Vietnam's Devaluation Helps Dong, but Problems Linger
Vietnam's devaluation will help shore up its currency system, but inflation and a big trade deficit mean the government has more work ahead--and that could include further devaluations and sharply higher interest rates.</br></br>The Southeast Asian nation, which has seen an influx of Western investment capital in recent years, grew 5.5% in 2009, World Bank estimates show, despite the global financial crisis. But in the transition to a more urban, market-based economy, the country has struggled to keep a lid on inflation and trade and budget deficits, which in turn has put pressure on its currency.</br></br>Vietnamese residents have responded by hoarding dollars and gold out of fear the currency--the dong--will become even less valuable in the future.</br></br>The State Bank of Vietnam on Thursday lowered by 3.4% the official value of the dong, which is pegged to the U.S. dollar, bringing the currency more in line with how it trades on the street in nongovernment sanctioned venues. Now, one U.S. dollar will buy 18,544 dong, compared with 17,941 dong earlier in the week. The country also capped the interest rate on some U.S.-dollar bank accounts at 1% in order to encourage businesses and state enterprises to hold dong instead of dollars.</br></br>Vietnam's problems are unlikely to spread to neighbors such as China, Thailand and Indonesia, which enjoy strong foreign exchange reserves and trade surpluses. The rest of the region is facing pressure for their currencies to rise, rather than weaken.