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NEWS UPDATES 27 November 2009

Cheaper Vietnam dong alarms rival exporters

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Vietnam's devaluation its currency raises tensions across Asia as the region's export-driven economies jostle for an edge amid a slow recovery in orders from the US and Europe, reported

Vietnam shaved 5 percent off the value of its currency, the dong, on Wednesday, its third devaluation since June 2008. It also increased interest rates by one percentage point, to 8 percent. The moves were driven primarily by domestic concerns, including a need to combat speculative pressure that has weighed on Vietnam's economy for more than a year.

The devaluation makes Vietnam's manufactured goods cheaper than those of many other Asian countries, improving its relative position in global trade. That puts Vietnam in the same camp as China, another country that has kept its currency weak compared with its neighbors, sparking complaints from manufacturers and leaders in the region who want China to let its currency, the yuan, rise.

Thai Finance Minister Korn Chatikavanij, whose country has spent at least $15 billion this year to slow the appreciation of its currency and keep it competitive with the yuan, said in a phone interview Wednesday that Thailand could see some "marginal impact" in low-margin export industries such as textiles after Vietnam's devaluation, but that he was hopeful the broader Thai economy wouldn't be buffeted too much.

Industry leaders, however, are worried. "The Thai baht is rising too quickly in comparison with some of our competitors, and we in the private sector are telling the government that it is rising too quickly -- but it seems they aren't doing anything," said Thamrong Tritiprasert, chairman of the footwear section of the Federation of Thai Industries, a trade association.

He said it wasn't just Thailand's shoe industry that would suffer because of Vietnam's devaluation, but potentially all industries. The two countries compete for markets for agricultural products such as rice.

Economists say Vietnam's move is unlikely to trigger copycat devaluations elsewhere. Vietnam's economy is relatively small, and most Asian countries are more concerned with currency policies in China -- a much bigger rival than Vietnam.

But Vietnam's actions matter a great deal in some industries, including textiles and agriculture, and could accelerate a longer-term shift of manufacturing to the country, which already has the advantage of a large and low-cost labor force. Vietnam's exports grew faster in percentage terms than other Asian economies' in recent years, and the country attracted more foreign direct investment in 2007 than its much-larger rival Thailand. It is among the world's top exporters of rice, coffee and shrimp.

Vietnam has economic problems, though, many of which contributed to the decision to devalue. In sharp contrast to many other emerging markets, whose currencies have gained value against the dollar this year, Vietnam continues to face severe downward pressure on its currency, in part because it is one of Asia's only economies with both a fiscal budget deficit and a current-account deficit.

Vietnam's problems stem from years of rapid expansion from 2000 to 2007, when gross domestic product grew an average of 7.5 percent a year, making the country a darling of global investors. Policy makers were unable to manage the massive inflows of capital, and inflation began, reaching a peak of 28 percent in August 2008 and threatening an economic crisis.

The global credit crunch helped to ease inflation by depressing oil and food prices. But it also knocked out much of the foreign direct investment on which Vietnam had come to depend, and exports slumped. The trade deficit ballooned, reaching $10.2 billion in the first 11 months of the year, while dollar sales aimed at stabilizing the dong shrunk foreign reserves. All that -- coupled with billions of dollars in spending on economic stimulus -- added to the pressure on the dong.

Wednesday's devaluation, in which the central bank lowered the midpoint of the dong's daily trading range 5.16 percent, was an attempt to help stabilise the situation. The accompanying one-percentage-point rise in interest rates, in effect Dec. 1, was designed to make sure there will be no further depreciation.

"This time our solution is to strongly intervene," State Bank of Vietnam Governor Nguyen Van Giau said. Many economists say they are skeptical that will be enough to halt the downward pressure on the dong. "The authorities are buying themselves some time with this move," says Tim Condon, head of Asian research at ING in Singapore.

But Vietnam needs the global recovery to pick up steam to boost exports and reduce the country's trade and balance-of-payments deficits before the situation can be remedied, he and others say.

Growth is still relatively strong in Vietnam, though, and the lower currency values could give a further shot to exporters. The World Bank expects Vietnam's GDP to climb 5.5 percent this year, compared with 6.2 percent in 2008.


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