How Does the Devaluation in US Dollars Affect VN’s Economy?

The ongoing decrease in the exchange rate between the Vietnamese dong (VND) against the US dollar is worrying thousands of exporters.  Dr. Tran Hoang Ngan of the HCMC University of Economics spoke about how the depreciation in the US currency will affect the national economy.

Reporter: Many economists have thought that the value of the Vietnamese currency had been fixed much higher than the US dollar. This trend is now changing. Can you explain why?

Dr. Tran Hoang Ngan: A few years ago, economists forecast that the exchange rate of VND against the US dollar would climb to VND17,000/US$1 or maybe even  to VND18,000/US$1.

This forecast had been given in the context of Viet Nam needing foreign currency as its foreign investment activities were not effective and export activities faced with an excess of import over export. This resulted in a situation where the demand for US dollars was much higher than the supply. That is why the VN dong was devalued against the US dollar at the time.

Due to the decline in purchase power on the US markets, many export companies in VN will be vulnerable to huge losses if they don’t take initiative in finding markets other than the US one for their exported products

At present, the US dollar is facing two problems impacting on its value against the Vietnamese currency.  Firstly, the foreign investment in the country has increased sharply and is expected to attract approximately US$20 billion in 2008.
              
Secondly, the American economy is now in recession and the Federal Reserve Bank of the US (FED) will have little choice but to repeatedly cut down the interest rate of the US dollar in a bid to improve the situation.

These two afore mentioned factors will no doubt devalue the US dollar against a number of other hard currencies in the world. This will result in the continued decrease in the exchange rate between the VND and the US dollar in the coming future.

In what way does the devaluation of the US dollar against the VN dong affect the economy of the country?

Dr. Tran Hoang Ngan: It will help curb the inflation rate and favor local enterprises in the importation of machines and equipment to improve their production capabilities.  Additionally, the US dollar will no longer play a vital role in the economy as neither investors, including foreign investors, nor nationals wish to keep it.

Exporters, on the other hand, will face losses as the depreciation in the US currency will directly affect the value of the amount of US dollars they collect from export activities.

The rate of unemployment will increase as the value of VN currency rises against the US dollar. This encourages import activities while the increase in production costs reduces the competitiveness of Vietnamese goods, leading to a situation where local producers will have no choice but to limit their production. 

Some countries like Thailand and China boost their export activities by fixing the value of their currencies lower than the US dollar. Is it too early yet for Viet Nam to increase the value of its currency against the US currency?

Dr. Tran Hoang Ngan:  Thailand and China could do so as they have had strength in financial resources. However, both countries are now in an awkward situation.

For example, after several years curbing the exchange rate of the US dollar in China at one dollar to eight yuan, the Chinese government now has to raise the exchange rate, specifically, one US dollar to 7.7 yuan and at the same time increased the country’s foreign currency reserves to US$1,500 billion in an effort to reduce inflation, which shot up to 7 percent in January 2008.

Except for agricultural product export enterprises that can make use of their gains thanks to the current increase in prices of agricultural products to make up for their losses caused by the depreciation in the US dollar; due to the decline in purchase power on the US markets, other companies  will be vulnerable to huge losses if they don’t take initiative in finding further markets for their exported products

Do you think the State Bank should purchase more US dollars as a measure to salvage the foreign exchange rate?

Dr. Tran Hoang Ngan:  Attracting foreign investment is a vital factor for a developing economy like Viet Nam. The government has called upon foreign investors to invest in Viet Nam. Now there will be no reason for us to reject foreign investment into our country.

The point is that what we should do is purchase US dollars in a reasonable way and at the same time figure out an effective output for them. We also have to figure out the expenditure needed to attract a large volume of currency in VND back to the country.

Some people blame the recent decrease in the exchange rate between VND and the US dollar for the State Bank’s policies, under which the bank has not hoarded foreign currencies purchased by commercial banks from their customers, but mostly from the Ministry of Finance.

Dr. Tran Hoang Ngan:  As a dependent agency to the government, the state bank cannot take the initiative in making timely decisions on measures to regulate foreign exchange rates, so I think that the bank’s restriction on buying foreign currencies from commercial banks was just an inopportune decision.

The National Monetary Council has recently proposed to the government a number of policies under which the State Bank will be given some rights to make decisions on regulating money supplies and foreign exchange rates subject to related fluctuations on the markets.

By Hai Dang (Tuoi Tre) – Translated by Phuong Lan

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