Late last year, the Vietnamese government announced that it would be devaluing its currency, the Dong (VND). At the new rate, VND will be allowed to be traded at a fluctuating rate between VND 21,243 against the US dollar to VND 21,673. While this may not mean major changes in the short run for people, it will affect all of us in the long run.
When any currency devalues – in this case moving the bracket at which the VND can be legally traded against the US Dollar (USD) – there are four main repercussions. Exports will be cheaper, imports will be more expensive, an increased demand for products and services will arise and there will also be the possibility of increased inflation.
The State Bank of Vietnam explains that its decision to devalue is to “control inflation” and “push up economic growth”. The second devaluation in 12 months is “in accordance with the developments of the domestic and international financial markets, creating a solid stability for the Forex market”.
What this means is that Vietnam is wrestling the changing nature of the world markets and the USD strengthening with issues in the domestic market, primarily inflation, foreign direct investment, local market commodities and price rises of everyday products. What does this mean to you and your pocket, though?
If your work contact stipulates that you get paid in VND but uses a fixed USD equivalent, your money will not go as far as before. It is only a small change, but if you have been here long enough, you will notice the minimum of a two percent change over the last year.
On the positive side, this devaluation has mainly been brought in to protect exports. If you work in an industry that uses imported goods to be finished here, such as textiles, the change may be mitigated by the increased cost of imports, however the vast majority of the export market will stand to benefit, resulting in more cash and foreign currency within the banking system. This is just what the country needs.
Higher bank deposits in foreign currencies will help to stabilise the fledgling industry and is one of the implications from the Moody’s report last year that ranked its outlook for the Vietnamese banking system to stable from negative. This may seem poor, however the good news is that the local currency deposit rating reflects Moody’s assessment of a moderate to high probability of support from the Government of Vietnam.
While the figures do not mean much to people on the street, the financial sector is moving slowly to a more transparent and safer environment, but it will take time and a great deal of work.
Paul McLardie is a partner at Total Wealth Management. Contact him at Paul.firstname.lastname@example.org