The Vietnamese economy, once considered one of Asia’s most promising emerging markets, has been unable to reverse a persistent trade deficit, which has undermined the dong and reduced the country’s foreign-exchange reserves.
In an effort to balance the trade account, the State Bank of Vietnam devalued the dong by 8.5% against the U.S. dollar on Feb. 11, the fourth devaluation in 14 months. Last week, it raised its main policy interest rate, the rate it charges commercial banks for capital—by two percentage points to 11%.
Moody’s Investors Service said Monday that the devaluation could be credit negative for domestic banks as it may weaken their asset quality and capital, adding that it may also raise the “liquidity management challenges” facing Vietnamese banks, and will exacerbate the country’s inflation problems.
The devaluation, however, may stem the slide in Vietnam’s currency reserves, which stand anywhere between $ 10 billion and $ 14 billion, and could also narrow its trade deficit, the rating agency said.
“However, without consistent policies to rein in excessive demand and control inflation, the positive aspects of the devaluation are likely to prove fleeting,” Moody’s said.
Economist Le Dang Doanh, a former adviser to the prime minister, said it is crucial the government introduces measures to ensure macroeconomic stability, including cutting expenditure and improving its investment efficiency.
“The government should cut down on the budget deficit, and slowing down credit growth is extremely important. If this set of measures is properly implemented, I think the country can still achieve gross domestic product growth of between 6% and 7% for this year,” he said.
The government is targeting economic growth of 7.0% to 7.5% this year.