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