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NEWS UPDATES 28 November 2009

Vietnam: Devaluation effect on economy yet to be seen

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Battling to contain inflation and bolster its trade, Vietnam had to devalue its currency after burning through reserves to defend the dong, but analysts say the economy is not out of the woods yet, AFP reported.

The State Bank of Vietnam (SBV) on Wednesday said that effective December 1, it was hiking interest rates by a full percentage point to 8.0 percent after inflation surged at the fastest pace in six months in November.

The communist-ruled country's central bank also reset the interbank exchange rate at a midpoint of 17,961 dong to one US dollar as of Thursday. That was compared to 17,034 on Wednesday -- a devaluation of 5.4 percent.

The step came despite assurances from Vietnamese leaders that no devaluation was on the horizon. Patrick Bennett, currency analyst at Societe Generale in Hong Kong, said it was "an appropriate response" to the dong's woes.

"A weaker dong will help exports to recover," he said, while cautioning: "There is certainly still pressure on the currency." SBV Governor Nguyen Van Giau Thursday ordered companies to sell US dollars to state banks, in an indication that official reserves are depleted after months of intervention to prop up the beleaguered dong.

Vietnamese firms are estimated to be holding around $10.3 billion, and analysts say that foreign exchange reserves have fallen from about $22 billion at the start of the year to $16.5 billion now.

"In the (currency) black market, the heat has gone down a bit. But whether the move by the SBV will really work, no one can say right now as it's too early," said one Vietnamese banker who declined to be named.

Vietnam is targeting economic growth of around five percent this year, which would be the worst performance in a decade. The country is lagging other Asian nations' rapid recovery from the global financial crisis.

The government is also aiming to limit inflation to 7.0 percent this year, after consumer prices surged by 23 percent in 2008. Vietnamese share prices dropped 4.1 percent Thursday, hurt by doubts over government policy following the devaluation, according to economist Vuong Quan Hoang of the Hanoi-based Center Emile Bernheim.

He said that "many players aren't sure what's next, so they are hesitant to put more money into stocks now". Vietnam has already seen a precipitous drop in foreign direct investment.

At about $19.7 billion from January to November, the total was barely a quarter of the amount registered over the same period of 2008. And with the trade deficit running at more than $10 billion over the 11 months, analysts said Vietnam was under far more pressure than other Asian countries that have weathered the economic crisis reasonably well.


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