Vietnam May Accelerate Dong's Decline, Goldman Says (Update2)
By Patricia Lui
June 3 (Bloomberg) -- Vietnam may speed up the pace of the dong's decline to prevent the currency from becoming ``excessively overvalued'' because of soaring inflation, according to Goldman Sachs Group Inc.
Deutsche Bank AG said the currency will weaken as much as 30 percent in the coming months, extending this year's 1.5 percent loss. Consumer prices have risen at the fastest pace in 16 years while the trade deficit has tripled in the four months through April on surging import costs. Forwards show traders are betting the currency will slump 26 percent in 12 months.
``They will be in more trouble'' if they don't consider speeding up the pace of the dong's decline, said Helen Qiao, a Hong Kong-based economist at Goldman in an interview today. ``We are thinking that this is the direction policy makers are moving toward.''
The dong was at 16,255 per dollar as of 4 p.m. in Hanoi, according to data compiled by Bloomberg. Twelve-month offshore non-deliverable forward contracts show traders are betting the U.S. dollar will buy 21,850 dong in a year. Such contracts, settled in dollars, are used by traders to bet on currencies they can't freely convert.
``The probability of the central bank being forced into taking an abrupt and sharp nominal devaluation in the near term is still low,'' wrote Qiao in a report published today. The dong will avoid the scale of devaluation like the Thai baht in 1997, Qiao said, because portfolio inflows and remittances will limit the increase in the trade deficit.
Deutsche's Singapore-based analyst Hak-Bin Chua disagreed with Goldman and echoed Morgan Stanley's forecast of an impending ``currency crisis.''
``An IMF-style program will be needed in coming months,'' Chua wrote in a report dated yesterday. ``This will involve further monetary tightening, sizeable dong devaluation, nationalizing insolvent banks and establishing an asset management entity to carve out bad loans.''
Goldman's Qiao declined to cite a forecast for the currency's accelerated pace of declines, and said Goldman is keeping to its forecasts set in May for the dong to trade at 16,220, 16,260 and 16,400 for three, six and 12 months.
``If inflation deteriorates further for a sustained period, local capital might flee into gold and the dollar, putting the domestic monetary system under stress,'' she wrote in the note. The State Bank of Vietnam may rein in inflation by extending price controls, fiscal measures and tighter controls on credit, Goldman said.
To contact the reporter on this story: Patricia Lui in Singapore at firstname.lastname@example.org
Last Updated: June 3, 2008 06:54 EDT