Illustrative image (Photo: cafef.vn)Hanoi (VNS/VNA) – The Government will have to decide either to devaluethe Vietnamese dong further against the US dollar to support exports andavoid cheaper Chinese goods to flood in the local market, or keep the USD/VNDexchange rate stable to avoid increased public debt and control inflation asthe US-China trade war accelerates.
As the trade war escalates, China has weakened its currency to boost exports,making its goods even cheaper in Vietnam.
Banking expert Nguyen Tri Hieu said while the Chinese yuan had lost 4 percentagainst the dollar since the beginning of this year, the dong had devalued byonly 1.5 percent against the dollar. The dong had also appreciated by some 1.8percent against the yuan to date this year.
The moves made Chinese imports much cheaper, Hieu said, adding that Vietnam hadto balance between controlling the trade deficit and being able to compete withcheaper Chinese goods in the market.
Hieu said the Government should remain cautious as the yuan could fall evenfurther.
According to Hieu, China has set the yuan’s foreign exchange rate at 6.95 perdollar, but around two years ago, that number was even lower at 6.69 perdollar, so there was potential for the yuan to slip further.
At this moment, Hieu said, a further devaluation of the dong was not necessary.However, if the trade war continued, the dong should be devalued by another 1.5percent this year to offset the devaluation of the yuan against the dollar.
A further devaluation of the dong would support Vietnam’s exports and preventChinese products from flooding the country like in 2015 when the yuan devaluedsharply against the dollar, Hieu said.
[Vietnam will overcome US-China trade war influences: Minister]
However, he also said a sharp devaluation of the dong could also cause arise in Vietnam’s public debts and inflation. He explained that more than halfof the nation’s debts were in dollar.
Nguyen Duc Thanh, Director of the Vietnam Institute for Economic and PolicyResearch (VEPR), also said that Vietnam should develop a policy to devalue the dongagainst the dollar at a moderate level to import cheap raw materials to improvethe production status in the context of the US-China trade war and thedevaluation of the yuan.
According to Thanh, Vietnam imports raw materials from China to process andexport, and the adjustment of the exchange rate will benefit importers from andexporters to the US. Taking advantage of the two big markets can improveproduction and the trade balance.
The US and China are Vietnam’s two most important trade partners. China is thelargest import market with turnover of 31.1 billion USD, with key commoditiesincluding fabric, phones and accessories and accounting for one fourth of totalimport turnover. China has replaced the Republic of Korea as Vietnam’s biggesttrade partner.
In terms of exports, the US is Vietnam’s largest market with export turnover of21.5 billion USD in the first half of 2018, increasing 9.2 percent compared tothe same period in 2017 and accounting for one fifth of Vietnam’s total exportturnover.
According to Thanh, when the yuan fell sharply and the dollar showed signs ofprice appreciation, Vietnam’s trade balance was greatly impacted due to cheapChinese goods flowing into the domestic market.
“The exchange rate will still suffer from pressure in the context ofinternational financial markets showing concerns about the escalation of theUS-China trade war. Vietnam should develop a policy to devalue the dong againstthe dollar at a sensible rate, and lower than the devaluation of the yuanagainst the dollar to benefit and improve production,” Thanh recommended.
Economist Ngo Tri Long, former director of the Market Price Research Instituteunder the Ministry of Finance, said that the central bank should adjust theexchange rate based on the market and not the yuan.
Long said adjusting the dong’s value at the moment was a risky move.
It would be hard to achieve the nation’s target of keeping inflation below 4percent this year, not to mention other factors such as higher oil prices andnatural disasters, Long said.
If Vietnam decided to move forward with devaluing the dong, the adjustmentsshould be based on market demand and not on the yuan’s value, Long said, addingthat a 2 percent drop would better match current market conditions.-VNS/VNA
VNA
