VN faces 'dong crisis'

As Vietnam's inflation rate soared to 25 per cent in May, the highest since 1992, there are rising concerns that this may result in a financial crisis and a hefty devaluation of the currency like Thailand experienced in 1997.

"There is talk that Vietnam's currency crisis could rival Thailand's currency crisis in 1997," said website UOBKayHian.

A Thai financial executive said if Vietnam were to devalue its currency as a way out of economic distress, it might lead to competitive devaluation among other regional currencies, including the baht.

Vietnam's dong dropped to its lowest in a week after the central bank set a weaker reference rate.

The currency is headed for a fifth weekly loss as Standard & Poor's, Moody's Investors Service and Fitch Ratings lowered their outlook on the nation's debt to negative, citing a slow government response to inflation.

The State Bank of Vietnam set a rate of 16,117 dong to the dollar yesterday, compared with 16,107 on Wednesday, according to its website. The currency is allowed to trade up to one per cent on either side of that rate.

The dong had weakened by 0.07 per cent to 16,277 to the dollar as of 10.45am in Hanoi, according to data compiled by Bloomberg.

Slowing economic growth and a widening trade deficit have caused a shortage of dollars in the market, the Nguoi Lao Dong newspaper reported, citing Cao Sy Kiem, former state bank governor and now a member of the National Advisory Council for Finance and Monetary Policy.

The exchange rate in the so-called free market, used by moneychangers in Ho Chi Minh City, was 18,000 to the dollar late yesterday, the newspaper said.

Inflation accelerated to 25.2 percent in May, the highest level since at least 1992, according to the Hanoi-based General Statistics Office.

The trade deficit in the first five months of the year tripled to US$14.42 billion (Bt474 billion) from $4.25 billion in the same period a year earlier.

The government yesterday cut its growth forecast for this year from 9 per cent to 7 per cent, and said curbing inflation was its top priority.

Other Southeast Asian countries are also battling high inflation. Indonesia and the Philippines have already raised interest rates as surging food and energy prices prompt policymakers across Asia to tackle inflation even as growth slows.

"It's a real dilemma for the central banks. They are facing their most testing time since the Asian crisis ten years ago," Robert Subbaraman, chief economist at Lehman Brothers Asia, said in an interview with Bloomberg Television. Growth in Asia is slowing and "at the same time inflation has picked up".