Vietnam Devalues Currency by 8.5%

HANOI—Vietnam's central bank devalued the dong Friday by 8.5% for its third devaluation in a year, in a concession to the market's lack of confidence in its currency as it struggles with a gaping trade deficit.

Vietnam devalued its currency by 8.5% as it struggles with high inflation and a large trade deficit, while China's Huawei Technologies is facing opposition over its U.S. developer purchase. WSJ's Jake Lee and Asia Economics Reporter Alex Frangos discuss.

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The State Bank of Vietnam set its exchange rate for the U.S. currency at 20,693 dong, up from 18,932 dong Thursday, according to its website. With Friday's move, the authorities have weakened the currency by 13.6% since November 2009.

In dollar terms, Friday's move set the U.S. currency 9.3% higher against the dong.

The central bank said the latest devaluation was in line with foreign currency supply and demand conditions and was aimed at increasing liquidity in the domestic foreign exchange market. The move would help limit the trade deficit, the central bank added.

The move bucks a broader trend in Asia, where most currencies have faced upward pressure due to large trade surpluses, and authorities in many countries have sought to slow the pace of appreciation to protect their export industries.

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Reuters

A woman counting Vietnamese dong bank notes in Hanoi.

The decision to lower the dong even further highlights the stress that Hanoi's policy focus on economic growth has put on the economy, once seen as one of Asia's most promising emerging markets. A loose monetary policy and deficit spending have spurred the economy, but inflation has also surged and the trade deficit has lingered as imports outpaced sluggish exports.

With accelerating inflation, the U.S. currency has for months fetched a high premium on the black market in Vietnam as people seek the safety of gold and hard currencies to protect their savings.

Inflation rose to 12.17% in January from 11.75% in December. The country ran a trade deficit of $1 billion in January following a deficit of $1.294 billion the previous month.

The news of the devaluation spooked the market, with the costs of protection against a default or restructuring of Vietnam's debt rising. The spread on Vietnam's five-year credit default swaps widened by a fifth of a percentage point from Thursday to 3.85 to 3.95 percentage points.

Moody's Investors Service said the devaluation supports its negative credit outlook on the country, since the move raises the cost of servicing Vietnam's external debts.

Christian De Guzman, an analyst at Moody's, said the move wasn't unexpected, given the country's wide trade deficit--one of the key factors behind the agency's downgrade of Vietnam in December--and a widening gap between Hanoi's official exchange rate and the rate in the market.

"Vietnam needs more aggressive policy tightening to alleviate overheating pressures and to restore domestic confidence in the dong," Mr. De Guzman said.

"However, there were no indications from the party congress meetings in January that the government would depart from its pro-growth bias," he said.

Barclays economist Prakriti Sofat said there had been rumors floating around for some time that Vietnam may devalue the dong after the Lunar New Year, "but the magnitude of the move is more than what the market had anticipated."

Andrew Colquhoun, a sovereign analyst at Fitch Ratings, said the devaluation moves the dong "to our best gauge of the genuine market level" and "underlines the negative pressure on the external finances" arising from Vietnam's large current-account deficit and low level of official foreign exchange reserves. Vietnam had reserves of $14.1 billion as of September, according to the International Monetary Fund.

Fitch downgraded Vietnam in July by a notch to B+, or four notches below investment grade, citing the country's external finances as a key weakness. The rating has a stable outlook.

"If the devaluation failed to halt the outflow of capital in the country, and foreign currency reserves were under downward pressure, then all of these things might lead us to consider further negative rating action," Colquhoun told Dow Jones Newswires in a telephone interview.

—Natasha Brereton contributed to this article.

state bank of vietnam, foreign exchange market, asia economics, huawei technologies, currency supply, trade surpluses, vietnamese dong, jake lee, lack of confidence, foreign currency, export industries, dollar terms, deficit spending, policy focus, devaluation, upward pressure, s central, wsj, trade deficit, state bank

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