costs. Forward contracts show traders are betting the currency will slump 26% in 12 months.
"They will be in more trouble" if Hanoi does not consider speeding up the pace of the dong's decline, said Helen Qiao, a Hong Kong-based economist at Goldman.
Deutsche Bank's Singapore-based analyst Hak-Bin Chua echoed Morgan Stanley's forecast of an impending "currency crisis".
"An IMF-style programme will be needed in coming months," Chua wrote in a report. "This will involve further monetary tightening, sizeable dong devaluation, nationalising insolvent banks and establishing an asset management entity to carve out bad loans."
Goldman's Ms Qiao declined to give a forecast for the currency's accelerated pace of declines, and said Goldman was keeping to its forecast set in May for the dong to trade at 16,220, 16,260 and 16,400 to the dollar for three, six and 12 months respectively.
Meanwhile, Moody's Investors Service has changed to negative from positive its outlook on Vietnam's key ratings owing to policy shortcomings in addressing inflationary and balance-of-payments pressures. The changed outlooks are for the Ba3 long-term government foreign- and local-currency ratings and the B1 foreign-currency bank deposit ceiling.
"The economic imbalances now emerging are greater than anticipated, thereby derailing the improving trend previously evident in the country's credit fundamentals," wrote Tom Byrne, a Moody's senior vice-president.
"Rising inflation is proving very difficult to control, and pressures have rapidly built up on the balance of payments."
Moody's further notes the government is facing greater-than-expected difficulty in ratcheting down inflation because overheated growth - due to excessive credit expansion and large "off-budget" development spending, and not just rising commodity prices - is also a contributing factor.
"For the authorities, the dilemma now is how to dampen growth without throwing the economy into recession or damaging the environment for FDI," said Mr Byrne.
He said that although Vietnam's apparently high level of official foreign exchange reserves provided a buffer to the abrupt shift in foreign portfolio investor sentiment, surging trade and current account deficits threaten to overwhelm the availability of more stable, long-term financing for the balance of payments, and may put substantial pressure on reserves and the exchange rate.
Moody's estimated that overall export growth actually accelerated to 28% in the first four months of 2008, in spite of the slowdown in the US, the largest market of Vietnam.
Meanwhile, FDI amounted to more than 9% of GDP in 2007, essentially financing the country's current account deficit of that year. From January to May this year, licensed approvals for investments more than doubled to $15 billion, but realised inflows lagged the sharper rise in the trade and current account deficits in the first quarter.
Despite the gloom, Mr Byrne says that in some respects Vietnam's credit fundamentals still compare favourably with those of other rated peers, and its long-term prospects will be favourable, if a stronger policy framework is put into place.
Conversely, he said, although ratings in the Ba category did not suggest any imminent debt repayment concerns, the persistence of very high inflation and large current account deficits may overwhelm Vietnam's shock-absorption capacity, and could add to downward pressure on the government's rating.
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