FromJune 13, 2008Vietnam on brink of Thai baht-style currency crisis of 1997
Vietnam, until recently a poster child among emerging economies, is on the brink of a currency collapse, which would mirror the rout of the Thai baht that sparked the Asian crisis in 1997.
This week the State Bank of Vietnam effectively devalued the dong 2 per cent against the dollar, a move that analysts said was designed to head off a speculative attack on the embattled currency.
The move highlighted concerns that Vietnam, where consumer price inflation is running at more than 25 per cent, is poised to suffer an exodus of foreign-controlled capital.
The nation’s benchmark equities index has lost 60 per cent of its value since January, making it the world’s worst performing stock market. Vietnam’s trade deficit for the year to May, at $14.4 billion (£7.4 billion), exceeds the $12.4 billion shortfall for 2007.
Claire Innes, at Global Insight, said: “The weakening of the currency is principally aimed at preventing speculative attacks.”
Matthew Hildebrandt, an economist at JP Morgan, said the move “will embolden the view that Vietnam is on the verge of a [balance of payments] crisis and larger devaluation.”
On the streets of Vietnam’s cities, there has been growing disquiet over the fate of the dong. Vietnam’s black-market currency exchange rate has reportedly jumped to a record high of more than 18,000 dong to the dollar – above last week’s official rate of 16,268.
Sherman Chan, at Moody’s economy.com, said: “A sense of déja vu and fears of sky-rocketing inflation are causing individuals and merchants to hoard rice, cement and steel, a return to old habits formed back when annual inflation exceeded 60 per cent.”
She added that inflationary pressures has prompted a stampede into gold: “The price of gold has tended to be a reliable proxy for the public’s assessment of the Government’s ability to stabilize the economy. Gold’s price in recent months underscores their stunning lack of confidence.”
The situation underscores the sharp reversal of sentiment over the Vietnamese economy, which, until last year, was among the fastest growing in Asia. In March 2007, the combined value of stocks on the Ho Chi Minh City and Hanoi stock exchanges stood at about $29 billion – up from less than $1 billion in 2005.
Economists say that a recent suggestion by the Vietnamese Government that it does not have sufficient foreign reserves to fend off an attack from speculators, who may bet on the dong suffering a sudden and sharp drop, was ill-timed.
Ms Chan said: “The bitter lessons of the Thais and Indonesians in 1997 are clear: even $22 billion can be used up very quickly when the currency is under heavy pressure from determined and well-financed speculators.
“The only way to regain credibility is by employing serious tools to attack the roots of the problem, which are an overheating economy and excessive inflation.”
She added: “To prevent a currency and balance of payments crisis, it is necessary that the Government take a tough tightening stance. This could dampen growth in the near term but the benefits outweigh the downside, as it would take an extended period for an economy to recover from a major crisis.”
The causes of inflation have been known for years; the cures are so politically unpalatable that central banks forever stall their implementation until the collapse has begun.
It’s interesting to see the rising inflation in the booming socialist nations, like Vietnam and China, and the non-boom socialist Zimbabwe. The socialist nations have just as difficult a time in biting the political bullet on fighting inflation as the capitalist countries.
Central bank independence appears to be the only viable long-term solution, but it is easy to see that many countries will not allow their money supply to de-link from their politics, especially in the socialist nations which perceive all economics to be a matter of class discrimination.