Devalue VND: the good, the bad and the very ugly.

Devalue VND: the good, the bad and the very ugly.

1/ The good: Every economics textbook will agree that a lower value of currency betters of the country’s import. Because the domestic products are now cheaper, they are more competitive in the market. Cheaper domestic products will limit import because foreign products are now more expensive. For example. In 2009, 1 USD equaled 19k VND. So, a 1000USD Dell laptop would cost 19milion VND. Now, 1 USD is equal to 21k VND. That laptop now costs 21milion, and it will be more expensive than before, and will becoming less competitive than a Levono laptop from China which has it price unchanged due to the stability in the relationship of VND and Yuan. American will want to travel in Ha Noi rather than Bangkok because USD is stronger in Vietnam. In 1992, UK was in a recession. And after decreasing the pound value 15%, the economy starts again thanks to a recover in export. Such concept has led to a small currency war between China, US and the rest of the world recently. Every countries wants to devalue their currency in order to stimulate import. And when everyone does that, no one wins. It’s a zero-sum game. If no one wins, will there be losers? Yes, everyone. Because of being busy racing to a slower value of currency, government fails to complete other economy tasks. Back to Vietnam, many experts believe that 1 USD should, now, cost 25k VND. The VND has been valued too high. And it will harm the export sector. Another reason to devalue VND is the gap between the interest rate of VN and US. US interest rate is about 0,25%, while in Vietnam is more than 15%. If the value of VND is not decreased, there will be arbitrage. Investors will borrow USD with a very low interest rate, convert it into VND and deposit into banks in Vietnam for a very high rate. Then after the maturity, they can convert the VND into USD and gain profit. Therefore, VND has to be devalued to stop such action [because investors cannot get much USD after the maturity. That will discourge them from doing that again]. In fact, our central bank is doing that. VND was devalued 3 times last year, peaked at 21,850/USD in the unofficial market. So, should VN really need to devalue VND immediately?

2/ The bad: Which does Vietnam export to the outside world? First of the list is clothes. Next is footwear. Third: farming products such as rice, coffee beans, tea, … What is the common of them? Low value, needing much labor, and no technology needed. Another common is that Vietnamese dominate the world market with those products. So, a weak VND won’t help much. In contrast, a weak VND will do more harm than good. Why? Because export products from Vietnam are not made from Vietnam. They are only made in Vietnam and made by Vietnamese. It means the main material to make these products are bought from other countries. For example, clothes. We have to buy silk from China and Indonesia. Farming products depend upon fertilizer and farming food made in China. And there are many many materials we have to import to support export. According to a most recent research, Vietnam contributes only 60% to the export products. In some products, such as clothes, all we do is proving a cheap source of labour. We’re replacing China to become the factory of the world. A weak VND means more expensive material exported. But we have to keep the price low in order to remain competitive. So, the income of workers has to be reduced. Who loses? The vietnamese workers. Who wins? Foreigners. Another reason why VND shouldn’t be devalued is that the government’s foreign debt is now too high, over 50% the total GDP. Most of them are valued in USD and Yen. A stronger USD means we have to pay more. For example, now we are in a debt of 60 bil USD, which means 1.200.000.000.000.000 VND [sorry, I cannot make it shorter. We may say more than one thounsand million VND]. If USD goes up and now costs 21k VND. We have to pay a little more 60.000.000.000 VND. Uff. The figure is too big. Despite we cannot imagine such a big number, we can all know that it’s not good.

3/ The very ugly: Every coins has 2 faces. As we see from above, a weak VND has both advantages and disadvantages. We cannot calculate which effect is greater. So, why devaluing VND is very ugly? Because it makes Vietnamese become ugly in the eyes of the world. When we make VND weaker, we join the silly zeo-sum game called “weak currency” to make other countries, which don’t play the game, poorer. The diplomatic will be in trouble. People of the world will see Vietnam as a selfish country. Moreover, controlling the currency will limit the government power to achieve other economy goals such as inflation and capital mobility. Economists call it the Trilema, or the Impossible triniy. We can only achieve 2 goals out of 3: inflation [freedom in fiscal policy], capital mobility and stable currency [about the IT, it’s a very long long story. Contact me if you’re interested in it]. If vietnamese focus on the currency, it fails to limit inflation. Or it can choose to control the capital mobility, which will cost much money and is a source of corruption. So, let the currency float. Because the real problem of VN economy doesn’t lie in the currency value. The real problem is us. So long as we’re still proud of being a source of cheap and unskilled labour, we will never better of. We have to increase technology contribution in our products. Material must be produced. Along with it is a decrease in foreign debt. If we can do it, we will never have to worry about the value of VND [like Japan some decades ago].


Kz