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Sunday June 23rd, 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.

Related

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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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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Sri Lanka Water Board makes profits, tax-payers inject Rs28bn

ECONOMYNEXT – Sri Lanka’s state-run National Water Supply and Drainage Board has made a profit of 5.2 billion rupees in the year to December 2023, after a tariff increase despite not getting money for 25 percent of its water it pumps out.

Total revenues went up to 61.8 billion rupees in 2023 from 35.4 billion rupees, a Finance Ministry report said.

Water revenue surged to 58.5 billion rupees from 33.1 billion rupees, cost of sales also went up to 32.8 billion rupees from 23.14 billion rupees, helping boost gross profits from 12.3 billion rupees to 29.0 billion rupees.

Finance costs surged to 14.9 billion rupees from 3.9 billion rupees,

NSWD reported net profits of 5.2 billion rupees for the year, against a loss of 2.7 billion rupees a year earlier.

The Treasury had given 28 billion rupees from tax payer money to settle loans.

During the Rajapaksa administration, macroeconomists who ran the Finance Ministry made state enterprises borrow money from banks through Treasury guarantees listing them as ‘contingent liabilities’, claiming they were ‘off balance sheet’.

The Road Development Authority, which had no revenues to speak of borrowed large amounts of money from banks which were listed as ‘contingent liabilities’ though they were a responsibility of the state from day one, allowing macroeconomists to understate both the budget deficit and national debt, critics say.

The water tariffs were raised by 81 percent after macroeconomists printed money to supress interest rates for flexible inflation targeting/potential output targeting. The currency collapsed after macroeconomists tried to float the rupee with a surrender rule in place.

Non-revenue water for which no money is collected was 25.2 percent. The agency was supposed to reduce non-revenue water. In some districts religious establishments are responsible for non-revenue water, according to an official who said it on condition of anonymity.

The water board is also unable to collect money from some services like common toilets for underserved communities. (Colombo/June23/2024 – Update II)

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Sri Lanka will expedite Indian projects: President

ECONOMYNEXT – Sri Lanka will expedite Indian-backed projects in the island, President Ranil Wickremesinghe told Indian business people after a visit by Indian External Affairs Minister S Jaishankar this week.

“I discussed with Prime Minister Modi the need to accelerate the joint program that we have decided, agreed on. So the major ones are identified, and Foreign Minister Jaishankar came down today [20] to have a discussion. Now this will show the new path we are taking,” president Ranil Wickremesinghe said.

“It won’t be individual projects. We’ve discussed a fair number of them. First is the grid interconnection between Sri Lanka and India, so that sustainable energy can be transmitted to India.

“We have the Sampur solar power project, which is a Government to Government (G2G) project, and a three island project, which is where we hope the ground breaking can take place in July,” he told Indian business people at the 31st All India Partner’s Meet 2024 (AIPM 2024), held at ICT Ratnadipa in Colombo.

The AIPM 2024 which was organised by KPGM Sri Lanka and India provided a platform for both countries to reaffirm their commitment to collaborative projects that promise to redefine bilateral relations and propel socio-economic growth.

“It’s a great pleasure and a privilege to have you in Sri Lanka, in Colombo, holding this meeting. It shows on one hand the close friendship that our two countries have, and on the other hand, the confidence that you have in Sri Lanka.

“Having now survived two difficult years, I must acknowledge that this was possible because India gave us a loan of $3.5 billion. All that will be repaid.”

Cooperation between the two nations needed to be enhanced, particularly in the energy sector, aiming to foster new development for the Northern region, Wickremesinghe said.

“We are looking at developing Palk Straight for wind energy and solar energy, both countries to get together and have a large farm for solar energy, for renewable energy. It also means that we will have a new economy for the northern province, which was worst affected by the war.”

Several Indian-backed projects in Sri Lanka have stalled due to protests from some parties, with some going to courts.

India is helping expand the Kankesanturai port, and is discussing development of the Palali and Colombo airports.

The National Livestock Development Board of Sri Lanka, in collaboration with India’s Amul Dairy Company, is involved in a project to enhance liquid milk production in the country.

The two nations are also considering establishing land connectivity.

Discussions have also taken place regarding expediting the Trincomalee Development Project, which encompasses industrial investment zones and tourist areas.

“Plans are underway to construct a multi-product oil pipeline from Nagapatnam to Trincomalee, pending the final observation report. Trincomalee is poised to become a hub for oil refining, with the development of ports and investment zones, transforming Trincomalee Port into a significant hub on the Bay of Bengal.

“Today, the entire East Coast is being opened up for tourism, with additional land earmarked for hotels in Galle and southern areas. Moreover, there are plans to establish more investment zones across the country, alongside expanding our professional training programs. In these endeavours, we are collaborating closely with India.” (Colombo/Jun22/2024)

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