Vietnamese hoard U.S. dollars as a hedge against inflation and depreciation

HO CHI MINH CITY, Vietnam. Jul 8, 2010 Developing countries, and these days even developed ones like Greece and Spain, constantly strive to retain the confidence of fickle foreign investors. Vietnam has a slightly different problem. Its government is struggling to restore faith among domestic investors.

Vietnamese have been vacuuming up gold and United States currency. So many dollars have been scooped up, in fact, that the country’s central bank, the State Bank of Vietnam, is at risk of running out, analysts warn. Any shock, like a double-dip global recession that hurts exports or foreign investment, and Vietnam could find itself without enough dollars to pay for crucial imports like fuel, they say.

In 2008, Vietnam sidestepped the global recession, growing 5.3 percent and pulling its gross domestic product per capita above $ 1,000 while keeping incomes more evenly distributed than in the United States.

“They’re moving away from a system of controls and directives toward a system based on market-based instruments,” said Benedict Bingham, the International Monetary Fund’s resident representative in Hanoi. But the landscape is shifting as they do. “The economy has shifted toward more faster-moving, private sector behavior. That has made macroeconomic management more complicated.”

Analysts and executives say Vietnam needs to do more to remove the state’s unsteady hand, primarily by privatizing state-owned industries to stimulate more efficient improvements in infrastructure.

In the last two years, the Vietnamese currency has fallen 15 percent.

High savings are a feature of Asian economies, one that economists say helps to perpetuate global trade imbalances and may have been a factor in the global crisis. Like other economies in the region, Vietnam is also a big exporter, the world’s second-largest exporter of rice and coffee. And like many of its neighbors, it fixes the official exchange rate of its currency against the dollar.

While other Asian nations accumulate dollars to keep their currencies from rising, Vietnam has been shedding dollars to keep the dong from falling and thereby worsening inflation, even though letting the dong depreciate freely would make its exports even cheaper.

In November, the central bank raised interest rates to quell inflation. And, unable to pull the dong’s street value back up to the official exchange rate, it lowered the official rate so it could stop selling dollars at what amounted to a discounted rate. In February, it lowered the official rate again.

The dong has stabilized somewhat now, and credit growth has cooled. But Vietnamese investors and analysts remain skeptical that the situation has entirely stabilized, largely because efforts to control inflation are accompanied by statements from Hanoi supporting faster economic growth