Vietnam props up economy by devaluing currency amid China row

HANOI, June 19 (Reuters): Vietnam devalued its currency for the first time in a year in what analysts said was an effort to prop up its economy without having to reduce policy rates and stoke inflationary pressures.
The Southeast Asian country announced late on Wednesday it would devalue the dong to help exports, its main economic driver, in a widely expected move that could mitigate pressure from an intractable row with its biggest trade partner, China.
The State Bank of Vietnam (SBV) lowered the midpoint rate for trading its dong currency on the interbank market by 1 per cent, or to 21,246 per dollar, on the assumption Vietnam can control inflation in the second half of the year.
The target is to keep inflation at 6-7 per cent this year and next, against 6.6 per cent last year.
"In the context inflation is being kept at a low level, in order to support exports in the last six months, the State Bank proactively adjusts the exchange rate," the SBV said on its website (www.sbv.gov.vn).
Although Vietnam's economy grew 5.42 per cent last year, one of the fastest rates in the region, it remains fragile, dependent on external markets and still grappling with toxic debt, bankruptcies and weak retail spending. It has targeted 5.8 per cent growth this year.
The central bank had kept the midpoint rate unchanged at 21,036 per dollar since June 28 last year, when it devalued the dong by 1 per cent, far short of the 8.5 per cent in Feb. 11, 2011, when it intervened to counter a widening gap between official and black market rates.
Since the devaluation a year ago though, Vietnam's neighbours have gained an edge in export competitiveness due to weakness in their currencies in the first half of this year.
"Persistent down-shift in regional currencies, particularly THB and CNY, since the last 1 per cent VND devaluation in late-June 2013 justifies measured dong correction," said Vishnu Varathan, Mizuho's regional strategist, in a note to clients referring to the Thai baht and Chinese yuan.
"This is to ensure that trade competitiveness is not needlessly diminished in the context of softer key trading partner/competitor currencies such as CNY and THB."
Varathan added that scope for further monetary easing was also limited as monetary conditions were already easy and real interest rates negative. "Thus, easing policy from the FX front is the best alternative to support (sub-par) growth."
Vietnam has projected its export growth this year to slow to 10 per cent, after a 15.4 per cent rise in 2013.
In recent weeks, banks have been quoting the dong against the dollar near its floor of 21,246 on the interbank market. The dollar has also been rising on the black market.
"Given that the VND has only depreciated by half of the maximum 2 per cent level stated by the SBV, there is a risk of a further 1 per cent depreciation later in the year, if policy makers feel it is necessary, though our base case is for a relatively stable VND for the coming months," HSBC said in a client note.