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March 19, 2008

Vietnam Tries to Cut Loose From Falling Dollar

Unlinking Currency May Curb Inflation But Irks Exporters
By JAMES HOOKWAY
March 19, 2008; Page A8

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HANOI, Vietnam -- Vietnam is trying to unshackle its fast-growing economy from the sliding U.S. dollar, a tactic that might stem rampant inflation but is rattling exporters and Vietnamese who have been using greenbacks as a daily currency for years. Earlier this month, Vietnam decided to partially abandon its de facto dollar peg as part of an effort to curb the highest inflation rates it has seen since 1995. After considering the move for several weeks, the central bank on March 10 widened the band in which it allows the Vietnamese dong to rise or fall against the dollar in one day to 1% from 0.75% previously. The bank said it plans to expand the band to 2%, and the black market is already pricing the dong much more strongly than the official rate -- a striking reversal of the days when the dollar commanded a premium on the backstreets of Hanoi and Ho Chi Minh City.
The Situation: Vietnam is allowing its currency, the dong, to rise against the U.S. dollar. Background: The dong's virtual dollar peg has helped give investors the confidence needed to invest in Vietnam. Fallout: Freeing the dong might stem inflation but hurts exporters' revenue and lowers faith in the dollar among many ordinary Vietnamese.

Freeing the dong will let it strengthen against the dollar "and will help tame the higher cost of oil and other imports," says Vo Tri Thanh, head of the Institute of Economic Planning, a state-run advisory group. Dollar-based prices of those items are relatively cheaper when translated into a

strengthening Vietnamese currency.

Loss of Confidence

The result for many Vietnamese is a sudden loss of confidence in the dollar, a currency widely used here as a convenient alternative to the unwieldy dong. The largest Vietnamese note is the rarely seen 500,000 dong bill. It is worth about $31. Tellers at branches of Military Bank, among others, have begun turning away visitors trying to exchange dollars for dong. They say banks worry the dollar's value will fall further. Some exchange counters are unplugging digital displays showing buy and sell prices for foreign currencies in the hope it will put people off trying to sell dollars. Ordinary savers are draining dollar accounts to make dong deposits instead, while others are turning to gold as a safe harbor. Some of the country's biggest exporters, meanwhile, have written letters to Vietnam's leaders pleading for help as their dollar-based revenue slumps. Unable to exchange their dollar income

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for local currency, some are having to borrow dong to cover their local costs. Other countries are also allowing their currencies to appreciate against the dollar to tackle inflation. They include China, which has allowed its currency to rise around 3% against the dollar this year. Kuwait last year began pegging its dinar to a basket of currencies instead of solely to the dollar. Other Persian Gulf states are also studying whether to change their dollar pegs. But few nations have been as dependent on the dollar for their economic progress as Vietnam. The dong's virtual peg -- a narrow trading band set by the central bank that allowed the dong to rise or fall 0.75% a day -- helped provide investors with the confidence they needed to put money into a country that only began opening up to foreign business in the early 1990s. The popularity of dollars was boosted further by Vietnamese who settled in the U.S. after the Vietnam War and who regularly sent dollars home to their families. When the dollar began its decline in 2002, the narrow trading range helped boost Vietnamese textiles and electronics exports because they were cheaper for U.S. customers than similar products made in Thailand, Malaysia or the Philippines. This helped Vietnam become a stellar performer in a high-achieving neighborhood; its economy has grown by an average of 7.5% a year since 2000. Later, the dong's tendency to follow the dollar contributed to an inflationary bubble as rising prices of oil and other commodities -- as well as Vietnam's unchecked growth -began to affect the country's economy. Inflation hit a 13year high of 15.7% in February, prompting a series of stiff measures designed to suck money out of the local banking system.
Worse to Come?

The most radical response was to widen the band in which the dong is allowed to trade. Since the band was widened on March 10, the official, central-bank rate for the dollar has fallen a slim 1%, from 16,030 dong to 15,855 dong. But on the black market, where currencies are traded in gold shops and cafs and from which banks are increasingly taking their lead, the dollar was fetching 15,500 yesterday. That is 3% off the March 10 rate, and an indication that Vietnamese think worse is to come as America's financial problems multiply. Vietnamese are now trying to get their hands on as much local currency as they can. With the U.S. apparently falling into recession, banks are reluctant to buy dollars from exporters or individuals. Vietnam's small stock market, Asia's best performer in 2006 before fading in 2007, has buckled under the severity of the adjustments now under way. Stocks first slumped when the central bank ordered local lenders to buy up government bonds in order to drain dong from the financial system and put a cap on inflation. After the band widened and the dollar began its fall,

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investors worried that foreigners wouldn't be able to find enough dong to buy stocks. On some days, there has been hardly any trading. The government has responded by announcing that its sovereign wealth fund would buy up shares of the country's leading companies, a measure that some government advisers have privately criticized as distorting the true value of the market. The VN Index at the Ho Chi Minh Stock Exchange in Ho Chi Minh City has fallen nearly 50% off its peak of 1170.67 in March last year. Yesterday the index closed at 588.26 points.
Seeking Liquid Sidelines

With trading volumes dwindling, some stock traders are now venturing into more liquid sidelines. Tran Thi Hong Lan, a director at VinaSecurities Co. in Hanoi, last week opened a new restaurant in the city with a partner to tap Vietnam's growing tourism industry, a venture she had planned before the dong was freed from its dollar peg. "Cash is king," Ms. Lan says, predicting that when the stock market recovers, it will rise along a more modest trajectory than before. The Vietnam Association of Shrimp Exporters recently sent a petition to the Minister of Agriculture pleading that the central bank instruct local banks to convert their dollar earnings into dong. Phan Van Danh, head of the An Giang province seafood cooperative, told local newspapers that seafood processors are now buying less from local fish farmers because they can't make enough money exporting fish. Mr. Danh says 50,000 to 70,000 tons of fish have been left unsold since the dong was unshackled from the dollar. Despite its inflation problem, Vietnam is still a cheaper place to do business than many other parts of Asia. Foreign manufacturers continue to flow into the country, and this could keep upward pressure on prices, say economists such as Song Seng Wun, who covers the Southeast Asian economy at CIMB-GK Research Pte Ltd. in Singapore.
--Nguyen Anh Thu contributed to this article.

Write to James Hookway at james.hookway@awsj.com 1

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