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Saturday March 2nd, 2024

Vietnam promises US it will not devalue, but dreaded Sri Lanka style ‘monetary modernization’ looms

DOMESTIC STABILITY: Vietnam central bank Governor Nguyen Thi Hong insisted that Dong at 23,000 was for domestic stability.

ECONOMYNEXT – Vietnam’s central bank has promised the US Treasury not to devalue the Dong while insisting that the monetary policy was aimed at domestic stability though the America has extracted a promise to allow “to improve exchange rate flexibility over time.”

A dreaded ‘modernization’ of monetary policy also looms, perhaps backed by the International Monetary Fund, which has been peddling flexible policy, that could bring Vietnam down in the future when the US tightens monetary policy.

In 2020 the US Treasury falsely accused the State Bank of Vietnam of ‘currency manipulation’ Mercantilist-speak to indicate country was ‘undervaluing’ the Dong to push exports.

The false Treasury label was promptly amplified by the hurrah boys of the Western financial press, though it was withdrawn in 2021.


Vietnam monetary policy for stability not trade PM tells Trump after false US charges of Dong ‘manipulation’

The Vietnam Dong has been stable since 2010, when it collapsed followings stimulus in the wake of the burst US housing bubble, though the SBV jacked up rates and intervened to try and stop it, creating domestic downturn in the process including in property.

Stable dong is for domestic stability not trade

“The SBV underscores that the focus of its monetary policy framework is to promote macroeconomic stability and to control inflation,” a joint statement issued after meeting a between SBV Governor Nguyen Thi Hong and Treasury Secretary Janet Yellen said.

“Vietnam confirms that it is bound under the Articles of Agreement of the IMF to avoid manipulating its exchange rate in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain from any competitive devaluation of the Vietnamese dong.”

In April 2021 the US lifted the false currency manipulator label on Dong and also the Swiss Franc. (U.S. Drops Switzerland, Vietnam Currency-Manipulator Labels)

The false labeling of the Swissie, one of the strongest currencies in the world, amused classical economists.

“The absurdity of putting the Swiss franc and the dong in the same basket brings back memories of May 1, 2002,” he US economist Steve Hanke wrote in December 2020.

“That’s when I appeared before the Senate Banking Committee, along with then-Treasury secretary Paul O’Neill, to testify on exchange rates and the Treasury’s “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.”

“I was highly critical of both the entire concept and the particular methods used to label a country as a currency manipulator. I indicated that the U.S. Treasury’s report was little more than an invitation for political mischief that would interfere with free trade.

“In short, I thought, and think, that the entire semi-annual currency-manipulator ritual is rubbish and should be trashed.”

Shortly before the US false charge, the International Monetary Fund had had also claimed that the Dong was ‘undervalued’ though its real effective exchange index of over 130 , citing a methodology using the country’s current account surplus.

Vietnam has a current account surplus partly due to dollar inflows sterilization and forex reserve collection by the SBV and partly due to Vietnam firms investing in neighboring countries such as Cambodia and Laos backed by the strong Dong.

Vietnam billionaires have also been buying up assets in the US.

Governor Hong also stuck to her guns insisting that no Dong ‘undervaluation’ was going on.

“The State Bank of Vietnam will continue to manage exchange rate policy within its general monetary policy framework to safeguard the proper functioning of the monetary and foreign exchange markets, to promote macroeconomic stability and to control inflation, not to create an unfair competitive advantage in international trade,” Governor Hong insisted in the joint statement.

Over several years the IMF has tried to push the Vietnam to a ‘flexible exchange rate’ with ‘flexible inflation targeting’, a deadly discretionary policy framework that has destroyed countries like Sri Lanka and neighboring Laos.

Ahead of the US Treasury false charge in 2020 the IMF had also fuelled false propaganda against Dong stability claiming it was undervalued despite the Real Effective Exchange Rate Index being over 130.

Related Vietnam REER ignored by IMF buoying US Mercantilists as Sri Lanka rupee falls

The US had previously pushed Japan to appreciate its currency, with Mercantilists at the Treasury hoping it would reduce the trade deficit.

Though the Yen was pushed up from 360 at the break-up of the Bretton Woods to around 110 now, the trade deficit with the US has remained.

Mercantilists fail to understand that America’s foreign financed deficit spending and inward foreign direct investment is the reason for trade deficits.

Dreaded ‘modernization’ of monetary policy

The US Treasury however had extracted a promise from Vietnam to allow ‘greater exchange rate flexibility’ and modernize its monetary policy framework, which could indicate ‘flexible inflation targeting’ or un-anchored monetary policy.

A ‘flexible’ exchange rate lowers or destroys the credibility of the peg, triggering capital flight and also panic among importers, while exporters hold back. The IMF – backed permanently depreciating ‘flexible exchange rate’ put around 4 billion US dollars of capital in rupee bonds to flight.

“The SBV is also making ongoing efforts to further modernize and make more transparent its monetary policy and exchange rate framework,” the joint statement said.

“In support of these efforts, the SBV will continue to improve exchange rate flexibility over time, allowing the Vietnamese dong to move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals, while maintaining macroeconomic and financial market stability.”

Modernization of monetary policy is Sri Lanka with a flexible exchange rate and flexible inflation targeting, or un-anchored monetary policy had brought multiple currency crises and the Indian Ocean is now close to sovereign default.

The IMF gave technical support to calculate an output gap, a type of monetary stimulus that brought down the Bretton Woods system of soft-peg and ended a centuries old gold standard that had been kept with floating two ways discount rates by many central banks for nearly three centuries.

Vietnam also maintains its peg to the US dollar with a wide policy corridor and two way simultaneous repo and reverse repo auctions.

However Mercantilists who study at Keynesian cannot grasp the concept that exchange rates are determined by the monetary anchor in use and has nothing to do with the broader economy. Keynes himself cheered as the Sterling floated and went off the gold standard in 1931.

“Stability of foreign exchange rates was in their eyes a mischief, not a blessing,” explained Ludwig von Mises, a classical economist.

“Such is the essence of the monetary teachings of Lord Keynes. The Keynesian school passionately advocates instability of foreign exchange rates.”

True to form the joint statement claimed that the Vietnam dong should “move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals,” implying that real economy factors – read current account surplus – and not the monetary anchor determines an exchange rate.

The Sri Lanka went through severe ‘flexible exchange rate’ episodes in 2018 and early 2020, earning downgrades in both cases.

Rating agencies have said the stability of the Dong was a key criteria for growth and foreign direct investment.


Vietnam’s stable exchange rate is key to FDI-driven export economy Moody’s says as Sri Lanka downgraded

Vietnam BB outlook raised to positive by S&P after IMF says high growth with no stimulus

Sri Lanka is now trying maintain a stable exchange rate but has no monetary policy to back it unlike Vietnam.

Sri Lanka is printing money (inflating the monetary base), which is the opposite of inflow sterilization. (Colombo/July23/2021)

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Sri Lanka eyes SOE law by May 2024 for better governance

ECONOMYNEXT – Sri Lanka is planning to pass a Public Commercial Business (PCB) Act improve governance of state-owned enterprise by May 2024 as part of an anti-corruption efforts following an International Monetary Fund assessment.

Sri Lanka’s state enterprises have been used by politicians to give ‘jobs of the boys’, appropriate vehicles for personal use, fill board of directors and key positions with henchmen and relatives, according to critics.

Meanwhile macro-economists working for the state also used them to give off-budget subsides or made energy utilities in particular borrow through supplier’s credits and state banks after forex shortages are triggered through inflationary rate cuts.

The government has taken billons of dollars of loans given to Ceylon Petroleum Corporation from state banks.

There have also been high profile procurement scandals connected to SOEs.

An SOE Reform Policy was approved by Sri Lanka’s cabinet of ministers in May 2023.

The Public Commercial Business (PCB) Act has now been drafted.

A holding company to own the SOEs will be incorporated and an Advisory Committee and Board of Directors will be appointed after the PCB law is approved, the statement said. (Colombo/Mar01/2024)

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Sri Lanka rupee closes at 308.80/90 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 308.80/90 to the US dollar Friday, from 309.50/70 on Thursday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.02.2026 closed at 10.65/75 percent up from 10.50/70 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent from 11.90/12.10 percent.

A bond maturing on 01.07.2028 closed at 12.15/35 percent down from 12.20/25 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent up from 12.30/45 percent.

A bond maturing on 15.05.2030 closed at 12.30/45 percent down from 12.35/50 percent.

A bond maturing on 01.07.2032 closed at 12.50/13.00 percent from 12.55/13.00 percent. (Colombo/Mar1/2024)

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Sri Lanka stocks close up 0.37-pct, Expo to de-list

ECONOMYNEXT – The Colombo Stock Exchange closed up 0.37 percent on Friday, and SG Holdings, the parent company of Expolanka Holdings Plc, said it was taking the company private.

Expolanka is the largest listed company on the Colombo Stock Exchange.

“Expolanka Holdings PLC has, at the Board Meeting held on 1st March 2024, considered a request from its principal shareholder and resolved to initiate the de-listing of the Company’s shares from the Official List of the Colombo Stock Exchange subject to obtaining necessary shareholder approval and regulatory approvals,” the company said in a stock exchange filing.

As per arrangements with SG Holdings Global Pte Ltd, the Company’s majority shareholder, it will purchase its shares from shareholders who may wish to divest their shareholding in the Company at a purchase price of Rs 185.00 per share. The share closed up at 150.50.

The broader All Share Index closed up 0.37 percent, or 39.47 points, at 10,691; while the S&P SL20 Index closed down 0.64 percent, or 19.59 points, at 3,037.

Turnover stayed above the 1 billion mark for the sixth consecutive day, registering 1.4 billion.

Crossings in Melstarcorp Plc (135mn) up at 89.50, Hatton National Bank Plc (64mn) up at 158.00, Hemas Holdings Plc (53mn) up at 75.00 and Central Finance Company Plc (26mn) up at 103.50, added significantly to the day’s turnover.

“The upward trend is continuing, with more retail buying also coming in, the number of trades was more than 10,000 today,” a market participant said. “Investors are looking for undervalued stocks and buying in quantities.” (Colombo/Mar1/2024).

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