Since the early 1990’s when Vietnam began the process of opening up its country to the world hereby allowing foreign direct investment (‘FDI’), its national currency the ‘dong’ has experienced periods of turbulence with steady depreciations and modest devaluations reflecting the economy’s growing pains. Many challenges in the future for Vietnam include spreading wealth to the masses as 30 percent of Vietnam’s 90.5 million citizens live below the poverty line. Vietnam’s economy is slowly moving away from the flawed centrally planned economic model to a free market open economy although with periods of difficulties similar to other transition countries.
POLITICS: stable. The Communist Party in Hanoi is in power, Vietnam declared independence from France on September 2, 1945. Vietnam is now taking steps to modernize the economy and integrate into the world’s economic systems including its membership to the WTO in January 2007. On July 13, 2000, Vietnam and the United States signed a trade pact which will open up communist Vietnam to U.S. companies while Vietnam in return gains access to the United States market under the same system of low tariffs enjoyed by most nations. Vietnam and the United States normalized relations in 1995, restoring full diplomatic ties 20 years after the end of the Vietnam War in 1975 which claimed 58,000 U.S. soldiers and 3 million Vietnamese lives.
ECONOMY: rapidly advancing from poor to middle income country with great advancements in the economy have taken place over the last 25 years. Vietnam is flourishing with new entrepreneurial start-ups, an economy flush with foreign investment monies into several industry groups including mining development as the country is rich in resources. During the early 1990’s, the economy suffered economic malaise following the break-up of the Soviet Union with the resulting loss of economic support from Moscow. By the mid 1990’s, early stages of structural reforms and FDI resulted in a large jump in real GDP growth to a buoyant level of 8 to 9 percent. It should be clarified that Vietnam’s economic statistics can be misleading as the Vietnamese receive food subsidies, free education and free health care.
progress for global integration for Vietnam includes the lifting of United States trade embargo in 1994, year 1995 normalization of diplomatic ties with America and the signing of a historic trade pact with the United States in July 2000 giving Vietnam access to the world’s largest economy. Tariffs were accordingly slashed to 4 percent from 40 percent for Vietnamese exports which benefits large global conglomerates such as American shoe maker Nike who have large manufacturing operations in Vietnam. Economy will continue with reforms, market liberalization, and integration into global market, continue to cut red tape, reform inefficient state owned enterprises and strengthen the rule of law. The society will gradually evolve with more freedoms and democracy over time as Vietnam matures and becomes wealthier, hence more stability. Today, increased freedoms are noticed with relaxation of censorship with Internet access.
Vietnam is in full transition away from the former ‘command economy model’ with state-controlled markets to a socialist capitalistic market economy similar to China. The 1997-98 Asian financial crises coupled with disenchantment from foreign investors over the slow progress of market reforms and widespread corruption resulted in FDI plunging from 8 billion USD in 1996 to 2.7 billion USD in 1997 and to 1 billion USD in 2001. By year 1999, Vietnam began its next surge economically forward with more reforms and privatizations of 3000 state owned industries ‘SOE’ and the opening of its own stock market in July 2000.
Over the last 10 years, FDI rebounded to large levels thus putting pressure on the dong to strengthen with large capital inflows. Vietnamese exports became more expensive impacting the local industries so the government authorities purposely then held down the exchange rate by buying USD with dong currency thus contributing to Vietnam’s inflation pressures.
GDP as measured by purchasing power parity came in at 276 billion USD (2010) with corresponding GDP/Capita at 3,100 USD. GDP measured by market prices is at 103 billion USD (2010). Real GDP growth is projected at 6.3 percent of GDP for 2011, year 2010 came in at 6.8 percent, 2009 at 5.3 percent, 2008 at 6.3 percent, year 2007 at 8.5 percent. Inflation is currently high with May 2011 inflation at 20 percent on an annual basis and estimated at 13.5 percent for the year, quotes include year 2010 at 11.8 percent and 2008 at 22 percent, inflation October 2007 at 9.3 percent annually. The current account is in deficit estimated at 9.5 percent of GDP (2011) due to a growing economy and increased demand for imported products, particularly gold bullion which is in high demand by Vietnamese citizens. Current account figures also include year 2010 shortfall at 9.4 percent of GDP, year 2008 at 10.8 percent. The trade component is in deficit at 12 billion USD (2010). External debt is at 33.5 billion USD (2010), public debt at 56 percent of GDP (2010). Fiscal account is in small deficit, public debt is at 51 percent of GDP. Unemployment is low at 2.9 percent as agriculture accounts for 20 percent of GDP. Economic aid is valued at 2 billion USD while annual remittances are worth 2.7 billion USD (2003). Major exports include oil, coffee, shoes, textiles and are the world’s number three rice exporter. Industries also include food processing, steel, tires, oil, and paper. Export – United States is the top market while China is the largest import supplier.
POSITIVES: well-educated nation with 94 percent literacy, efficient workforce, one of the world’s largest coffee producers, largest exporter of shoes to the European Union, net energy & rice exporter. CONCERN: rising drug addiction, inflation & bond default risk, diseases – high risk, poverty remains a problem.
BANKING SYSTEM: Foreign exchange reserves stood at 13.5 billion USD as of May 2011 equivalent to 1.4 months of imports which is low. Central Bank – State Bank of Vietnam base interest rate stands at 9 percent (May 2011) while the discount rate is at 13 percent (May 2011).
REGIONAL ANALYSIS: China, Laos, Thailand
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CURRENCY: ISO Symbol ‘VND’, Vietnam Dong, Vietnamese Dong. At time of review on March 28, 2011, the dong had an exchange value of 20,895 VND to 1 US-dollar (USD) and/or 29,348 VND to 1 Euroland euro (EUR). Exchange controls have been eased since its pegging to the USD in 1999. The currency exchange rate regime today follows that of a managed float whereby the dong has an official exchange rate band of +/- 1 percent. By July 2001, the authorities were depreciating the dong by about 4 to 5 percent per year; the dong was most recently devalued by 7 percent in February 2011. The dong is a non-convertible currency; a black market currency rate is also a reality for the dong. The State Bank of Vietnam during 2002 provided the exchange rate with more flexibility by increasing the exchange band. Since 2008, the dong has depreciated by 20 percent to the declining USD itself during this time reflecting a significant drop in purchasing power for the Vietnamese. Gold bullion is considered to be a parallel currency to the dong as many Vietnamese now hold bullion to counter the impact of inflation within Vietnam.
CURRENCY HISTORY: current dong has been in circulation since country reunification in 1978. Historical valuations include: February 2011 at 20,306 VND to 1 US dollar (USD), January 2011 at 19,487 VND, January 2010 at 18,460 VND, January 2009 at 17,483 VND, January 2008 at 15,992 VND, January 2007 at 16,059 VND, January 2006 at 15,926 VND, January 2005 at 15,801 VND, January 2004 at 15,642 VND, August 29, 2003 at 15,520 VND August 4, 2000 at 14,098 VND to the USD, August 25, 1999 at 13,959, in year 1995 at 11,193, November 1993 at 10,800, July 1991 at 8,100. Since country independence, the value of Vietnamese paper money has had a turbulent history with a significant revaluation of the dong taking place in 1958 at 1000 old to 1 new currency unit (North Vietnamese dong). Formerly, both South Vietnam and North Vietnam had their own separate dong currencies in use during the time Vietnam remain politically divided between the communist North and free-market South.
CURRENCY FORECAST: as the economy continues to open up to the rest of the world, the dong may begin to experience more volatility and continued modest short-term depreciation to the USD as inflation creates continued difficulties. Vietnam is now no longer closed off to the rest of the world economically and the dong will be also impacted by developments in the Japanese yen, Chinese Yuan and Thai baht. The dong will experience a sizeable depreciation to the Chinese Yuan in the years ahead. In 2002, Vietnam garnered a B1 sovereign rating which is a few notches just below investment grade, tapped the bond markets for first time. Over the very long term, BankINTRO.com believes that the young Vietnamese majority will continue to support pro-Western lifestyle as the elder hard-line communists pass on. As a member of the 10 member country ASEAN (The Association of Southeast Asian Nations), the groundwork is being put forward for a future single currency bloc for the member countries in similar fashion as the Euroland euro (EUR). Realistically, this concept for ASEAN single currency is still years away. The future looks very bright indeed for Vietnam.