Vietnam Currency Discussion Board

[RICK C]

KEN'S LATEST THOUGHTS------INTERESTING READING--------------
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I just recieved this and thought it might be of interest to some-
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this is a great article but it's important to read it from an academic perspective and not just skim it for good news. It's all good news in my opinion because it is consistent with speculation that Vietnam will either have to revalue it's currency or allow it to trade on the open market.

There are a list of economic and political factors that will eventually force Vietnam to do one of the other in my opinion. E-mail me and ask me to describe them for you and I will elaborate.

I have inserted my own "edits" to point out some of those economic factors in play now that need to be considered along with some of the points below. I hope they help to give you some additional insights.

Let me know if you have questions.

Regards,


Ken


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ASIA FOCUS

Reminders of 1997 haunt Vietnam

Saturday June 30, 2007


K. NOLAN CRAWFORD

As economists and policymakers look back a decade to the financial disaster that tamed the East Asian tiger economies, questions linger whether another major crisis could ever ensnare the region and what the lessons of 1997 mean for newly emerging markets such as Vietnam.

For the most part, Vietnamese businesses are not overly concerned about a possible downturn in the economy, according to a recent confidence report on small- to medium-sized enterprises (SMEs) by HSBC. And, on the surface, there is little indication they should be.

The government last week reported that gross domestic product (GDP) during the first half of the year grew at a four-year high of 7.9%, with exports surging more than 19% to $22.46 billion. Though economic growth was below the government's 8.2% target and there was an overall trade deficit, the figures were still very positive for many executives and public officials.


A construction worker stands next to a steel girder near the construction site of the Vinh Tuy Bridge in Hanoi. The government last week reported that GDP during the first half of the year grew at a four-year high of 7.9%, with exports surging more than 19% to $22.46 billion. — BLOOMBERG NEWS


In addition, imports in the first six months of the year were dominated by heavy machinery and raw materials, both of which will help boost output and exports down the line.

In statements at the World Economic Forum this past week in Singapore, Deputy Prime Minister Nguyen Sinh Hung added that the government also plans to weaken the dong this year by another 0.5-1%, which should allow Vietnamese exports to be eve n more price-competitive in the region. The Vietnamese dong has already fallen 0.4% against the greenback this year.(Edit: this is how Vietnam is growing their economy and it's working very well. The lower the Dong the cheaper their exports are for other countries (see following paragraph). To curb inflation eventually Vietnam will have to reverse this process. They can only go so low. Some speculate they are at the bottom now. Also, keep in mind a 1% decrease is a net loss of .62 cents per million. It's more about time).

A weaker dong also makes foreign direct investments and key production factors, such as labour and transport, even cheaper for overseas businesses.

The State Bank of Vietnam maintains a managed exchange rate, and for the past few years has kept close tabs on the dong in relation to the US dollar. This week, the dong-dollar rate was fluctuating around 16,120 dong.

The economy has been driven for the past five years by aggressive expansion in output and exports, and foreign investments. These factors, though, cannot be sustained forever.

"The economy continues to grow well, but the CPI [a key measure of inflation] is something to watch," said Katie Dean, a senior economist at ANZ Bank, "particularly when it comes to capital flows and consumer spending."

Over the past few months, inflation has increased. (Edit: to counter inflation countries typically will increase the value of their currency by either raising interest rates or revaluing their currency). This week the General Statistics Office reported that the consumer price index (CPI) grew 7.8% year-on-year in June, up from 7.31% in May.

The June figure is above the government's accepted range of 7-7.5%, and threatens the State Bank of Vietnam's (SBV's) long term policy of keeping inflation below economic growth (Edit: as I've said before, I am speculating that Vietnam wil have to revalue it's currency. Not that Vietnam will want to revalue it's currency. There are many other economic and political pressures that will force them to do so as well. Inflation is just one single factor).

Economists have commented that prices should actually be hitting a seasonal downtrend, but instead have accelerated due to higher food, energy and construction prices. Viet Nam News, the state news agency, quoted an unnamed source at the Price Management Board questioning whether the government will be able to control inflation in the months ahead. A major stumbling block in controlling price fluctuations will actually be any attempt to depreciate the dong further - it cuts both ways. While making exports more price competitive, the policy also makes imports more expensive for Vietnamese companies that do not have access to foreign capital or have taken out foreign loans to fuel growth.(Edit: a perfect example of the need to revalue the currency. If not now, eventually).

In addition, controlling capital flows via a managed or controlled exchange rate regime goes right back to 1997. During the time, Thailand had kept the baht artificially weak and in the process depleted its foreign reserves and ability to control short-term fluctuations on the foreign exchange market. (Edit: Vietnam may learn from Thailand's mistake and allow it's currency to free float on the open market which should lead to a significant rise in value. The IMF has issued a statement pressuring Vietnam to do so as recently as last month).

Deputy Prime Minister Hung's comments on artificiall y depreciating the dong could be seen as a step back in creating a liberalised foreign exchange market, though central bank officials could not be reached this week to confirm this is indeed a set-in-stone policy (Edit: some investors are speculating that the Vietnamese government is bluffing and creating a smokescreen to deter investors from buying up it's currency on the cheap).

Another key lesson from 1997 is the buildup of risky and often foreign-denominated debt. Thailand and South Korea were hit harder than other economies in the region a decade ago because banks had exposed themselves to a high level of risky loans, much of which was influenced by government policy.

Analysts last week said that as Vietnam's four state banks partially privatise in the second half of the year, it will become ever more important to minimise government intervention into direct capital investments.

The memories of Asian economic crisis may not be too big of a concern for Vietnam, but there are 1997-type issues that need to be addressed.

"The one thing I can say definitively is that Vietnam needs to continue its transition from a state-owned enterprise into a capital-driven market," said Ms Dean.

http://www.bangkokpost.net/300607_Business/30Jun2007_focus05.php

Thanks and Regards,
Ken Kuhn
(630)-631-6407
P.O. Box 163
Geneva, Illinois 60134
United States
www. dealorbuydinar.com
KEN will answer what ever questions he can, remember it is 1 Person's OPINION ONLY.