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Wednesday December 7th, 2022

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

CHERRY PICKING: Vietnam’s Real Effective Exchange Rate is over 130 but Mercantilists insist the Dong is ‘undervalued’ using cherry picked methods.

ECONOMYNEXT – Vietnam stable exchange kept around a 3 percent trading band by the central bank has been a key ingredient of the country’s foreign direct investment driven export sector, Moody’s a rating agency said upgrading outlook on the country Ba3 rating to positive.

Vietnam’s neighbor Laos and Sri Lanka has been downgraded by Moody’s in 2020 as their non-credible ‘flexible’ exchange rates collapsed leading to forex shortages and difficulties in debt service.

Vietnam has also avoided the stimulus mania that has gripped the Western nations and interventionists in other countries who want to boost state spending.

Vietnam’s Dong exchange rate has been steady around 23,000 to the US dollar during the 2020 Coronavirus crisis and in 2018 when the US tightened monetary policy by allowing the overnight call rates to rise and liquidity to tighten.

“The central bank, the State Bank of Vietnam (SBV), has accumulated a record high $89 billion in foreign exchange reserves through September 2020 while maintaining a stable exchange rate around the 3 percent trading band for the dong, a key ingredient of Vietnam’s foreign direct investment-driven export sector,” Moody’s said.

Vietnam has been resisting pressure from the International Monetary Fund to move to a non-credible ‘flexible exchange’ that is backfiring on its neighbhour, Laos.

The Laos kip following a non-credible ‘flexible’ exchange rate has depreciated from 8,300 in January 2018 to 9,400 by April 2021.

Moody’s downgraded Laos to Caa2 from B3 in August 2020 saying “the country was facing severe liquidity stress, given sizeable debt servicing payments due this year and persisting until 2025, and constrained financing options.”

Cambodia is already dollarized after the central bank saw steep depreciation in the 1990s and is rated B2 by Moody’s.

The State Bank of Vietnam also faced steep depreciation in the 1980s which led to an implosion of the economy, until it was reformed in 1989.

Central bank financing of state enterprises and industrial and agricultural credit was halted and the departments spun off as commercial banks.

Strong currencies allow governments to finance deficits domestically at low rates and helps companies invest outside while maintaining the confidence of foreign investors.

Coupled with central bank collection of reserves through sterilized purchase of inflows, such countries may also run current external account surpluses.

However the IMF has been pressuring Vietnam to break the peg and move towards a flexible policy which has brought countries like Sri Lanka to the brink of default.

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In a tag team style maneuver Trump’s Treasury labeled Vietnam a ‘currency manipulator’ along with the Swiss central bank much to the amusement of classical economists.

Vietnam insisted that the Dong’s strength was for domestic stability, there was no trade advantage.

US Mercantilists falsely claim that high performing East Asia ‘undervalues’ currencies though some of them are among the strongest currencies in the world.

Such false accusations have been leveled against China and Japan in the past.

Claims that Vietnam’s currency is undervalued is argued on cherry picked models using its current account surplus as the country’s real effective exchange rate index shows high ‘overvaluation’ based on standard Mercantilism.

Vietnam’s currency collapsed from 16,000 to 21,000 after the US housing and commodity bubble burst in 2008, and the country was misled into ‘stimulus’.

During the current Coronavirus crisis the Vietnam avoided the now-worldwide stimulus mania and only unveiled a package to help distressed companies and the unemployed and aggressively contact traced infected persons.

However the ceiling policy rate has been cut several times since 2011 and it is unclear whether it is high enough to save the dong in the next Fed tightening cycle.

“Moody’s expects public debt to rise slightly to 39 percent of GDP in 2020, as the pandemic hit revenue and raised expenditure albeit materially less than for most other sovereigns, before declining steadily in the next few years,” the agency said.

Vietnam’s economy was one of the fastest growing economies in 2020 and may grow up to 7 percent in 2021.

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon
seasons.

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the
vessel.

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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Sri Lanka President says 2015-2019 policy struggle was ‘warfare’

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.

“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“We were able to get a surplus in the primary budget. But it was warfare.

“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”

Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.

Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.

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Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.

The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.

The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.

Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.

The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.

The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.

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Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.

After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)

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China calls for joint effort to ease Sri Lanka’s debt burden, no mention of restructure

ECONOMYNEXT — A top Chinese official has expressed hope that countries and multilaterals like the International Monetary Fund (IMF) work with Beijing to play a constructive role in easing Sri Lanka’s debt burden, stopping short of an assurance on debt restructuring.

Chinese Foreign Ministry spokesperson Mao Ning was quoted by international media as saying on Monday December 05 that China attaches high importance to Sri Lanka’s difficulties and challenges.

She was responding to a question on media reports that an IMF team will be in China this week to discuss faster progress on debt restructuring for countries including Sri Lanka, which is negotiating for an IMF bailout.

“On Sri Lanka’s debt issue, I’d like to stress that we support the financial institutions in working out ways with Sri Lanka to properly solve the issue,” said Ning.

“We also hope relevant countries and international financial institutions will work with China and continue to play a constructive role in helping Sri Lanka overcome the current difficulties, ease its debt burden and realise sustainable development,” she added.

She said China has long-standing sound cooperation with the IMF and other international economic and financial institutions.

The spokesperson avoided any mention of debt restructuring, a prerequisite for the IMF extended fund facility (EFF).

Nearly a fifth of Sri Lanka’s public external debt is held by China, according to one calculation. The emerging superpower has been generous in Sri Lanka’s time of need, extending much needed assistance in the form of rice, medicine and other commodities.

The latest arrival in the Colombo port from China was 2 billion Sri Lankan rupees worth of essential medicines and medical supplies, delivered on Tuesday.

However, critics say China is doing everything but what Sri Lanka really needs: agreeing to restructure its outstanding debt.

At least one Sri Lankan opposition MP has demanded that China agree to a restructure.

Related:

Sri Lanka debt restructuring: opposition MP warns of “China go home” protests

Tamil National Alliance (TNA) legislator Shanakiyan Rasamanickam, who had been on the warpath with Beijing over an apparent lethargy in helping the crisis-hit island nation restructure its debt, recently warned of a “China, go home” protest campaign similar to the “Gota, go home” protests that unseated the country’s powerful former president in July.

The MP told parliament last Friday December 02 that Sri Lanka owes 7.4 billion dollars to China, a nearly 20-trillion dollar economy, and if the latter was was a true friend, it would agree to either write off this debt or at least help restructure it.

Colombo has been vague at best on the status of ongoing restructure talks with Sri Lanka’s creditors, and opposition lawmakers and others have expressed concern over what seems to be a worrying delay. Rasamanickam and others have claimed that China, Sri Lanka’s largest bilateral creditor, is the reason for the apparent standstill. (Colombo/Dec06/2022)

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