Vietnam Dong at a four month low

The fall of the Vietnamese Dong against the dollar has been allowed by the government, and by the end of last week was at a four month low as the State Bank of Vietnam set the official exchange rate at 16,086 dong per dollar.

According to Goldman Sachs Group Inc. a u-turn may been needed by the State Bank as the speed of the decline has been ‘excessively overvalued’, even when accounting for inflation, as analysts predict that the currency will weaken as much as 30 percent over the next few months.

Following the threat of double digit inflation, Fitch Ratings lowered the outlook on Vietnam’s BB-minus sovereign rating to negative from stable.

Despite this call, it seems highly unlikely that the central bank will be forced into a change in the nominal valuation, and that the dong will not follow in the footsteps of the Thai baht in 1997 as the trade deficit is not on the same scale.

Vietnam’s annual inflation accelerated to 25.2 percent in May from 21.4 percent last month, and if inflation continues to worsen it would not be inconceivable that the local capital might revert to bargaining in gold and the dollar, which would strain the domestic monetary system.

The State Bank of Vietnam could control inflation by extending price controls and tighter controls on credit.

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