Vietnam devalues currency as growth, inflation drop

Source: Agencies  |   2008-12-25  |     ONLINE EDITION

VIETNAM devalued its currency by 3 percent today as falling inflation and the weakest annual economic growth in nine years gave it the impetus to act. The central bank set today's dong mid-point at 16,989 per dollar versus 16,494 yesterday after a cabinet meeting in which Prime Minister Nguyen Tan Dung said gross domestic product grew 6.23 percent this year.

The Southeast Asian nation's economy has not grown slower since 1999 when it went up 4.77 percent.

Last year, Vietnam clocked 8.5 percent expansion and was a darling of the investment community. After a domestic overheating crisis earlier this year, and faced with the global slowdown, the government has cut its growth forecast to 6.5 percent.

Next year would be worse, Dung predicted.

"The year 2009 will be tougher than 2008 as we will be facing with a strong impact from the global economic downturn," a government statement quoted Dung as telling the cabinet in Ho Chi Minh City, Vietnam's commercial centre.

The government forecasts 6-6.5 percent growth in 2009, but the International Monetary Fund sees it coming in at 5 percent.

Consumer prices rose 19.89 percent in December, well below the government's forecast of 22 percent, while average inflation over the year was 22.97 percent, the government statistics office said today.

December was the 14th consecutive month of double digit inflation in Vietnam but the monthly figure has eased for three months running.

Earlier in the year, soaring inflation and a widening trade deficit sparked an overheating crisis in Vietnam that the government doused with three interest rate hikes and strict measures to curb credit growth.

But since the global credit crunch started turning into a worldwide economic slowdown, Hanoi has taken a policy u-turn.

The State Bank of Vietnam, the central bank, has slashed rates five times since late October, unwinding most of the earlier tightening, and lowered banks' compulsory reserve ratio, effectively flooding the financial system with money.

Prime Minister Dung has said promoting exports was a priority, and the government has announced plans for a US$6 billion economic stimulus package.

Foreign portfolio investment has fallen while export revenues have also slowed in Vietnam's major markets, though, and the dong has come under pressure to slip.

Until today, the authorities had devalued the dong mid-rate by around 2 percent and widened its tightly managed trading band three times this year, allowing it to effectively lose about 6 percent of its value against the dollar.

Still, the offshore, non-deliverable dong forwards market had priced in a further fall and the interbank dollar/dong market was frozen in recent weeks.

Traders had expected the central bank to allow the dong to weaken, and ahead of today's devaluation some said the trading band was likely to be widened again from the current 3 percent on either side of the mid-point.