FDI might suffer from high VND devaluation
Updated at Tuesday, 24 Jul 2018, 08:08
The Hanoitimes - The foreign direct investment (FDI) capital inflow to Vietnam can reduce significantly if the Vietnamese dong (VND) - the local currency - devalues sharply against the US dollar.
Due to impacts from the US-China trade war, the dong has lost 1.5 percent against the dollar this year. In this context, some experts said that a further devaluation of the currency should be considered to support GDP growth and support exports if the conflict accelerates.
However, according to economist Nguyen Duc Do, nobody wants to invest in an economy where the local currency sharply devalues because they can suffer big losses even without doing any business.
Some experts suggest a futher VND devaluation to support exports.
Or at least, Do explained, foreign investors will delay their disbursement plans in the country as they can make more profits, just by doing nothing but holding the dollar for a longer time.
According to Do, Vietnam used to suffer adverse impacts of the VND devaluation on its FDI capital source in the 1997-1999 period when the dong lost more than 8% and FDI capital source also slid nearly 16% as a domino effect.
It was the same in the 2009-2011 period when the currency devalued by some 8% and FDI capital declined by up to 10%.
As FDI capital accounts for more than 20% of Vietnam’s total investment capital source, the sharp drop of the capital source significantly affected negatively on the country’s economic growth, Do said.
According to Do, the country’s GDP growth rate in the 1997-1999 period was only 6.2%, of which the rate in 1999 even hit 4.8%, the lowest level since 1995. The rate in the 2009-2011 period also averaged at only 6%, much lower than the 6.7% rate in the 1995-2016 period.
Experts said that the government will have to select to either devalue the dong further against the dollar to support GDP growth and exports or keep the USD/VND exchange rate stable to stabilize macro-economy if the US-China trade tensions turn into a full blown war.
As the trade skimmish 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 has lost by some 4% against the dollar since the beginning of this year, the dong has devalued by only 1.5% against the dollar. The dong has also appreciated by some 1.8% against the yuan year to date.
The moves made Chinese imports much cheaper, Hieu said, adding that Vietnam has to balance between keeping the trade deficit under control and being able to compete with cheaper Chinese goods in the market.
Hieu recommended the government should be seriously cautious about this issue as the yuan could fall even further in the time ahead. China has set the yuan’s foreign exchange rate at 6.95 per dollar. But around two years ago, that number was even lower at 6.69 per dollar. So there is a potential for the yuan to slip further.
At this moment, Hieu said, a further devaluation of the dong is not necessary. However, he noted, if the trade war keeps accelerating, the currency should be further devalued by another 1.5% this year to offset for the devaluation of the yuan against the dollar.
A further devaluation of VND will support Vietnam’s exports and prevent Chinese products from flooding in Vietnam as it used to be in 2015 when the yuan devalued sharply against the dollar, Hieu said.
However, Hieu also said a sharp devaluation of VND can also cause a rise in Vietnam’s public debt and inflation. He explained that more than a half of the nation’s debts are in the dollar.
Meanwhile, economist Ngo Tri Long said that adjusting VND’s value at the moment is a risky move, especially, with a 3% drop for this year.
It was going to be hard to achieve the nation’s target of keeping inflation below 4% by the end of this year, not to mention other future-factors such as higher oil prices and damage caused by natural disasters, Long said.
But if Vietnam decides to move forward with devaluing VND, the adjustments should be based on market demand and not on the yuan’s value, Long said, adding that a 2% drop for this year will better match the current market.