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19 May 2009

Vietnam seen allowing depreciation of dong to boost exports

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Vietnam is expected to allow a bigger depreciation in the dong in the second half of the year to support exports and help ease a domestic dollar shortage, Reuters quoted bankers as saying Monday.

The State Bank of Vietnam, the central bank, said last week it saw no reason for a big devaluation of the dong and forecast the currency would fall up to 6 percent against the dollar in 2009 as a whole.

But demand for dollars from importers and gold traders has recently jumped in Vietnam's unofficial markets, pushing the dollar to 18,250 dong, way above the official rate of 17,780 dong, ANZ bank said in its country report for May.

"In the coming weeks, the authorities are likely to sanction further weakening in the dong as a means of addressing an onshore dollar supply/demand imbalance," the report said, noting the central bank's denial of any dollar shortage.

"Something has to give, and we expect it to come in the form of a dong devaluation -- sooner, rather than later," it said.

ANZ forecast the dong, which has fallen 1.7 percent so far this year on the official market to around 17,783 per dollar, would drop another 5.7 percent to 18,800 dong by December. Last year, the dong slipped more than 8 percent.

A dealer at a foreign bank branch in Ho Chi Minh City forecast the currency would be even weaker by year-end, saying the dollar would hit 19,000 to 19,250 dong.

"The dong is expected to be adjusted once in June and again in September to fall to around 19,000 dong by the year end," he said, adding that banks had not been able to obtain enough dollars, partly because exporters' revenues have fallen.

Vietnamese exports in the first four months of this year edged down 0.1 percent to $18.64 billion from a year before as the global economic slowdown weighed on demand, and actual foreign direct investment dipped to $2.2 billion from $3.15 billion in the same period last year, government data shows.

In the money market, interest rates on the dong are expected to rise to towards the country's inflation rate, which reached an annual rate of 9.23 percent last month, bankers said.

Banks quoted 12-month deposit rates at 7.8-8.0 percent in recent days, up from 7.8-7.95 percent a week ago, while lending rates were unchanged at 8.5-10 percent, central bank reports said.

"Yields on the bond market could jump first to be on par with inflation, and dong interest rates will follow to be in double digits by the year-end," the Ho Chi Minh City-based dealer said.

One-year government bond yields edged up to 8.23 percent on Monday from 8.22 percent a week ago, according to Reuters data .

A government interest rate subsidy programme has had the effect of pushing banks' rates up, as banks had to raise dong deposit rates in order to get funds to meet increased loan demand, the ANZ report said.

The central bank said loans under the package totalled 291.89 trillion dong as of May 14, more than triple the 93 trillion dong at the end of February, the month the scheme started.

Rates on overnight dong loans rose to 5.84 percent on Monday from 5.58 percent last Friday on the interbank market, and the 12-month rate increased to 8.64 percent from 8.63 percent last Friday.




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