Devaluation Of The Dong Puts Pressure On Thai Exporters

[webfact]

WATCHDOG

Devaluation of the dong puts pressure on Thai exporters

By Nophakhun Limsamarnphun

Running counter to the regional trend of monetary policy tightening to curb inflation and strengthening currencies, Vietnam this week decided to devalue the dong for the fourth time in 15 months.

The official exchange rate is now about 20,800 dong per dollar, up 7 per cent from the previous 19,400 dong. Yet, the dong is weaker on the black market, trading at around 21,300 dong per dollar, reflecting a lack of confidence despite the latest official devaluation.

On one hand the devaluation makes Vietnam's exports cheaper in the international market. This will hurt Thai exports as some Thai and Vietnamese products are similar - such as rice and certain low-end manufactured goods. On the other hand, the devaluation will worsen inflation, which has long been a significant issue as far as Vietnam's economic stability is concerned.

By further devaluaing the dong, Vietnam risks runaway inflation, especially amid the rising global inflationary pressures caused by the dollar's weakness and commodity speculation.

In response to this trend, China's central bank earlier last week raised its lending and deposit interest rates by another 25 basis points to 6.06 per cent and 3 per cent, respectively.

The Chinese authorities said the rate hike was necessary to tame inflation and reduce liquidity in the banking system. China's inflation rate was 5.1 per cent in November 2010 and 4.6 per cent in December 2010.

The Chinese are especially concerned about the rising prices of food items and agricultural products on the world market. They chose to tighten the monetary policy further, via rate hikes to rein in inflation. At the least, further rate increases of another 50 basis points are expected toward the end of this year. The Bank of Thailand is also expected to further increase its benchmark interest rate at the next meeting of the Monetary Policy Committee (MPC) on March 9.

At the last meeting in Janauary, the policy rate was raised 25 basis points to 2.25 per cent, as headline inflation was around 3 per cent. It is expected that the Thai central bank will increase interest rates a few times this year to bring the benchmark rate to around 3 per cent.

Last week, the swap rate jumped to 2.115 per cent, the highest in 19 months, underlining the market's expectation that there will be a further rate hike at the next MPC meeting.

However, the macro-economic situation in Vietnam appears to be rather different from that of Thailand or China, so Thailand's neighbour prefers to boost exports in the hope of remedying its problems.

Besides high inflation, Vietnam is also facing a dwindling foreign exchange reserve, which dropped to only US$13.6 billion at the end of December. In fact, Vietnam hopes that a weaker dong will bring in more hard currency and help narrow its trade deficit, even though the move may hurt the domestic economy as imports will become more expensive.

For Thai exporters, the fourth devaluation of the dong in the past 15 months is a renewed challenge, as most have been able to cope with the situation after previous devaluations.

However, this time the 7 per cent devaluation is bigger than before.

-- The Nation 2011-02-12

[yellow1red1]

devalued - up 7%

???

can buy them at a bank for 20.8

then sell them on the 'black market' for 21.3

???

Edited February 12, 2011 by yellow1red1

[webfact]

BOT: Vietnamese dong devaluation slightly affects Thailand’s exports

BANGKOK, Feb 12 -- Thailand’s exports, which compete with neighbor Vietnam, will be affected slightly following a currency devaluation by Hanoi in a move to tackle its huge trade deficit and high inflation, said Prasarn Trairatvorakul, governor of the Bank of Thailand (BOT).

Mr Prasarn said Thailand currently exported about 3 per cent out of the total exports to Vietnam and enjoyed a trade surplus of US$4.5 billion last year.

Thai exports compete with Vietnamese products in the global market for rice, clothing, furniture, shoes, and toys, he said, adding that this country’s exports would be affected slightly as most Thai exporters have switched to using innovative technologies.

Only 6 per cent out of the total Thai exports are competing against Vietnam’s exports in the world market, Mr Prasarn said.

Thailand is now the world’s largest rice exporter followed by Vietnam, and is not expected to be hurt much after the devaluation of the dong because consumer products are now the seller market while demand and consumption of these products are on the rise, notably among emerging economies and it is believed that both countries could strike a bargain with buyers.

The State Bank of Vietnam on Friday devalued the dong with the average interbank exchange rate adjusted by 9.3 per cent to 20,693 dong against the dollar, compared with 18,932 dong previously. Vietnam’s previous devaluation by 2.1 per cent was made last August.

Friday’s devaluation came after the ruling Communist Party last month set an economic framework for the coming years as its leaders noted a need to stabilise the macroeconomy.

Songtham Pinto, director of the BOT Macroeconomics Office, noted that Thailand’s exports would be hit marginally after the dong devaluation, as the kingdom has now switched to export more hi-tech products including hard-disc drives, electrical appliances, chemical products and automobiles unlike before when the country relied on exporting agricultural products more heavily.

Mathee Supapongse, senior director of BoT’s Domestic Economy Department, said Vietnam probably wanted to strengthen its export competitiveness by devaluing its currency and to offset its rising inflation as well. But Vietnam cannot use the same method in the future as it would push inflation higher and lower the country’s competitiveness. (MCOT online news)

-- TNA 2011-02-12

[MaiChai]

Thailand needs to be more proactive managing its economy like the Vietnamese. They have been sitting on the fence too long regarding the strength of the Baht. I know its weakened a bit recently, however if Thailand wants to remain competitive their exports need to be competitive, and that needs a better exchange rate. Vietnam's economy is storming ahead.

[stickyrice2000]

It's inflation around the world. I will buy any cheaper products with reasonable quality right now because my salary does not increase with the prices of the foods.

[modafinil]

The dong had been rising against the poon for too long in my opinion, is it any wonder that the Vietnamese want to use their dong overseas to penetrate new markets?

[RKASA]

The dong had been rising against the poon for too long in my opinion, is it any wonder that the Vietnamese want to use their dong overseas to penetrate new markets?

Yes, but how to do it with a soft Dong is the issue.

[baboon]

The dong had been rising against the poon for too long in my opinion, is it any wonder that the Vietnamese want to use their dong overseas to penetrate new markets?

Yes, but how to do it with a soft Dong is the issue.

Yes. I see a promising start quickly followed by an embarrassing flop,leading to a great deal of frustration.

[jombom]

It would be nice if someone told the Vietnamese.

The street rate in Saigon has been much the same all week, at around 21,000 Dong per USD. If anything it reduced today to 20,600, and I even saw 20,3000 quoted.

As far as I can see, nobody uses the official rate, except the banks, when they do the usual rip-off of their customers. Obviously nobody here talks about bahts.

[kuffki]

It would be nice if someone told the Vietnamese.

The street rate in Saigon has been much the same all week, at around 21,000 Dong per USD. If anything it reduced today to 20,600, and I even saw 20,3000 quoted.

As far as I can see, nobody uses the official rate, except the banks, when they do the usual rip-off of their customers. Obviously nobody here talks about bahts.

The move is aimed at the big boys not the small 20 piece seller.

If currency is cheaper, the bank rate, more investment comes in and big boys like car manufactures or electronics start to consider the move, because they do not do exchanges on the street.

Also the street vendor may well be aware but if he/she to make more money without any effort, why pass on the rate?

[Puccini]

I wonder what the lowest denomination Dong bank note is. It may cheaper to use these bank notes than regular wallpaper to cover a wall.

[darhut]

The dong had been rising against the poon for too long in my opinion, is it any wonder that the Vietnamese want to use their dong overseas to penetrate new markets?

Yes, but how to do it with a soft Dong is the issue.

Yes. I see a promising start quickly followed by an embarrassing flop,leading to a great deal of frustration.

I think that by weakening the dong their ultimate goal is to break into the pharmaceutical industry and eventually the country will ride on the back of the new "vietagra".

Maybe some other industry will pop up?

[asiawatcher]

I love the use of the word 'hard currency'. No such thing. It is all worthless and paper only and no backing or strength. The difference between the 100 dollar bill and the 1 dollar bill is two zero's and it is all just paper. I would doubt the ability of the US to maintain this fiat currency scam much longer so VN gaining 'hard currency' for its reserves would mean when (not if) it all tanks - a wheel barrow of Dong or USD will only buy a coffee. However - the world continues to believe the lies and thinks paper has value. Time will tell ...