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Saturday May 25th, 2024

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.


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

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

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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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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